Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-K**

**(Mark One)**

| **x**      | **Annual Report Pursuant to Section 13 or 15(d) of  the**     | ** ** |
|------------|-------------------------------------------------------------------------|------------|
| ** ** | **Securities Exchange Act of 1934**                                     | ** ** |
| ** ** | ** **                                                              | ** ** |
| ** ** | **For the fiscal year ended December 31, 2008**                    | ** ** |
| ** ** | ** **                                                              | ** ** |
| ** ** | **or**                                                                  | ** ** |
| ** ** | ** **                                                              | ** ** |
| **o**      | **Transition Report Pursuant to Section 13 or  15(d) of the** | ** ** |
| ** ** | **Securities Exchange Act of 1934**                                     | ** ** |

 

**For the transition period from              to             **

 

**Commission File Number: 000-51293**

 

**Behringer Harvard REIT I, Inc.**

(Exactname of registrant as specified in its charter)

 

| **Maryland**                                                    | ** ** | **68-0509956**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (I.R.S.  Employer Identification No.) |
| ** **                                                      | ** ** | ** **                            |
| **15601 Dallas Parkway, Suite 600, Addison, Texas**        | ** ** | **75001**                             |
| (Address  of principal executive offices)                       |       | (Zip  Code)                           |

 

**(866) 655-1605**

(Registrant’s telephone number, including area code)

 

Securitiesregistered pursuant to section 12(b) of the Act:

**None**

 

Securitiesregistered pursuant to section 12(g) of the Act:

**Commonstock, $.0001 par value per share**

(Titleof class)

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes o No x

 

Indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or Section 15(d) ofthe Act. Yes o No x

 

Indicate by check mark whether theregistrant:  (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x   No o

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o                                              |   | Accelerated filer o         |
|------------------------------------------------------------------------|--------|-----------------------------|
|                                                                   |   |                        |
| Non-accelerated filer x (Do not check if a smaller reporting  company) |   | Smaller reporting company o |

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).       Yes o   No x

 

While there is no established market for theregistrant’s shares of common stock, the registrant has completed a secondfollow-on offering of its shares of common stock pursuant to a registrationstatement on Form S-11. In each of its primary offerings, the registranthas sold shares of its common stock for $10.00 per share, with discountsavailable for certain categories of purchasers. The number of shares held bynon-affiliates as of June 30, 2008 (the last business day of theregistrant’s most recently completed second fiscal quarter) was approximately233,060,795.

 

As of March 13, 2009, the registrant had291,465,075 shares of common stock outstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

None

 

 

 

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**BEHRINGER HARVARD REIT I, INC.**

**FORM 10-K**

**Year Ended December 31, 2008**

 
| ** **      | ** **                                                                                                             | **Page**   |
|-----------------|------------------------------------------------------------------------------------------------------------------------|------------|
| ** **      | ** **                                                                                                             | ** ** |
| ** **      | **PART I**                                                                                                             | ** ** |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 1.**     | **Business**                                                                                                           | **3**      |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 1A.**    | **Risk  Factors**                                                                                                      | **6**      |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 1B.**    | **Unresolved  Staff Comments**                                                                                         | **29**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 2.**     | **Properties**                                                                                                         | **29**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 3.**     | **Legal  Proceedings**                                                                                                 | **32**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 4.**     | **Submission  of Matters to a Vote of Security Holders**                                                               | **32**     |
| ** **      | ** **                                                                                                             | ** ** |
| ** **      | **PART II**                                                                                                            | ** ** |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 5.**     | **Market for Registrant’s Common Equity,  Related Stockholder Matters and Issuer Purchases of Equity Securities** | **33**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 6.**     | **Selected  Financial Data**                                                                                           | **35**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 7.**     | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                        | **36**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 7A.**    | **Quantitative and Qualitative Disclosures  about Market Risk**                                                        | **48**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 8.**     | **Financial Statements and Supplementary Data**                                                                        | **49**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 9.**     | **Changes in and Disagreements With  Accountants on Accounting and Financial Disclosure**                              | **49**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 9A(T).** | **Controls and Procedures**                                                                                            | **49**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 9B.**    | **Other Information**                                                                                                  | **49**     |
| ** **      | ** **                                                                                                             | ** ** |
| ** **      | **PART III**                                                                                                           | ** ** |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 10.**    | **Directors, Executive Officers and Corporate  Governance**                                                            | **50**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 11.**    | **Executive Compensation**                                                                                             | **55**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 12.**    | **Security Ownership of Certain Beneficial  Owners and Management and Related Stockholder Matters**                    | **56**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 13.**    | **Certain Relationships and Related  Transactions, and Director Independence**                                         | **58**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 14.**    | **Principal Accounting Fees and Services**                                                                             | **59**     |
| ** **      | ** **                                                                                                             | ** ** |
| ** **      | **PART IV**                                                                                                            | ** ** |
| ** **      | ** **                                                                                                             | ** ** |
| **Item 15.**    | **Exhibits, Financial Statement Schedules**                                                                            | **61**     |
| ** **      | ** **                                                                                                             | ** ** |
| **Signatures**  | **62**                                                                                                                 |

 

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### **Forward-Looking Statements**

 

Certain statements in thisAnnual Report on Form 10-K constitute “forward-looking statements” withinthe meaning of Section 27A of the Securities Act of 1933, as amended (the “SecuritiesAct”) and Section 21E of the Securities Exchange Act of 1934, as amended(the “Exchange Act”). These forward-looking statements include discussion andanalysis of the financial condition of Behringer Harvard REIT I, Inc. andour subsidiaries (which may be referred to herein as the “Company,” “we,” “us”or “our”), our anticipated capital expenditures required to complete projects,amounts of anticipated cash distributions to our stockholders in the future andother matters. These forward-looking statements are not historical facts butare the intent, belief or current expectations of our management based on theirknowledge and understanding of the business and industry. Words such as “may,” “anticipates,”“expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,”“should” and variations of these words and similar expressions are intended toidentify forward-looking statements. These statements are not guarantees offuture performance and are subject to risks, uncertainties and other factors,some of which are beyond our control, are difficult to predict and could causeactual results to differ materially from those expressed or forecasted in theforward-looking statements. We intend for these forward-looking statements tobe covered by the applicable safe harbor provisions created by Section 27Aof the Securities Act and Section 21E of the Exchange Act.

 

Forward-looking statementsthat were true at the time made may ultimately prove to be incorrect or false. Wecaution investors not to place undue reliance on forward-looking statements,which reflect our management’s view only as of the date of this Annual Reporton Form 10-K. We undertake no obligation to update or reviseforward-looking statements to reflect changed assumptions, the occurrence ofunanticipated events or changes to future operating results. Theforward-looking statements should be read in light of the risk factorsidentified in the “Risk Factors” section of this Annual Report on Form 10-K.

 

**CautionaryNote**

 

The representations,warranties and covenants made by us in any agreement filed as an exhibit tothis Annual Report on Form 10-K are made solely for the benefit of theparties to the agreement, including, in some cases, for the purpose ofallocating risk among the parties to the agreement, and should not be deemed tobe representations, warranties or covenants to or with any other parties. Moreover,these representations, warranties or covenants should not be relied upon asaccurately describing or reflecting the current state of our affairs.

 

**PART I**

 

**Item 1.            Business.**

 

**Organization**

 

Behringer Harvard REIT I, Inc.was incorporated in June 2002 as a Maryland corporation and has elected tobe taxed, and currently qualifies, as a real estate investment trust, or REIT,for federal income tax purposes. We acquire and operate institutional qualityreal estate. We completed our first property acquisition in October 2003and, as of December 31, 2008, we owned interests in 74 office propertieslocated in 23 states and the District of Columbia.

 

We are externally managedand advised by Behringer Advisors, LLC (referred to herein as “BehringerAdvisors” or “our advisor”), a Texas limited liability company that wasorganized in June 2007. Behringer Advisors is responsible for managing ourday-to-day affairs and for identifying and making acquisitions and investmentson our behalf. Prior to June 30, 2007, we were advised by BehringerAdvisors LP, a Texas limited partnership, which was merged into BehringerAdvisors solely to change the type of entity.

 

Substantially all of ourbusiness is conducted through Behringer Harvard Operating Partnership I LP, aTexas limited partnership organized in 2002 (“Behringer OP”). Our wholly-ownedsubsidiary, BHR, Inc., a Delaware corporation, is the sole general partnerof Behringer OP. Our direct and indirect wholly-owned subsidiaries, BHRBusiness Trust, a Maryland business trust, and BHR Partners, LLC, a Delawarelimited liability company, are limited partners holding substantially all ofBehringer OP.

 

Our office is located at15601 Dallas Parkway, Suite 600, Addison, Texas 75001, and our toll-freetelephone number is (866) 655-1605. The name Behringer Harvard is the propertyof Behringer Harvard Holdings, LLC (“Behringer Harvard Holdings”) and is usedby permission.

 

**2008Highlights**

 

During the year ended December 31,2008, we added management depth to support our operations by identifyingexperienced talent from within the Behringer Harvard organization, and also byadding experienced and well respected real estate professionals from the REITindustry. More specifically, Mr. Robert S. Aisner was promoted to chiefexecutive officer and Mr. Thomas F. August was elected to serve asour chief operating officer. In addition, Messrs. Michael A. Ernst

 

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andScott W. Fordham joined our advisor and Gerald D. Oliver, Jr. joined ourproperty manager. Also during 2008, we completed the third and final primarypublic offering of our common stock.

 

**InvestmentObjectives**

 

Our investment objectivesare:

 

·                                          to preserve, protect and return investors’ capital contributions;

 

·                                          to maximize cash distributions paid toinvestors;

 

·                                          to realize growth in the value of ourinvestments upon the ultimate sale of these investments; and

 

·                                          to list our shares for trading on a nationalsecurities exchange or, if we do not list our shares by 2017, to make an orderlydisposition of our assets and distribute the cash to our investors, unless amajority of our directors, including a majority of our independent directors,extends this date.

 

**Acquisition and InvestmentPolicies**

 

We acquire and operate institutional quality realestate. In particular, we focus primarily on acquiring institutional qualityoffice properties that we believe have premier business addresses, desirablelocations and high quality construction, and offer personalized amenities, withhighly creditworthy commercial tenants. To date, we have focused all of ourinvestments in institutional quality office properties, or in development ofthese types of properties, located in metropolitan cities and suburban marketsin the United States. Our management and members of our board of directors haveextensive experience in investing in numerous types of properties. Thus, wealso may acquire institutional quality industrial, retail, hospitality,multifamily and other real properties, including existing or newly constructedproperties or properties under development or construction, based on our viewof existing market conditions. We also may invest in real estate-relatedsecurities, including securities issued by other real estate companies, eitherfor investment or in change of control transactions completed on a negotiatedbasis or otherwise. We also may invest in collateralized mortgage-backedsecurities, mortgage, bridge or mezzanine loans and Section 1031tenant-in-common (“TIC”) interests, including those previously issued byprograms sponsored by Behringer Harvard Holdings or its affiliates, or inentities that make investments similar to the foregoing. Although ourinvestments to date have been located in the United States, we also may investin real estate assets located outside the United States. Our investmentstrategy is intended to provide investors with a geographically diversifiedportfolio of real estate assets.

 

We typically make ourreal estate investments in fee title or a long-term leasehold estate throughBehringer OP or indirectly through limited liability companies or throughinvestments in joint ventures, partnerships, co-tenancies or other co-ownershiparrangements with the developers of the properties, affiliates of BehringerAdvisors or other persons.

 

As of December 31,2008, we owned interests in 74 properties located in 23 states and the Districtof Columbia. As of December 31, 2008, the properties in which we own aninterest were approximately 91.2% leased on a weighted average basis.

 

# **BorrowingPolicies**

 

Our board of directorshas adopted a policy to generally limit our aggregate borrowings toapproximately 55% of the aggregate value of our assets unless substantialjustification exists that borrowing a greater amount is in our best interests. Forthese purposes, the aggregate value of our assets is equal to our total assetsplus acquired below-market lease intangibles, each as reflected on our balancesheet at the time of the calculation without giving effect to any accumulateddepreciation or amortization attributable to our real estate assets. Our policylimitation, however, does not apply to individual real estate assets and willapply only when we have invested substantially all of our capital raised in theprimary portion of our public offerings, at which point our board of directorsalso may consider any unrealized change in value of our real estate assets, asdetermined by Behringer Advisors in its sole discretion, when evaluatingcompliance with our policy limitation. We typically borrow, and expect tocontinue borrowing, more than 55% of the contract purchase price of any realestate asset we acquire to the extent our board of directors determines thatborrowing these amounts is reasonable. In making this determination, our boardconsiders relevant financial factors, particularly whether borrowing additionalamounts are expected to be accretive to returns related to the particularportfolio investment. As of December 31, 2008, we have borrowedapproximately 54% of the aggregate value of our assets and, on average,approximately 65% of the contract purchase price of each acquired real estateasset. These percentage amounts would increase if we use any unencumbered realestate assets to secure additional borrowings or borrow additional amounts oncurrently encumbered assets. Our board of directors must review our aggregateborrowings at least quarterly.

 

**DistributionPolicy**

 

Inorder to qualify as a REIT for federal income tax purposes, we must distributeat least 90% of our REIT taxable income to our stockholders on an annual basis.We currently intend to make distributions to holders of shares of our

 

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common stock at least at thelevel required to maintain our REIT status unless our results of operations,our general financial condition, general economic conditions or other factorsinhibit us from doing so. Distributions are authorized at the discretion of ourboard of directors based on itsanalysis of our earnings, cash flow, anticipated cash flow, capital expenditurerequirements, general financial condition and other factors that our board deemsrelevant. The board’s decisions also are influenced in substantial part by therequirements necessary to maintain our REIT status under the Internal RevenueCode of 1986, as amended (the “Code”).

 

Distributionsare paid to investors who are stockholders as of the record dates selected byour board of directors. There can be no assurance that we will be able toachieve expected cash flows necessary to continue to pay distributions as theymay be established or maintain distributions at any particular level, or thatdistributions will increase over time. Since we began operations, our board ofdirectors has declared distributions as summarized below:

 
| **Period**         | ** ** | **Approximate Amount  (Rounded)** | ** **          | **Annualized Percentage Return  Assuming $ 10.00 Per share  Purchase Price*** | ** ** |
|--------------------|------------|----------------------------------------|---------------------|------------------------------------------------------------------------------------------------------------------|------------|
| 4th Qtr. 2003 |       | $                                      | 0.1764376 per share |                                                                                                             | 7          | % |
| Fiscal Year  2004  |       | $                                      | 0.6999970 per share |                                                                                                             | 7          | % |
| Fiscal Year  2005  |       | $                                      | 0.6999970 per share |                                                                                                             | 7          | % |
| Fiscal Year  2006  |       | $                                      | 0.6999970 per share |                                                                                                             | 7          | % |
| Fiscal Year  2007  |       | $                                      | 0.6706516 per share |                                                                                                             | 6.7        | % |
| Fiscal Year  2008  |       | $                                      | 0.6384016 per share |                                                                                                             | 6.4        | % |
| 1st Qtr. 2009 |       | $                                      | 0.1620528 per share |                                                                                                             | 6.5        | % |

 

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* The average weighted share price may be lower than$10.00 per share, and the individual percentage return may be greater than thepercentage noted, as a result of shares purchased through our distributionreinvestment plan at less than $10.00 per share or acquired in connection withour 10% stock dividend.

 

**Public Offerings**

 

We have completed threepublic offerings of our common stock. As of December 31, 2008, the closeof our third primary public offering, we had raised a total of approximately$2.8 billion of gross offering proceeds as a result of these offerings(inclusive of distribution reinvestments and redemptions). On January 5,2009, we commenced a public offering of up to 60,000,000 shares of common stockoffered at a price of $9.50 per share under our Distribution Reinvestment Plan,or “DRIP” pursuant to a Registration Statement on Form S-3 filed under theSecurities Act. We are offering shares under our DRIP until the earlier of January 5,2014 or the date we sell all $570 million worth of shares in this offering.

 

Asof December 31, 2008, we had 288,807,752 shares of our common stockoutstanding, which includes the effect of a 10% stock dividend issued on October 1,2005 and the effect of distribution reinvestments, redemptions, and 22,000shares issued to Behringer Harvard Holdings. Net proceeds after sellingcommissions, dealer manager fees and organization and offering expenses totaledapproximately $2.5 billion.

 

**TaxStatus**

 

We elected to be taxed as aREIT for federal income tax purposes and believe that we have qualified sincethe year ended December 31, 2004. As long as we qualify for taxation as aREIT, we generally will not be subject to federal income tax at the corporatelevel to the extent we distribute annually at least 90% of our “REIT taxableincome,” as defined by the Code, to our stockholders. If we fail to qualify asa REIT in any taxable year, we will be subject to federal income tax (includingany applicable alternative minimum tax) on our taxable income at regularcorporate rates. Unless entitled to relief under specific statutory provisions,we also will be disqualified for taxation as a REIT for the four taxable yearsfollowing the year in which we lose our qualification. Even if we qualify as aREIT, we may be subject to certain state and local taxes on our income andproperty and to federal income and excise taxes on our undistributed income. Asof December 31, 2008, and the date of this filing, we believe we are incompliance with all applicable REIT requirements.

 

We intend to elect forIPC (US), Inc. to be taxed as a REIT for federal income tax purposes forthe tax year ending December 31, 2008. IPC (US), Inc. is our indirectwholly-owned subsidiary that we acquired December 12, 2007 as part of ouracquisition of the subsidiaries of IPC US Real Estate Investment Trust (“IPC”).

 

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**Competition**

 

We are subject tosignificant competition in seeking real estate investments and tenants. Wecompete with many third parties engaged in real estate investment activitiesincluding other REITs, specialty finance companies, savings and loanassociations, banks, mortgage bankers, insurance companies, mutual funds,institutional investors, investment banking firms, lenders, hedge funds,governmental bodies and other entities. We also face competition from otherreal estate investment programs, including other Behringer Harvard programs,for investments that may be suitable for us. Many of our competitors havesubstantially greater financial and other resources than we have and may havesubstantially more operating experience than either us or Behringer Advisors. Theyalso may enjoy significant competitive advantages that result from, among otherthings, a lower cost of capital.

 

**Regulations**

 

Our investments are subjectto various federal, state, local and foreign laws, ordinances and regulations,including, among other things, zoning regulations, land use controls,environmental controls relating to air and water quality, noise pollution andindirect environmental impacts such as increased motor vehicle activity. Webelieve that we have all permits and approvals necessary under current law tooperate our investments.

 

**Environmental**

 

As an owner of real estate,we are subject to various environmental laws of federal, state and localgovernments. Compliance with existing laws has not had a material adverseeffect on our financial condition or results of operations, and management doesnot believe it will have such an impact in the future. However, we cannotpredict the impact of unforeseen environmental contingencies or new or changedlaws or regulations on properties in which we hold an interest, or onproperties that may be acquired directly or indirectly in the future.

 

**Employees**

 

We have no employees. Theemployees of Behringer Advisors and other affiliates of Behringer HarvardHoldings perform a full range of real estate services for us, includingacquisitions, property management, accounting, legal, asset management andinvestor relations services.

 

We are dependent onaffiliates of Behringer Harvard Holdings for services that are essential to us,including asset acquisition decisions, property management and other generaladministrative responsibilities. In the event that these companies were unableto provide these services to us, we would be required to provide such servicesourselves or obtain such services from other sources.

 

**Financial Information AboutIndustry Segments**

 

Our current businessconsists of owning, operating, acquiring, developing, investing in anddisposing of real estate assets. We internally evaluate operating performanceon an individual property level and view all of our real estate assets as oneindustry segment, and, accordingly, all of our properties are aggregated intoone reportable segment.

 

**AvailableInformation**

 

We electronically fileannual reports on Form 10-K, quarterly reports on Form 10-Q, currentreports on Form 8-K and all amendments to those reports with the SEC. Wealso have filed with the SEC a registration statement in connection with ourcurrent DRIP offering. Copies of our filings with the SEC may be obtained fromthe website maintained for us and our affiliates at *www.behringerharvard.com*or from the SEC’s website at *www.sec.gov*. Accessto these filings is free of charge. We are not incorporating our website or anyinformation from the website into this Form 10-K.

 

**Item 1A.         RiskFactors.**

** **

****The factors described below represent our principal risks. Otherfactors may exist that we do not consider to be significant based oninformation that is currently available or that we are not currently able toanticipate.****The occurrence of any of the risksdiscussed below could have a material adverse affect on our business, financialcondition, results of operations and ability to pay distributions to ourstockholders. ****Our stockholders may be referred to as “you” or “your” inthis Item 1A, “Risk Factors” section.****

**** ****

**Risks Related to OurBusiness in General**

** **

***A limit on thenumber of shares a person may own may discourage a takeover.***

*** ***

Our charter, with certain exceptions,authorizes our directors to take such actions as are necessary and desirable topreserve our qualification as a REIT. Unless exempted by our board ofdirectors, no person or group may own more than 9.8% of our outstanding commonor preferred stock, in value or number of shares, whichever is morerestrictive. This restriction may have the effect of delaying, deferring orpreventing a change in control of us, including an extraordinary

 

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transaction (such as a merger,tender offer or sale of all or substantially all of our assets) that mightotherwise provide stockholders with the opportunity to receive a controlpremium for their shares.

 

***Maryland lawprohibits certain business combinations, which may make it more difficult forus to be acquired.***

*** ***

Under Maryland law, “business combinations” between a Marylandcorporation and an interested stockholder or an affiliate of an interestedstockholder are prohibited for five years after the most recent date on whichthe interested stockholder becomes an interested stockholder. These businesscombinations include a merger, consolidation, share exchange or, incircumstances specified in the statute, an asset transfer or issuance orreclassification of equity securities. An interested stockholder is defined as:

 

·                                          anyperson who beneficially owns 10% or more of the voting power of the thenoutstanding voting stock of the corporation; or

 

·                                          an affiliateor associate of the corporation who, at any time within the two-year periodprior to the date in question, was the beneficial owner of 10% or more of thevoting power of the then outstanding voting stock of the corporation.

 

A person is not an interested stockholder under the statute if theboard of directors approved, in advance, the transaction by which the person otherwisewould have become an interested stockholder. However, in approving atransaction, the board of directors may condition its approval on compliance,at or after the time of approval, with any terms and conditions determined bythe board.

 

After the expiration of the five-year period described above, anybusiness combination between the Maryland corporation and an interestedstockholder generally must be recommended by the board of directors of thecorporation and approved by the affirmative vote of at least:

 

·                                          80% of thevotes entitled to be cast by holders of the then outstanding shares of votingstock of the corporation; and

 

·                                          two-thirds ofthe votes entitled to be cast by holders of voting stock of the corporationother than shares held by the interested stockholder with whom or with whoseaffiliate the business combination is to be effected or held by an affiliate orassociate of the interested stockholder.

 

These super-majority voting requirements do not apply if thecorporation’s common stockholders receive a minimum price, as defined underMaryland law, for their shares in the form of cash or other consideration inthe same form as previously paid by the interested stockholder for its shares. Marylandlaw also permits various exemptions from these provisions, including business combinationsthat are exempted by the board of directors before the time that the interestedstockholder becomes an interested stockholder. The business combination statutemay discourage others from trying to acquire control of us and increase thedifficulty of consummating any offer.

 

***Maryland lawalso limits the ability of a third-party to buy a large stake in us andexercise voting power in electing directors.***

*** ***

Maryland law also contains a second statutethat may have an anti-takeover effect. This statute, known as the Control ShareAcquisition Act, provides that persons or entities owning “control shares” of aMaryland corporation acquired in a “control share acquisition” have no votingrights with respect to those shares except to the extent approved by a vote oftwo-thirds of the corporation’s disinterested stockholders. Shares of stockowned by the acquirer, by officers or by employees who are directors of thecorporation, are not considered disinterested for these purposes. “ControlShares” are shares of stock that, taken together with all other shares of stockthe acquirer previously acquired, would entitle the acquirer to exercise votingpower in electing directors within one of the following ranges of voting power:

 

·                                          one-tenthor more but less than one-third of all voting power;

 

·                                          one-third ormore but less than a majority of all voting power; or

 

·                                          a majority ormore of all voting power.

 

Control Shares do not include shares of stock the acquiring person isentitled to vote as a result of having previously obtained stockholder approval.A “control share acquisition” means the acquisition of Control Shares, subjectto

 

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certain exceptions. The Control ShareAcquisition Act does not apply to (1) shares acquired in a merger,consolidation or share exchange if the corporation is a party to thetransaction or (2) acquisitions approved or exempted by our charter orbylaws. Our bylaws exempt any acquisition by any person of shares of our commonstock from the Control Share Acquisition Act.

 

***Yourinvestment return may be reduced if we are required to register as aninvestment company under the Investment Company Act.***

*** ***

We are not registered, and do not intend to register, as an investmentcompany under the Investment Company Act of 1940, as amended, based onexclusions that we believe are available to us. If we were obligated toregister as an investment company, we would have to comply with a variety ofsubstantive requirements under the Investment Company Act imposing, among otherthings:

 

·                                          limitationson capital structure;

 

·                                          restrictionson specified investments;

 

·                                          prohibitionson transactions with affiliates; and

 

·                                          compliancewith reporting, record keeping, voting, proxy disclosure and other rules andregulations that would significantly change our operations.

 

In order to beexcluded from regulation under the Investment Company Act, we must engageprimarily in the business of buying real estate assets or real estate-relatedassets. The position of the SEC staff generally requires us to maintain atleast 55% of our assets directly in qualifying real estate interests in orderfor us to maintain our exemption. Mortgaged-backed securities may or may notconstitute qualifying real estate assets, depending on the characteristics ofthe mortgage-backed securities, including the rights that we have with respectto the underlying loans.

 

To maintaincompliance with the Investment Company Act exemption, we may be unable to sellassets we would otherwise want to sell and may need to sell assets we wouldotherwise wish to retain. In addition, we may have to acquire additional incomeor loss generating assets that we might not otherwise have acquired or may haveto forgo opportunities to acquire interests in companies that we wouldotherwise want to acquire and would be important to our investment strategy.

 

If we were required to register as an investment company but failed todo so, we would be prohibited from engaging in our business, and criminal and civil actions could bebrought against us. In addition, our contracts would be unenforceable unless acourt required enforcement, and a court could appoint a receiver to takecontrol of us and liquidate our business.

 

***Stockholdershave limited control over changes in our policies and operations.***

*** ***

Our board of directors determines our major policies, including thoseregarding investment policies and strategies, financing, growth, debtcapitalization, REIT qualification and distributions. Our board of directorsmay amend or revise certain of these and other policies without a vote of thestockholders.

 

***We may notsuccessfully provide stockholders with a liquidity event.***

*** ***

We anticipate providing our stockholders witha liquidity event by listing our common stock on a national securities exchangeor selling our assets and distributing the proceeds to our stockholders. Ourboard is not required to consider the process of listing or liquidation priorto February 2013, subject to then prevailing market conditions. Marketconditions and other factors could cause us to delay a liquidity event beyondthis period and to defer a stockholder vote or any liquidation eventindefinitely. Therefore, if we are not successful in implementing our exitstrategy, your shares will continue to be illiquid.

 

***Yourpercentage interest in Behringer Harvard REIT I will be reduced if we issueadditional shares.***

*** ***

Existingstockholders do not have preemptive rights to any shares issued by us in the future.Our charter currently has authorized 400,000,000 shares of capital stock, ofwhich 382,499,000 shares are designated as common stock, 1,000 shares aredesignated as convertible stock and 17,500,000 are designated as preferredstock. Subject to any limitations set forth under Maryland law, our board ofdirectors may increase the number of authorized shares of capital stock,increase or decrease the number of shares of any class or series of stockdesignated, or reclassify any unissued shares without obtaining stockholderapproval. Shares may be issued in the discretion of our board of directors. Thepercentage of our outstanding

 

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shares owned by stockholders at the time ofany issuance will likely be reduced if we (1) sell additional shares inthe future, including those issued pursuant to the distribution reinvestmentplan, (2) sell securities that are convertible into shares of our commonstock, (3) issue shares of our common stock in a private offering ofsecurities, (4) issue shares of common stock upon the conversion of theconvertible stock, (5) issue shares of our common stock upon the exerciseof the options granted to our independent directors or employees of BehringerAdvisors and HPT Management, our property management company, or theiraffiliates, (6) issue shares to our advisor, HPT Management Services LP (“HPTManagement”) or their successors or assigns, or (7) issue shares of ourcommon stock to sellers of properties acquired by us in connection with anexchange of limited partnership interests of Behringer OP. In addition, thepartnership agreement for Behringer OP contains provisions that would allow,under certain circumstances, other entities, including other Behringer Harvardsponsored programs, to merge into, or cause the exchange or conversion of theirinterest for interests of, Behringer OP. Because the limited partnershipinterests of Behringer OP may be exchanged for shares of our common stock, anymerger, exchange or conversion between Behringer OP and another entityultimately could result in the issuance of a substantial number of shares ofour common stock, therefore reducing the number of outstanding shares owned byour other stockholders. Further, our board of directors could authorize theissuance of stock with terms and conditions that subordinate the rights of thecurrent holders of our common stock or have the effect of delaying, deferringor preventing a change in control of us, including an extraordinary transaction(such as a merger, tender offer or sale of all or substantially all of ourassets) that might provide a premium price for our stockholders. Because ofthese and other reasons described in this “Risk Factors” section, you shouldnot expect to be able to own a significant percentage of our shares.

 

***Until wegenerate sufficient cash flow from operations to make distributions to ourstockholders, we may make distributions from other sources, which maynegatively impact our ability to sustain or pay distributions.***

*** ***

Distributions are authorized at thediscretion of our board of directors based on its analysis of our earnings,cash flow, anticipated cash flow, capital expenditure requirements, generalfinancial condition and other factors that our board deems relevant. Actualcash available for distribution may vary substantially from estimates. Inaddition, to the extent we invest in development or redevelopment projects, orin properties that have significant capital requirements, our ability to makedistributions may be negatively impacted. If cash flow from operations is notsufficient to fully fund the payment of distributions, the level of ourdistributions may not be sustainable and some or all of our distributions willbe paid from other sources. For example, we may generate cash to paydistributions from financing activities, components of which may includeborrowings (including borrowings secured by our assets) in anticipation offuture operating cash flow. In addition, from time to time, our advisor and itsaffiliates may agree, but are not required, to waive or defer all, or aportion, of the acquisition, asset management or other fees or other incentivesdue to them, enter into lease agreements for unleased space, pay generaladministrative expenses or otherwise supplement investor returns in order toincrease the amount of cash available to make distributions to ourstockholders. To the extent distributions are paid from financing activities,we will have less money available to invest in properties or other realestate-related investments, which may negatively impact our ability to achieveour investment objectives.

 

***Our stockholders are limited in their ability to selltheir shares pursuant to our share redemption program****.*

 

Ourcurrent share redemption program, as approved by our board of directors, limitsthe amount of shares that may be redeemed in any given twelve-month period andthe price at which the shares may be redeemed. Subject to funds beingavailable, we currently limit the number of shares redeemed pursuant to ourshare redemption program to 5% of the weighted average number of sharesoutstanding during the twelve-month period immediately prior to the date ofredemption. In addition, stockholders generally must have held their shares fora period of one year prior to submitting a redemption request. Finally, ourboard of directors, in its sole discretion, may amend, suspend or terminate ourshare redemption program at any time it determines that doing so is in our bestinterest, or to reduce the number of shares purchased under the shareredemption program if it determines the funds otherwise available to fund theprogram are needed for other purposes. On March 24, 2009, our boardsuspended, until further notice, redemptions other than those submitted inrespect of a stockholder’s death, disability or need for long-term care,therefore reducing the potential liquidity of a stockholder’s investment.

 

***Adverse economic and geopoliticalconditions and dislocations in the credit markets could have a material adverseeffect on our results of operations, financial condition and ability to paydistributions to you.***

 

The global financial marketsare currently undergoing pervasive and fundamental disruptions. Thecontinuation or intensification of such volatility has had and may continue tohave an adverse impact on the availability of credit to businesses, generally,and has resulted in and could lead to further weakening of the U.S. and globaleconomies. The U.S. Department of Labor has acknowledged that the economic “slowdown”has resulted in a recession, and many economists believe that the recession maylast several more quarters. Our business may be affected by market and economicchallenges experienced by the U.S. economy or real estate industry as a wholeor by the local economic conditions in the markets in which our properties arelocated, including the current dislocations in the credit markets and generalglobal

 

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economic recession. These current conditions,or similar conditions existing in the future, may have the followingconsequences:

 

·                                          the financial condition of our tenants, manyof which are financial, legal and other professional firms, may be adverselyaffected, which may result in us having to increase concessions, reduce rentalrates or make capital improvements in order to maintain occupancy levels, orwhich may result in tenant defaults under leases due to bankruptcy, lack ofliquidity, operational failures or for other reasons;

 

·                                          significant job losses in the financial andprofessional services industries may occur, which may decrease demand for ouroffice space, causing market rental rates and property values to be negativelyimpacted;

 

·                                          our ability to borrow on terms and conditionsthat we find acceptable, or at all, may be limited, which could reduce our abilityto pursue acquisition opportunities and refinance existing debt, reduce ourreturns from our acquisition and development activities and increase our futureinterest expense;

 

·                                          reduced values of our properties may limitour ability to dispose of assets at attractive prices or to obtain debtfinancing secured by our properties and may reduce the availability ofunsecured loans;

 

·                                          the value and liquidity of our short-terminvestments and cash deposits could be reduced as a result of a deteriorationof the financial condition of the institutions that hold our cash deposits orthe institutions or assets in which we have made short-term investments, thedislocation of the markets for our short-term investments, increased volatilityin market rates for such investments or other factors; and

 

·                                          one or more counterparties to our derivativefinancial instruments could default on their obligations to us, or could fail,increasing the risk that we may not realize the benefits of these instruments.

 

Further, in light of the current economic conditions, we cannot provideassurance that we will be able to sustain the current level of our distributions or that the amount of distributions willincrease over time.  If the conditionscontinue, our board may determine to reduce our current distribution rate inorder to conserve cash.

 

***The failure ofany bank in which we deposit our funds could reduce the amount of cash we haveavailable to pay distributions and make additional investments.***

*** ***

We have diversified our cash and cashequivalents between several banking institutions in an attempt to minimizeexposure to any one of these entities. However, the FDIC generally only insureslimited amounts per depositor per insured bank. Through December 31, 2009,the FDIC is insuring up to $250,000 per depositor per insured bank; on January 1,2010, the standard coverage limit will return to $100,000 for most depositcategories. (Unlimited deposit insurance coverage will be available to ournon-interest bearing transaction accounts held at those institutionsparticipating in FDIC’s Temporary Liquidity Guarantee Program through December 31,2009.) At December 31, 2008, we had cash and cash equivalents andrestricted cash deposited in interest bearing transaction accounts at certainfinancial institutions exceeding these federally insured levels. If any of thebanking institutions in which we have deposited funds ultimately fails, we maylose our deposits over the federally insured levels. The loss of our depositswould reduce the amount of cash we have available to distribute or invest.

 

***We areuncertain of our sources for funding of future capital needs, which couldadversely affect the value of our investments.***

*** ***

Substantially all of the net proceeds of ourpublic offerings have been, or will be, used to make investments in real estateand real estate-related assets, to pay various fees and expenses related to thepublic offerings and to pay a portion of any distributions we make. Thus, ourability to fund future investments or capital needs will depend on our abilityto borrow or to generate additional cash flows from operations. We establishcapital reserves on a property-by-property basis, as we deem appropriate. Inaddition to any reserves we establish, a lender may require escrow of reservesin excess of our established capital reserves. If these reserves are insufficient to meetour cash needs, we may have to obtain financing from either affiliated orunaffiliated sources to fund our cash requirements. We cannot assure you thatadditional funding will be available to us for potential capital needs in thefuture. If we do not have sufficient reserves or generate sufficientcash from operations to fund capital improvements throughout the life of theinvestment in a property, we may be required to defer necessary improvements tothe property which may cause the property to suffer from a greater risk ofobsolescence or a decline in value, or a greater risk of decreased cash flow asa result of fewer potential tenants being attracted to the property. If thishappens, we may not be able to maintain projected rental rates for effectedproperties, and our results of operations and ability to pay distributions maybe negatively impacted.

 

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***We may sufferfrom delays in selecting, acquiring and developing suitable properties.***

*** ***

Even if we are able to access sufficientcapital, we may suffer from delays in deploying capital into properties orother real estate assets or in realizing a return on the capital weinvest.  Delays may occur, for example,as a result of competition in the relevant market, regulatory requirements suchas those imposed by the SEC which require us to provide audited financialstatements for certain acquisitions and our reliance on our advisor, BehringerAdvisors, and its affiliates to identify investment opportunities given thatthe employees of these entities are simultaneously seeking to locate suitableinvestments for other programs sponsored by our sponsor.  In addition, as a result of recentdisruptions in the U.S. credit markets, negotiations regarding the value andprice of investment opportunities are unusually challenging, which may delay,and potentially prevent, the closing of an acquisition. Further, ourinvestments may not yield immediate returns. For example, properties acquired prior to the start of construction ordevelopment or during the early stages of construction or development typicallydo not generate income for some period of time. Further, pending investing in real estate assets, we may invest capitalin short-term, highly-liquid investments. These short-term investments typically yield less than investments incommercial real estate and our distribution rate.

 

***We may have tomake decisions on whether to invest in certain properties without detailedinformation on the property.***

*** ***

To effectivelycompete for the acquisition of properties and other investments, our advisor and board of directors may be required to make decisions or post substantial non-refundable deposits prior tocompleting our analysis and due diligence on property acquisitions.  In these cases, the information available to our advisor and board of directors at the time of makingany particular investment decision, including the decision to pay anynon-refundable deposit and the decision to consummate any particularacquisition, may be limited, and our advisor and board of directors may not have access todetailed information regarding any particular investment property, such asphysical characteristics, environmental matters, zoning regulations or otherlocal conditions affecting the investment property.  Therefore, there is no assurance that ouradvisor andboard of directors will have knowledge of all circumstances that may adverselyaffect an investment.  In addition, ouradvisor andboard of directors expect to rely upon independent consultants in connectionwith evaluating proposed investment properties, and no assurance can be givenas to the accuracy or completeness of the information provided by theseindependent consultants.

 

***If we lose orare unable to obtain key personnel, our ability to implement our investmentstrategies could be delayed or hindered.***

*** ***

Our ability to achieve our investment objectives depends, to asignificant degree, upon the continued contributions of our executiveofficers and other key personnel of Behringer Advisors and HPT Management andtheir affiliates. We do not have employment agreements with our executiveofficers.  Although several of ourexecutive officers have entered into employment agreements with affiliates ofBehringer Advisors, including Harvard Property Trust, LLC, these agreements areterminable at will, and we cannot guarantee that they will remain affiliatedwith our advisor.  We believe that our future success depends, in largepart, on the ability of Behringer Advisors and HPT Management and theiraffiliates to hire and retain highly-skilled managerial, operating andmarketing personnel. Competition for persons with these skills is intense, andwe cannot assure you that Behringer Advisors and HPT Management and theiraffiliates will be successful in attracting and retaining skilled personnel.Further, we have established, and intend in the future to establish, strategicrelationships with firms that have special expertise in certain services or asto assets both nationally and in certain geographic regions. Maintaining theserelationships is important for us to effectively compete for assets. We cannotassure you that we will be successful in attracting and retaining thesestrategic relationships. If we lose or are unable to obtain the services of ourexecutive officers and other key personnel of Behringer Advisors and HPTManagement and their affiliates, or do not establish or maintain the necessarystrategic relationships, our ability to implement our investment strategy could be delayed or hindered.

 

***If weinternalize our management functions, the percentage of our outstanding commonstock owned by our other stockholders will be reduced, and we could incur othersignificant costs associated with being self-managed.***

*** ***

At some point in the future, we may consider internalizing thefunctions performed for us by our advisor and property manager.  The method by which we could internalizethese functions could take many forms, although the method or cost ofinternalizing cannot be determined or estimated at this time.  If we acquired our advisor and propertymanager as part of an internalization, the amount and form of any considerationthat we would pay in this type of transaction could take many forms.  For example, we could acquire the advisor andproperty manager through a merger in which we issue shares of our common stockfor all of the outstanding common stock or assets of these entities.  Issuing shares of our common stock wouldreduce the percentage of our outstanding shares owned by stockholders prior toany transaction and may not be accretive. Further, issuing promissory notes could reduce our net income, cash flowfrom operations and our ability to make distributions to you particularly ifinternalizing these functions does not produce cost savings.  There is no assurance that internalizing ourmanagement functions will be beneficial to us and our stockholders.  For example, we may not realize the perceivedbenefits or we may not be able to properly integrate a new staff of managersand employees or we may not be able to effectively replicate the servicesprovided previously by our advisor, property manager or their affiliates.  In addition, we may not be able to effect aninternalization plan that enables us to retain all of the employees of ouradvisor or 

 

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property manager or to maintain arelationship with our sponsor. Internalization transactions involving the acquisition of advisors orproperty managers affiliated with entity sponsors have also, in some cases,been the subject of litigation.  Even ifthese claims are without merit, we could be forced to spend significant amountsof money defending claims which would reduce the amount of funds available forus to invest in real estate or to pay distributions.

 

***Our rights,and the rights of our stockholders, to recover claims against our officers,directors and advisor are limited.***

*** ***

Our charter states that we may indemnify ourdirectors, our officers, our employees, our agents and our advisor and itsaffiliates for losses or liability they may suffer so long as the personseeking indemnity has determined that the course of conduct that caused theloss or liability was in our best interests, they were acting on our behalf orperforming services for us, the liability was not the result of negligence ormisconduct by our non-independent directors, our advisor and its affiliates orgross negligence or willful misconduct by our independent directors, and theindemnification is recoverable only out of our net assets or the proceeds ofinsurance and not from the stockholders. As a result, we and our stockholders may have more limited rightsagainst our directors, officers, employees and agents, and Behringer Advisorsand its affiliates, even if their conduct causes a loss to us.  In addition, we may be obligated to fund thedefense costs incurred by our directors, officers, employees and agents orBehringer Advisors in some cases.

 

***Yourinvestment may be subject to additional risks if we make internationalinvestments.***

*** ***

We may purchase real estate assets located outside the United Statesand may make or purchase mortgage, bridge, mezzanine or other loans orparticipations in mortgage, bridge, mezzanine or other loans made by a borrowerlocated outside the United States or secured by property located outside theUnited States.  The experience of ouradvisor and its affiliates with respect to investing in real estate assets locatedoutside the United States is not as extensive as it is with respect to investing in the UnitedStates.  Foreign investments are subjectto many of the same risks as domestically located properties as well asadditional risks such as:

 

·                                          governmentallaws, rules and policies including laws relating to the foreign ownershipof real property or mortgages and laws relating to the ability of foreignpersons or corporations to remove profits earned from activities within thecountry to the person’s or corporation’s country of origin;

 

·                                          variations incurrency exchange rates;

 

·                                          changes inrelative interest rates;

 

·                                          changes inreal estate and other tax rates, the tax treatment of transaction structuresand other changes in operating expenses in a particular country where weinvest;

 

·                                          the fact thatour REIT status is not recognized in foreign countries, and any income or gainsfrom foreign sources will be subject to foreign taxation, withholding taxes,transfer taxes and value added taxes;

 

·                                          any taxplanning may be defeated by changes in foreign tax laws without any offsettingbenefit to us or our stockholders;

 

·                                          lack ofuniform accounting standards (including availability of information inaccordance with U.S. generally accepted accounting principles);

 

·                                          morestringent environmental laws or changes in these laws;

 

·                                          changes insocial stability or other political, economic or diplomatic developments in oraffecting a country where we have an investment; and

 

·                                          legal andlogistical barriers to enforcing our contractual rights.

 

***We may haveincreased exposure to liabilities from litigation as a result of anyparticipation in Section 1031 TIC transactions.***

*** ***

Many of our acquisitions of TIC interestswere structured to qualify for like-kind exchange treatment under Section 1031of the Code and we, through our affiliates, may continue to enter into Section 1031TIC transactions in the future.  Thesetransactions, referred to herein as “Section 1031 TIC Transactions,” arestructured as the acquisition of real estate owned in co-tenancy arrangementswith parties seeking to defer taxes under Section 1031 of the Code,including 

 

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single member limited liabilitycompanies or similar entities (referred to as “Behringer Harvard ExchangeEntities”).  We may provide accommodationin support of or otherwise be involved in such Section 1031 TICTransactions.  Specifically, at theclosing of certain properties acquired by a Behringer Harvard Exchange Entity,we may enter into a contractual arrangement with such entity providing:  (1) in the event that the BehringerHarvard Exchange Entity is unable to sell all of the co-tenancy interests inthat property to 1031 participants, we will purchase, at theBehringer Harvard Exchange Entity’s cost, any co-tenancy interests remainingunsold; (2) we will guarantee certain bridge loans associated with thepurchase of the property in which TIC interests are to be sold; or (3) wewill provide security for the guarantee of such bridge loans.

 

Although our participation in Section 1031TIC Transactions has certain benefits to our business, including enabling us toinvest capital more readily and over a more diversified portfolio, there aresignificant tax and securities disclosure risks associated with the relatedofferings of co-tenancy interests to 1031 participants.  Changes in tax laws may negatively impact thetax benefits of like-kind exchanges or cause these transactions not to achievetheir intended purpose.  Furthermore, theInternal Revenue Service, or “IRS,” may determine that the sale of TICinterests is a “prohibited transaction” under the Code, which would cause allof the gain we realize from the sale to be taxed with none of the gainavailable for distribution to our stockholders. The IRS also may audit the purchasers of TIC interests and successfullychallenge the qualification of the transaction as a like-kind exchange.  In certain Section 1031 TICTransactions, we could receive fees in connection with our provision ofaccommodation in support of the transaction and, as such, even though we do notsponsor these Section 1031 TIC Transactions, we may be named in orotherwise required to defend against any lawsuits brought by 1031 participantsbecause of our affiliation with sponsors of these transactions.  We also may be named in or otherwise requiredto defend against any lawsuits brought by stockholders or 1031 participants inconnection with Section 1031 TIC Transactions in which we directly sellTIC interests.  In addition, as a sellerof TIC interests, we would be required to comply with applicable federal andstate securities laws and to provide fair and adequate disclosure to 1031participants relating to the respective Section 1031 TIC Transaction.  Any alleged failure by us to comply withthese requirements could expose us to risks of litigation and could require usto expend funds defending claims brought against us.

 

***We haveacquired, and may continue to acquire, certain properties in the form of TIC orother co-tenancy arrangements. Therefore, we are subject to risks associated with co-tenancyarrangements that otherwise may not be present in non-co-tenancy real estateinvestments.***

*** ***

We have entered into TIC or other co-tenancyarrangements to acquire certain properties. Whether acquired as a planned co-tenancy or as the result of anaccommodation or other arrangement disclosed above, ownership of co-tenancyinterests involves risks generally not otherwise present with an investment inreal estate including:

 

·                                          the risk thata co-tenant may at any time have economic or business interests or goals thatare or that become inconsistent with our business interests or goals;

 

·                                          the risk thata co-tenant may be in a position to take action contrary to our instructions orrequests or contrary to our policies or objectives;

 

·                                          thepossibility that an individual co-tenant might become insolvent or bankrupt, orotherwise default under the applicable mortgage loan financing documents, whichmay constitute an event of default under all of the applicable mortgage loanfinancing documents or allow the bankruptcy court to reject thetenants-in-common agreement or management agreement entered into by theco-tenants owning interests in the property;

 

·                                          thepossibility that a co-tenant might not have adequate liquid assets to make cashadvances that may be required in order to fund operations, maintenance andother expenses related to the property, which could result in the loss of acurrent or prospective tenants and may otherwise adversely affect the operationand maintenance of the property, and could cause a default under the mortgageloan financing documents applicable to the property and may result in latecharges, penalties and interest, and may lead to the exercise of foreclosureand other remedies by the lender;

 

·                                          the risk thata co-tenant could breach agreements related to the property, which may cause adefault under, or result in personal liability for, the applicable mortgageloan financing documents, violate applicable securities law and otherwiseadversely affect the property and the co-tenancy arrangement; or

 

·                                          the risk thata default by any co-tenant would constitute a default under the applicablemortgage loan financing documents that could result in a foreclosure and theloss of all or a substantial portion of the investment made by the co-tenants.

 

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**General Risks Related toInvestments in Real Estate**

** **

***Our operatingresults are affected by economic and regulatory changes that may have anadverse impact on the real estate market in general.***

*** ***

Our operating results are subject to risks generally incident to the ownership of realestate, including:

 

·                                          changes ingeneral economic or local conditions;

 

·                                          changes insupply of, or demand for, similar or competing properties in an area;

 

·                                          ability tocollect rent from tenants;

 

·                                          changes ininterest rates and availability of permanent mortgage funds, that may renderthe sale of a property difficult or unattractive;

 

·                                          theilliquidity of real estate investments generally;

 

·                                          changes intax, real estate, environmental and zoning laws; and

 

·                                          periods ofhigh interest rates and tight money supply.

 

For these and other reasons, we cannot assureyou that we will be profitable or that we will realize growth in the value ofour investments.

 

***Increasing vacancyrates resulting from recent disruptions in the financial markets anddeteriorating economic conditions could adversely affect the value of our realproperty investments.***

*** ***

The revenues generated by our realproperty investments, particularly properties occupied by a single tenant,depend on the financial stability of the tenants.  Recent disruptions in the financial marketsand deteriorating economic conditions have resulted in a trend toward increasedtenant delinquencies and defaults under leases, which has resulted inincreasing vacancy rates for certain classes of commercial property, includingoffice properties.  Business failures anddownsizings also have led to reduced demand for office space, as well aspotential oversupply of rentable space, which could require us to increaseconcessions, tenant improvement expenditures or reduce rental rates to maintainoccupancies at our properties, beyond those anticipated at the time we acquiredthe properties. The continuation of disruptions in the financial markets anddeteriorating economic conditions could impact certain of our properties, andthe value of our real property investments could decrease below the amounts wepaid for these investments.  Revenuesfrom properties could decrease due to lower occupancy rates, reduced rentalrates and potential increases in uncollectible rent. We will incur expenses,such as for maintenance costs, insurances costs and property taxes, even thougha property is vacant. The longer the period of significant vacancies for aproperty, the greater the potential negative impact on our revenues and resultsof operations.  The resale value of ourproperties ultimately may be diminished because the market value of aparticular property will depend, in part, upon the cash flow generated by theproperty.

 

***We may suffer adverse consequences due to the financial difficulties,bankruptcy or insolvency of our tenants.***

 

The current economicconditions have caused, and may continue to cause, our tenants to experiencefinancial difficulties, including bankruptcy, insolvency or a general downturnin their business. We cannot assure you that any tenant that files forbankruptcy protection will continue to pay us rent. A bankruptcy filing by orrelating to one of our tenants or a lease guarantor would bar efforts by us tocollect pre-bankruptcy debts from that tenant or lease guarantor, or its property,unless we receive an order permitting us to do so from the bankruptcy court. Inaddition, we cannot evict a tenant solely because of bankruptcy. The bankruptcyof a tenant or lease guarantor could delay our efforts to collect past duebalances under the relevant leases, and could ultimately preclude collection ofthese sums. If a lease is assumed by the tenant in bankruptcy, allpre-bankruptcy balances due under the lease must be paid to us in full. If,however, a lease is rejected by a tenant in bankruptcy, we would have only ageneral, unsecured claim for damages. An unsecured claim would only be paid tothe extent that funds are available and only in the same percentage as is paidto all other holders of general, unsecured claims. Restrictions under thebankruptcy laws further limit the amount of any other claims that we can makeif a lease is rejected. As a result, it is likely that we would recoversubstantially less than the full value of the remaining rent during the term.

 

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***We may beunable to secure funds for future tenant improvements.***

*** ***

We may be required to expend substantial funds to improve or refurbishleaseable space either to maintain existing tenants or to attract newtenants.  Although we have establishedreserves for capital improvements, these reserves may not be sufficient whichwould require us to seek funds from other sources.  We cannot assure you that sufficientfinancing will be available or, if available, will be available on termsacceptable to us, if at all.  Moreover,certain reserves required by lenders may be designated for specific uses andmay not be available to use for tenant improvements.  Additional borrowing for capital improvementswill increase our interest expense. Failure to make these improvements could have a material adverse effecton the value of the impacted properties and the revenues generated by thoseproperties.

 

***We may beunable to sell a property on acceptable terms and conditions, if at all.***

*** ***

We intend to hold our realproperties and other investments until our board decides that a sale or otherdisposition is consistent with our investment objectives or until it appearsthat these objectives will not be met.  Otherwise, Behringer Advisors,subject to approval of our board, may exercise its discretion as to whether andwhen to sell a property, and we will have no obligation to sell properties atany particular time, except upon our liquidation if we do not cause the sharesto be listed for trading on a national securities exchange by 2017, unless amajority of the board of directors, including a majority of the independentdirectors, approve otherwise.  We may not be able to sell a property orproperties even if Behringer Advisors believes doing so would be in our bestinterest.  Real estate investmentsgenerally, and in particular large office properties like those that we own,often cannot be sold quickly. The capitalization rates at which properties maybe sold have generally been rising, thereby reducing our potential proceedsfrom sale. Consequently, we may not be able to alter our portfolio promptly inresponse to changes in economic or other conditions. In addition, the Codelimits our ability to sell properties that we have held for fewer than twoyears without resulting in adverse consequences to our stockholders.Furthermore, properties that we have owned for a significant period of time orthat we acquired in exchange for partnership interests in our operatingpartnership often have a low tax basis. If we were to dispose of any of these properties in a taxabletransaction, we may be required under provisions of the Code applicable toREITs to distribute a significant amount of the taxable gain to ourstockholders and this could, in turn, impact our cash flow. In some cases, taxprotection agreements with third parties will prevent us from selling certainproperties in a taxable transaction without incurring substantial costs. Inaddition, purchase options and rights of first refusal held by tenants orpartners in joint ventures may also limit our ability to sell certainproperties. All of these factors reduce our ability to respond to changes inthe performance of our investments.

 

***We may sufferuninsured losses relating to real property or pay excessively expensivepremiums for insurance coverage.***

*** ***

Although Behringer Advisors attempts toensure that all of our properties are adequately insured to cover casualtylosses, there are certain types of losses, generally catastrophic in nature,such as losses due to wars, acts of terrorism, earthquakes, floods, hurricanes,pollution or environmental matters, which are uninsurable or not economicallyinsurable, or may be insured subject to limitations, such as large deductiblesor co-payments.  Insurance risksassociated with potential terrorist acts could sharply increase the premiums wepay for coverage against property and casualty claims.  Mortgage lenders generally insist thatspecific coverage against terrorism be purchased by commercial property ownersas a condition for providing mortgage, bridge or mezzanine loans.  We cannot be certain that this coverage willcontinue to be available, or available at reasonable cost, if at all, whichcould inhibit our ability to finance or refinance our properties.  We may be required to provide other financialsupport, either through financial assurances or self-insurance, to coverpotential losses.  We cannot assure youthat we will have adequate coverage for any losses we may suffer.  In the event that any of our propertiesincurs a casualty loss that is not fully covered by insurance, the value ofthat asset will be reduced by the uninsured loss.  In addition, other than any capital reservewe may establish, we will have limited sources of funding to repair orreconstruct any uninsured damaged property, and we cannot assure you that thosereserves will be sufficient.

 

***Developmentand construction projects are subject to delays that may materially increasethe cost to complete the project.***

*** ***

We may, from time to time, develop and construct new properties orredevelop existing properties.  In doingso, we will be subject to the risks and uncertainties associated withconstruction and development including the environmental concerns ofgovernmental entities or community groups and our builder’s ability to controlconstruction costs or to build in conformity with plans, specifications andtimetables.  The builder’s failure toperform may necessitate legal action by us to rescind the purchase or theconstruction contract or to compel performance. Performance also may be affected or delayed by conditions beyond thebuilder’s control.  Delays in completionof construction also could give tenants the right to terminate preconstructionleases for space at a newly developed project. We may incur additional risks when we make periodic progress payments orother advances to builders prior to completion of construction.  These and other such factors can result inincreased costs of a project or loss of our investment.  In addition, we will be subject to normallease-up risks relating to newly constructed or re-developed projects.  Furthermore, we must rely upon projections ofrental income and 

 

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expenses and estimates of the fair marketvalue of property upon completion of construction when agreeing upon a price tobe paid for the property at the time of acquisition of the property.  If our projections are inaccurate, we may paytoo much for a property, and our return on our investment could suffer.

 

We may also invest in unimproved real property.  Returns from development of unimprovedproperties also are subject to additional risks and uncertainties such as those associated with re-zoning.

 

***We could loseour earnest money deposit.***

*** ***

We may enter intocontracts to acquire real property, under which we are obligated to pay asubstantial earnest money deposit.  As aresult of customary closing conditions in these agreements, includingcompletion of due diligence investigations, we may be unable to complete anacquisition, or we may choose not to close on an acquisition. If we choose notto close on an acquisition, we could lose our earnest money.

 

Alternatively, wemay enter into agreements with real estate developers, including BehringerDevelopment Company LP, an affiliate of Behringer Advisors, where, at the timeof contracting and paying our earnest money deposit, the developer has not yetacquired title to the subject property. The developer may only have a contract to acquire land, a developmentagreement to develop a building on the land and an agreement with one or moretenants to lease all or part of the property upon its completion.  In the event that the developer is unable toacquire title to the property or complete the development, and we do not closeon the purchase of the property, there is no assurance that the developer willrefund our earnest money deposit, which may not be secured by any assets.

 

***We competewith third parties in acquiring properties and other assets.***

*** ***

We believe thatthe current market for properties that meet our investment objectives is highlycompetitive.  We compete with many otherentities engaged in real estate investment activities, including individuals,corporations, bank and insurance company investment accounts, other REITs, realestate limited partnerships and other entities engaged in real estate investment activities, many of which have greaterresources than we do.  Larger real estateprograms may enjoy significant competitive advantages that result from, amongother things, a lower cost of capital and enhanced operating efficiencies.  In addition, the number of entities and theamount of funds competing for suitable investment properties may increase.  Any increase would result in increased demandand prices for these assets.  If we payhigher prices for properties and other investments, our returns on investmentwill be less which may have an adverse effect on our ability to paydistributions to our stockholders.

 

***Aconcentration of our investments in any one property class may leave ourprofitability vulnerable to a downturn in that sector.***

*** ***

Substantially all of our investments are focused on institutionalquality office properties.  As a result, we are subject to risks inherentin investing in a single type of property.  The impact of a downturn indemand for institutional quality office properties could be more pronouncedthan if we had more fully diversified our investments.

 

***Acquiring orattempting to acquire multiple properties in a single transaction may adverselyaffect our operations.***

*** ***

From time to time, we have acquired, and may continue to acquire,multiple properties in a single transaction.  Portfolio acquisitions aremore complex and expensive than single property acquisitions, and subject to agreater risk of not closing.  Portfolio acquisitions also may result in usowning investments in geographically dispersed markets, placing additionaldemands on our ability to manage the properties in the portfolio.  Inaddition, a seller may require that a group of properties be purchased as a package even though we may not want topurchase one or more properties in the portfolio.  In these situations, ifwe are unable to identify another person or entity to acquire the unwantedproperties, we may be required to operate or attempt to dispose of these properties. Acquiring multiple properties in a single transaction likely requires us toaccumulate a large amount of cash.  Thereturns that we earn on this excess cash are typically less than the ultimatereturns generated by the real property and therefore, accumulating such cashcould reduce the funds available to pay distributions to our stockholders.

 

***Our operatingresults will be negatively affected if our investments, including investmentsin TIC interests sponsored by our sponsor, do not meet projected distributionlevels.***

*** ***

Affiliates of Behringer Advisors have formedand organized a number of TIC real estate projects.  Some of these projects have not met thedistribution levels or the leasing and operational thresholds projected by BehringerHarvard Holdings and its affiliates. Specifically, several TIC investment programs have not benefited fromexpected leasing improvements.  BehringerHarvard Holdings has provided support for some of these programs in the form ofmaster leases 

 

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and other payments.  If projections related to our investments,including any TIC interests in which we invest, are inaccurate, we may pay toomuch for an investment and our return on our investment could suffer.

 

***The cost ofcomplying with environmental and other governmental laws and regulations mayadversely affect us.***

*** ***

All real property and the operationsconducted on real property are subject to federal, state and local laws andregulations (including those of foreign jurisdictions) relating toenvironmental protection and human health and safety. These laws andregulations generally govern wastewater discharges, air emissions, the operationand removal of underground and above-ground storage tanks, the use, storage,treatment, transportation and disposal of solid and hazardous materials, andthe remediation of contamination associated with disposals. We also arerequired to comply with various local, state and federal fire, health,life-safety and similar regulations. Some of these laws and regulations may impose joint and severalliability on tenants or owners for the costs of investigating or remediatingcontaminated properties.  These laws andregulations often impose liability whether or not the owner knew of, or wasresponsible for, the presence of the hazardous or toxic substances.  The cost of removing or remediating could besubstantial.  In addition, the presenceof these substances, or the failure to properly remediate these substances, mayadversely affect our ability to sell or rent a property or to use the propertyas collateral for borrowing.

 

Environmental laws and regulations also mayimpose restrictions on the manner in which properties may be used or businessesmay be operated, and these restrictions may require substantial expenditures byus.  Environmental laws and regulationsprovide for sanctions in the event of noncompliance and may be enforced bygovernmental agencies or, in certain circumstances, by private parties.  Third parties may seek recovery from ownersof real properties for personal injury or property damage associated withexposure to released hazardous substances. Compliance with new or more stringent laws or regulations or stricterinterpretations of existing laws may require material expenditures by us.  We cannot assure you that future laws,ordinances or regulations will not impose any material environmental liabilityon us or that the environmental condition of our properties will not beaffected by the manner in which tenants operate their businesses, by theexisting condition of the land, by operations in the vicinity of theproperties, such as the presence of underground storage tanks, or by the activitiesof unrelated third parties.

 

***Our costsassociated with complying with the Americans with Disabilities Act may affectcash available for distributions.***

*** ***

Our real properties are generally subject tothe Americans with Disabilities Act of 1990, as amended, or similar laws offoreign jurisdiction.  Under this Act,all places of public accommodation are required to comply with federalrequirements related to access and use by disabled persons.  The Act has separate compliance requirementsfor “public accommodations” and “commercial facilities” that generally requirethat buildings and services be made accessible and available to people withdisabilities.  The Act’s requirementscould require removal of access barriers and could result in the imposition of injunctiverelief, monetary penalties or, in some cases, an award of damages.  We attempt to acquire properties that complywith the Act or any relevant law or regulation of a foreign jurisdiction orplace the burden on the seller or other third-party, such as a tenant, toensure compliance with those laws or regulations.  However, we cannot assure you that we will beable to acquire properties or allocate responsibilities in this manner.

 

***If we sellproperties by providing financing to purchasers, we will bear the risk ofdefault by the purchaser.***

*** ***

We may, from timeto time, sell a property or other asset by providing financing to thepurchaser.  There are no limits orrestrictions on our ability to accept purchase money obligations secured by amortgage as payment for the purchase price. The terms of payment to us will be affected by custom in the area wherethe property being sold is located and then-prevailing economicconditions.  If we receive promissorynotes or other property in lieu of cash from property sales, the distributionof the proceeds of sales to our stockholders, or reinvestment in otherproperties, will be delayed until the promissory notes or other property areactually paid, sold, refinanced or otherwise disposed.  In some cases, we may receive initial downpayments in cash and other property in the year of sale in an amount less thanthe selling price and subsequent payments will be spread over a number ofyears.  We will bear the risk of defaultby the purchaser and may incur significant litigation costs in enforcing ourrights against the purchaser.

 

**Risks Associated withDebt Financing**

** **

***We incurmortgage indebtedness and other borrowings, which increases our business risks.***

*** ***

We are permitted to, and typically do, acquire real properties andother real estate-related investments by assuming either existing financingsecured by the asset or by borrowing new funds. In addition, we may incur or increase our mortgage debt by obtainingloans secured by some or all of our assets to obtain funds to acquireadditional investments or to pay distributions to our stockholders.  We also may borrow funds if necessary tosatisfy the requirement that we distribute at least 90% of our annual “REITtaxable income,” or otherwise as is necessary or advisable to assure that wemaintain our qualification as a REIT for federal income tax purposes.

 

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Although our charter imposes limits on our total indebtedness, there isno limit on the amount we may invest in any single property or other asset oron the amount we can borrow to purchase any individual property or otherinvestment.  Further, we may exceed thelimits set forth in our charter if approved by a majority of our independentdirectors.

 

In addition toour charter limitation, our board of directors has adopted a policy togenerally limit our aggregate borrowings to approximately 55% of the aggregatevalue of our assets unless substantial justification exists that borrowing agreater amount is in our best interests. Our policy limitation, however, does not apply to individual real estateassets and will apply only when we have invested most of our capital raised inthe primary portion of our public offerings. As a result, we typically borrow, and expect to continue borrowing, morethan 55% of the contract purchase price of each real estate asset we acquire tothe extent our board of directors determines that borrowing these amounts isreasonable.

 

We do not borrow money secured by a particular real property unless webelieve the property’s projected cash flow is sufficient to service themortgage debt.  However, if there is ashortfall in cash flow, then the amount available for distributions tostockholders may be affected.  Principaland interest payments reduce cash that would otherwise be available for otherpurposes.  Further, incurring mortgagedebt increases the risk of loss because defaults on indebtedness secured by aproperty may result in foreclosure actions initiated by lenders and our loss ofthe property securing the loan that is in default.  For tax purposes, a foreclosure is treated asa sale of the property for a purchase price equal to the outstanding balance of the debtsecured by the mortgage.  If theoutstanding balance of the debt secured by the mortgage exceeds our tax basisin the property, we would recognize taxable income on foreclosure, but wouldnot receive any cash proceeds.  We alsomay provide full or partial guarantees to lenders of mortgage debt to ourindirect subsidiaries that own our properties. If we guarantee debt on behalf of an entity that owns one of ourproperties, we will be responsible to the lender for satisfaction of the debtif it is not paid by the entity.  If anymortgages contain cross-collateralization or cross-default provisions, there isa risk that more than one real property may be affected by a default.

 

***Recent disruptions in thefinancial markets and deteriorating economic conditions could adversely affectour ability to secure debt financing on attractive terms and the values of ourinvestments.***

 

The commercialreal estate debt markets are currently experiencing volatility as a result ofcertain factors, including the tightening of underwriting standards by lendersand credit rating agencies and the significant inventory of unsoldcollateralized mortgage backed securities in the market.  Credit spreads for major sources of capitalhave widened significantly as investors have demanded a higher riskpremium.  This is resulting in lendersincreasing the cost for debt financing. An increase in the overall cost of borrowings, either by increases inthe index rates or by increases in lender spreads, may result in our investmentoperations generating lower overall economic returns and a reduced level ofcash flow, which could potentially impact our ability to make distributions toour stockholders at current levels.  Inaddition, the recent dislocations in the debt markets have reduced the amountof capital that is available to finance real estate, which, in turn: (1) leadsto a decline in real estate values generally; (2) slows real estatetransaction activity; (3) reduces the loan to value upon which lenders arewilling to extend debt; and (4) results in difficulty in refinancing debtas it becomes due.  If the current debtmarket environment persists, we may be required to modify our investmentstrategies in order to seek to optimize our portfolio performance.  Our strategies may include, among otheroptions, limiting or eliminating the use of debt, focusing on those investmentsthat do not require the use of leverage or pursuing real estate assets otherthan real properties, in order to meet our portfolio goals.

 

The pervasiveand fundamental disruptions that the global financial markets are currentlyundergoing have led to extensive and unprecedented governmentalintervention.  Such intervention has incertain cases been implemented on an “emergency” basis, suddenly and substantiallyeliminating market participants’ ability to continue to implement certainstrategies or manage the risk of their outstanding positions.  In addition, these interventions havetypically been unclear in scope and application, resulting in confusion anduncertainty, which in itself has been materially detrimental to the efficientfunctioning of the markets as well as previously successful investmentstrategies.  Among measures proposed bylegislators have been moratoriums on loan payments, limits on the ability oflenders to enforce loan provisions, including the collection of interest atrates agreed in the loan documents, and involuntary modification of loanagreements.  It is impossible to predictwhat, if any, additional interim or permanent governmental restrictions may beimposed or the effect of such restrictions on us and our results ofoperations.  There is likely to beincreased regulation of the financial markets.

 

***Lendersoften require us to enter into restrictive covenants relating to ouroperations, which could affect our distribution and operating policies,including our ability to pay distributions.***

 

In connection with obtainingfinancing, lenders may impose restrictions on us that affect our distributionand operating policies.  Our credit facility, for example, restricts usfrom paying distributions if the aggregate distributions paid or declaredduring a period of four consecutive quarters exceeds 95% of our funds fromoperations during that period, and restricts us from paying any distributions,other than as required to maintain our REIT qualification, or any advisory feesif 

 

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an event of default has occurred and iscontinuing.  In addition, we have entered into, in the case of our creditfacility, and may continue to enter into, lending agreements that limit ourability to incur additional debt or make certain investments.  Further,our loan agreements generally restrict our ability to encumber or otherwisetransfer our interest in the respective property without the prior consent ofthe lender.  Loan documents we enter into may contain other customarynegative covenants that may limit our ability to further mortgage the property,discontinue insurance coverage, replace Behringer Advisors as our advisor orimpose other limitations.

 

***Interest-onlyindebtedness may increase our risk of default and ultimately may reduce ourfunds available for distribution to our stockholders.***

*** ***

We may financeour property acquisitions using interest-only mortgage indebtedness. During the interest only period, the amount of each scheduled payment will beless than that of a traditional amortizing mortgage loan.  The principalbalance of the mortgage loan will not be reduced (except in the case ofprepayments) because there are no scheduled monthly payments of principalduring this period.  After the interest-only period, we will be requiredeither to make scheduled payments of amortized principal and interest or tomake a lump-sum or “balloon” payment at maturity.  These required principal or balloon paymentswill increase the amount of our scheduled payments and may increase our risk ofdefault under the related mortgage loan.

 

If the mortgage loan has an adjustable interest rate, the amount of ourscheduled payments also may increase at a time of rising interest rates. Increased payments and substantial principal or balloon payments will reducethe funds available for distribution to our stockholders because cash otherwiseavailable for distribution will be required to pay principal and interestassociated with these mortgage loans.

 

***Increases ininterest rates could increase the amount of our debt payments and adverselyaffect our ability to make distributions to our stockholders.***

*** ***

We may borrow money that bears interest at a variable rate.  Variable rate loans will expose us toincreases in costs in a rising interest rate environment.  In addition, if rising interest rates causeus to need additional capital to repay indebtedness, we may be forced to sellone or more of our properties or investments in real estate at times which maynot permit us to realize the return on the investments we would have otherwiserealized.

 

***To hedgeagainst exchange rate and interest rate fluctuations, we may use derivativefinancial instruments.  Derivativefinancial instruments may be costly and ineffective and may reduce the overallreturns on your investment.***

*** ***

From time to time we may use derivative financial instruments to hedgeexposures to changes in exchange rates and interest rates on loans secured byour assets and investments in collateralized mortgage-backed securities. Derivative instruments may include interest rate swap contracts, interest ratecap or floor contracts, futures or forward contracts, options or repurchaseagreements.  Our actualhedging decisions will be determined in light of the facts and circumstancesexisting at the time of the hedge and may differ from time to time.  There is no assurance that our hedgingactivities will have a positive impact on our results of operations orfinancial condition. We might be subject to costs, such as transaction fees orbreakage costs, if we terminate these arrangements.

 

To the extent that we use derivative financial instruments to hedgeagainst exchange rate and interest rate fluctuations, we are exposed to creditrisk, basis risk and legal enforceability risks.  In this context, credit risk is the failureof the counterparty to perform under the terms of the derivative contract.  If the fair value of a derivative contract ispositive, the counterparty owes us, which creates credit risk for us.  Basis risk occurs when the index upon whichthe contract is based is more or less variable than the index upon which thehedged asset or liability is based, thereby making the hedge lesseffective.  Finally, legal enforceabilityrisks encompass general contractual risks including the risk that thecounterparty will breach the terms of, or fail to perform its obligationsunder, the derivative contract, particularly in light of current marketconditions.  Further, the REIT provisionsof the Code may limit our ability to hedge the risks inherent to ouroperations.  We may be unable to managethese risks effectively.

 

***We may enter intoderivative contracts that could expose us to contingent liabilities in thefuture.***

*** ***

Our derivative financial instruments may require us to fund cashpayments upon the early termination of a derivative agreement caused by anevent of default or other early termination event. The amount due would beequal to the unrealized loss of the open swap positions with the respectivecounterparty and could also include other fees and charges. In addition, someof these derivative arrangements may require that we maintain specifiedpercentages of cash collateral with the counterparty to fund potentialliabilities under the derivative contract. We may have to make cash payments inorder to maintain the required percentage of collateral with the counterparty.These economic losses would be reflected in our results of operations, and ourability to fund these obligations would depend on the liquidity of ourrespective assets and 

 

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access to capital at the time. Our duediligence may not reveal all of an entity’s liabilities and may not revealother weaknesses in the entity’s business.

 

**Risks Related toConflicts of Interest**

** **

***We are subject to conflicts ofinterest arising out of our relationships with our advisor and its affiliates,including the material conflicts discussed below.***

*** ***

***Becausea number of Behringer Harvard real estate programs use investment strategiesthat are similar to ours, Behringer Advisors and its and our executive officersface conflicts of interest relating to the purchase and leasing of propertiesand other investments, and these conflicts may not be resolved in our favor.***

 

Affiliates ofBehringer Advisors are currently sponsoring or have recently sponsored sixpublic real estate programs with substantially the same investment objectivesand strategies as ours.  There may beperiods during which all of these programs are seeking to invest in similarproperties and other real estate-related investments.  As a result, we may be seeking to buyproperties and other real estate-related investments at the same time as theseother Behringer Harvard-sponsored programs that are managed by officers andemployees of our advisor and itsaffiliates.  Our executive officers andthe executive officers of our advisor are also the executive officers of otherBehringer Harvard-sponsored REITs and their advisors, the general partners ofBehringer Harvard-sponsored partnerships or the advisors or fiduciaries ofother Behringer Harvard-sponsored programs. Behringer Advisors may choose a property that provides lower returns tous than a property purchased by another Behringer Harvard-sponsoredprogram.  In the event these conflictsarise, we cannot assure you that our best interests will be met when officersand employees acting on behalf of our advisor and on behalf of advisors and managers ofother Behringer Harvard-sponsored programs decide whether to allocate anyparticular property to us or to another Behringer Harvard-sponsored program oraffiliate, which may have an investment strategy that is similar to ours.  In addition, we may acquire properties ingeographic areas where other Behringer Harvard-sponsored programs ownproperties.  If one of the otherBehringer Harvard-sponsored programs attracts a tenant that we are competingfor, we could suffer a loss of revenue due to delays in locating anothersuitable tenant.  Similar conflicts ofinterest may occur if our advisor determines to make or purchase mortgage,bridge or mezzanine loans or participations in mortgage, bridge or mezzanineloans on our behalf, since other Behringer Harvard-sponsored programs may becompeting with us for these investments.

 

***Our advisorand its affiliates, including all of our executive officers and some of ourdirectors, face conflicts of interest caused by their compensation arrangementswith us, which could result in actions that are not in the long-term bestinterests of our stockholders.***

*** ***

Our advisor and its affiliates,including our property manager, are entitled to substantial fees from us underthe terms of our advisory management agreement and property managementagreement.  These fees were not negotiated at arm’slength and reduce the amount of cash available for investment in properties orto pay distributions to stockholders.

 

These fees could influence ouradvisor’s advice to us as well as the judgment of affiliates of our advisorperforming services for us. Among other matters, these compensationarrangements could affect their judgment with respect to:

 

·                                          continuing,renewing or enforcing our agreements with our advisor and its affiliates,including the advisory management agreement and the property managementagreement;

 

·                                          propertysales, which reduce the asset management and property management fees payableto our advisor but also entitle our advisor to real estate commissions and thepossible issuance to our advisor of shares of our common stock through theconversion of our convertible stock;

 

·                                          propertyacquisitions from other Behringer Harvard-sponsored programs, which mightentitle affiliates of our advisor to real estate commissions and possiblesuccess-based sale fees in connection with its services for the seller;

 

·                                          propertyacquisitions from third parties, which entitle our advisor to acquisition andadvisory fees and asset management fees;

 

·                                          borrowingsto acquire properties, which increase the acquisition, debt financing and assetmanagement fees payable to our advisor;

 

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·                  whetherwe seek to internalize our management functions, which could result in usretaining some of our advisor’s key officers and employees for compensation thatis greater than that which they currently earn and which could requireadditional payments to affiliates to purchase the assets and operations of ouradvisor;

 

·                  whetherand when we seek to list our common stock on a national securities exchange,which could entitle our advisor to the issuance of shares of our common stockthrough the conversion of our convertible stock; and

 

·                  whetherand when we seek to sell the company or its assets, which sale could entitleour advisor to real estate commissions and to the issuance of shares of ourcommon stock through the conversion of our convertible stock.

 

The feesour advisor receives in connection with transactions involving the purchase andmanagement of an asset are based on the cost of the investment, including theamount budgeted for the development, construction, and improvement of eachasset, and are not based on the quality of the investment or the quality of theservices rendered to us. This may influence our advisor to recommend riskiertransactions to us. Furthermore, the advisor will refund these fees to theextent they are based on budgeted amounts that prove too high once development,construction, or improvements are completed, but the fact that these fees areinitially calculated in part based on budgeted amounts could influence our advisorto overstate the estimated costs of development, construction, or improvementsin order to accelerate the cash flow it receives.

 

Inaddition, the conversion feature of our convertible stock could cause us tomake different investment or disposition decisions than we would otherwisemake, in order to avoid the stock conversion.

 

***Because our ability to replace our propertymanager is restricted, we may be unable to terminate the property managementagreement at the desired time, which may adversely affect our operations andthe distributions we are able to pay to our stockholders.***

 

Under the terms of our property managementagreement, we may terminate the agreement upon 30 days’ notice in the event of,and only in the event of, a showing of misconduct, negligence or deliberatemalfeasance by the property manager in performing its duties.  Our boardof directors may find the performance of our property manager to beunsatisfactory.  However, unsatisfactory performance by the propertymanager may not constitute “misconduct, negligence or deliberate malfeasance.” As a result, we may be unable to terminate the property management agreement atthe desired time, which may have a material adverse effect on the managementand profitability of our properties.

 

***Behringer Advisors will face conflicts ofinterest relating to joint ventures, TIC investments or other co-ownershiparrangements that we enter with other Behringer Harvard-sponsored programs,which could result in a disproportionate benefit to another BehringerHarvard-sponsored program.***

 

We may enter into joint ventures, TICinvestments or other co-ownership arrangements with other BehringerHarvard-sponsored programs to acquire, develop or improve properties as well asto acquire other real estate-related investments.  Theexecutive officers of Behringer Advisors are also the executive officers ofother Behringer Harvard-sponsored REITs and their advisors, the generalpartners of other Behringer Harvard-sponsored partnerships or the advisors orfiduciaries of other Behringer Harvard-sponsored programs.  These executive officers face conflicts ofinterest in determining which Behringer Harvard-sponsored program should enterinto any particular joint venture, TIC or co-ownership arrangement.  These persons may also have a conflict instructuring the terms of the relationship between our interests and theinterests of the Behringer Harvard-sponsored co-venturer, co-tenant or partneras well as conflicts of interest in managing the joint venture.

 

In the event that we enter into a jointventure, TIC investment or other co-ownership arrangements with anotherBehringer Harvard-sponsored program or joint venture, Behringer Advisors andits affiliates may have a conflict of interest in determining when, andwhether, to buy or sell a particular real estate property.  Our goals and objectives also may divergefrom those of our joint venture partner which could lead to deadlocks anddelays in decisions to sell a property or result in the premature sale of aproperty.  In the event that aco-venturer has a right of first refusal to buy out the other co-venturer, itmay be unable to finance the buy-out at that time.  If our interest is subject to a buy/sellright, we may not have sufficient cash, available borrowing capacity or othercapital resources to allow us to purchase an interest of a co-venturer subjectto the buy/sell right, in which case we may be forced to sell our interest asthe result of the exercise of the right when we would otherwise prefer to keepour interest.  Furthermore, we may not beable to sell our interest in a joint venture if we desire to exit the venturefor any reason or if our interest is likewise subject to a right of firstrefusal of our co-venturer or partner, our ability to sell such interest may beadversely impacted by this right.

 

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***Our officers face conflicts of interestrelated to the positions they hold with other entities affiliated withBehringer Advisors, which could diminish the value of the services they provideto us.***

 

Each of our executive officers is also anofficer of Behringer Advisors, our property manager or other entitiesaffiliated with Behringer Advisors, including the advisors and fiduciaries toother Behringer Harvard-sponsored programs. As a result, these individuals owe fiduciary duties to these otherentities and their equity holders, which may conflict with the fiduciary dutiesthat they owe to us and our stockholders. Their loyalties to these other entities and equity holders could resultin action or inaction that is detrimental to our business, which could harm theimplementation of our business strategy and our investment and leasingopportunities.  In addition, becausethese persons have competing interests on their time and resources, they mayhave conflicts of interest in allocating their time between our business andthese other activities.  Conflicts withour business and interests are most likely to arise from involvement inactivities related to: (1) allocating new investments and management timeand services between us and the other entities; (2) the timing and termsof the investment in, or sale of, an asset; (3) development of ourproperties by affiliates of our advisor; (4) investments with affiliatesof our advisor; (5) compensation to our advisor; and (6) ourrelationship with our property manager.

 

***The percentage of our shares that you ownwill be diluted upon conversion of the convertible stock.***

 

Behringer Advisors purchased 1,000 shares ofour non-participating, non-voting, convertible stock for an aggregate purchaseprice of $1,000.  Under limited circumstances, these shares may beconverted into shares of our common stock, reducing the percentage of ourcommon stock owned by stockholders prior to conversion.  The terms of the convertible stock providethat, generally, holders of convertible stock will receive shares of commonstock with an aggregate value equal to 15% of the amount by which (1) ourenterprise value, including the total amount of distributions paid to our stockholders, exceeds (2) thesum of the aggregate capital invested by our stockholders plus a 9% cumulative,non-compounded, annual return on such capital.  The shares of convertiblestock will be converted into shares of common stock automatically if:

 

·                  the holders of our common stock havereceived distributions equal to the sum of the aggregate capital invested bystockholders and a 9% cumulative, non-compounded, annual return on thiscapital;

 

·                  the shares of common stock are listedfor trading on a national securities exchange; or

 

·                  the advisory management agreementexpires and is not renewed or is terminated, other than due to a terminationbecause of a material breach by our advisor, and at the time of, or subsequentto, termination, the holders of our common stock have received aggregatedistributions equal to the sum of the capital invested by stockholders and a 9%cumulative, non-compounded, annual return on the capital contributions throughthe date of conversion.

 

Behringer Advisors caninfluence whether we terminate the advisory management agreement or allow it toexpire without renewal, or whether our common stock is listed for trading on anational securities exchange.  Accordingly, Behringer Advisors caninfluence both the conversion of the convertible stock issued to it and theresulting dilution of other stockholders’ interests.

 

***Behringer Advisors faces conflicts ofinterest relating to the incentive fee structure under our advisory managementagreement, which could result in actions that are not necessarily in thelong-term best interests of our stockholders.***

 

Under our advisory management agreement,Behringer Advisors is entitled to fees that provide incentives to our advisorto perform in our best interests and in the best interests of ourstockholders.  However, because our advisor does not maintain asignificant equity interest in us and is entitled to receive substantialminimum compensation regardless of performance, our advisor’s interests are notwholly aligned with those of our stockholders.  In that regard, ouradvisor could be motivated to recommend riskier or more speculative investmentsin order for us to generate the specified levels of performance or salesproceeds that would entitle our advisor to fees.  In addition, our advisor’sright to fees upon the sale of our assets and to participate in sale proceedscould result in our advisor recommending sales of our investments at theearliest possible time at which sales of investments would produce the level ofreturn that would entitle the advisor to compensation relating to such sales,even if continued ownership of those investments might be in our best long-terminterest.

 

Our advisory management agreement alsorequires us to pay a performance-based termination fee to our advisor (reducedby the value of shares of common stock issued or issuable upon conversion ofour convertible stock) in the event that the advisory management agreement expires and is not renewed oris terminated, other than because of a material breach by the advisor; theholders of the common stock have received distributions equal to the sum of thecapital invested by such stockholders and a 9% cumulative, non-compounded,annual return; or the shares of common stock are listed for 

 

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trading on a national securitiesexchange.  To avoid paying this fee, our independent directors may decideagainst terminating the advisory management agreement prior to our listing evenif, but for the termination fee, termination of the advisory managementagreement would be in our best interest.  In addition, the requirement topay a fee to our advisor at termination could cause us to make differentinvestment or disposition decisions than we would otherwise make, in order tosatisfy our obligation to pay the fee to the terminated advisor. Moreover, our advisor has the right to terminate the advisory managementagreement upon a change of control of our company and thereby trigger thepayment of the performance fee, which could have the effect of delaying,deferring or preventing the change of control.

 

***Because we rely on affiliates of BehringerHarvard Holdings to provide advisory and property management services, ifBehringer Harvard Holdings is unable to meet its obligations we may be requiredto find alternative providers of these services, which could disrupt ourbusiness.***

 

Behringer Harvard Holdings, through one ormore of its subsidiaries, owns and controls our advisor and our propertymanager.  These entities represent asubstantial part of Behringer Harvard Holdings’ business.  In light of the common ownership of theseentities and their importance to Behringer Harvard Holdings, we consider thefinancial condition of Behringer Harvard Holdings when assessing the financialcondition of our advisor and property manager. Although we believe that Behringer Harvard Holdings currently hasadequate working capital, from both funds on hand and borrowing capacity, tomeet its obligations, itscontinued viability may be affected by its ability to continue to successfullysponsor and operate real estate programs. In the event that Behringer Harvard Holdings would be unable to meet itsobligations as they become due, we might be required to find alternativeservice providers, which could materially disrupt our business.

 

**Risks Related toInvestments in Real Estate-Related Securities**

 

***Investments in real estate-related-securitieswill be subject to specific risks relating to the particular issuer of thesecurities and may be subject to the general risks of investing in subordinatedreal estate securities.***

 

We may invest in real estate-relatedsecurities of both publicly traded and private real estate companies.  Real estate-related equity securities arealways unsecured and subordinated to other obligations of the issuer.  Investments in real estate-related equitysecurities are subject to risks of: (1) limited liquidity in the secondarytrading market in the case of unlisted or thinly traded securities; (2) substantialmarket price volatility resulting from changes in prevailing interest rates inthe case of traded equity securities; (3) subordination to the liabilitiesof the entity; (4) the operation of mandatory sinking fund orcall/redemption provisions during periods of declining interest rates thatcould cause the issuer to  redeem thesecurities; and (5) the possibility that earnings of the issuer may beinsufficient to meet its debt service and distribution obligations.  In addition, investments in realestate-related securities will involve special risks relating to the particularissuer of the securities, including the financial condition and businessoutlook of the issuer.  Issuers of realestate-related securities generally invest in real estate or realestate-related assets and are subject to the inherent risks associated withreal estate-related investments discussed in this Annual Report on Form 10-K,including:

 

·                  fluctuations in value due to changesin interest rates;

 

·                  interest rate caps on adjustablemortgage-backed securities;

 

·                  increases in levels of prepayments;

 

·                  fluctuations in the market value ofmortgage-backed securities;

 

·                  increases in borrower defaults;

 

·                  decreases in the value of propertyunderlying mortgage-backed securities; and

 

·                  conflicts between the debt structureused to acquire a mortgage and the debt structure of the mortgages.

 

These risks may adversely affect the value ofoutstanding real estate-related equity securities and the ability of theissuers thereof to repay principal and interest or make distribution payments.

 

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***Recent market conditions and the risk ofcontinued market deterioration may reduce the value of any real estate-relatedsecurities in which we may invest.***

 

Recently the U.S. credit markets and the sub-prime residential mortgagemarket have experienced severe dislocations and liquidity disruptions.Sub-prime mortgage loans have experienced increasing rates of delinquency,foreclosure and loss. These and other related events have had a significantimpact on the capital markets associated not only with sub-primemortgage-backed securities, asset-backed securities and collateralized debtobligations, but also with the U.S. credit and financial markets as a whole.

 

If we were to invest in real estate-related securities, including collateralizedmortgage-backed securities, as part of our investment strategy, we would beexposed to the volatility of the credit markets.  Turmoil in the credit market may have amaterial adverse effect on the value of our securities portfolio.

 

Because there may be significant uncertainty in the valuation of, or inthe stability of the value of, securities holdings, the fair values of theseinvestments might not reflect the prices that we would obtain if we sold theseinvestments.   Furthermore, due to the recentmarket events, these investments would be subject to rapid changes in valuecaused by sudden developments that could have a material adverse affect on thevalue of these investments.

 

To the extent that these volatile marketconditions persist or deteriorate, they may negatively impact our ability toboth acquire and sell any real estate-related securities holdings at a priceand with terms acceptable to us, and we could be required to recognizeimpairment charges or unrealized losses.

 

***The fees that we pay to invest in realestate-related securities will be greater than any fees that you would pay toinvest directly in these securities.***

 

We may pay acquisition fees tothird parties, including investment bankers and brokers, in connection withidentifying, reviewing, evaluating and investing in real estate-relatedsecurities.  In addition, we mayreimburse these third parties for these third parties for expenses related toselecting and acquiring securities for us, including, but not limited to, legalfees and expenses, third-party brokerage fees and other closing costs.   The fees we pay in connection with investingin real estate-related securities likely will be greater than the individualfees that you would pay to invest directly in these securities.

 

***Investments in real estate-related preferredequity securities involve a greater risk of loss than traditional debtfinancing.***

 

We may invest in real estate-relatedpreferred equity securities, which may involve a higher degree of risk thantraditional debt financing due to a variety of factors, including that suchinvestments are subordinate to the liabilities of the entity and are notsecured by property underlying the investment.  Furthermore, should theissuer default on our investment, we would be able to proceed only against theentity in which we have an interest, and not the property owned by such entity and underlying ourinvestment.  As a result, we may not recover some or all of ourinvestment.

 

***We may invest in non-U.S. dollar denominatedsecurities, exposing us to fluctuating currency rates.***

 

We may purchase real property or realestate-related securities denominated in foreign currencies.  A change inforeign currency exchange rates may have an adverse impact on returns on ournon-U.S. dollar denominated investments.  Although we may hedge ourforeign currency risk subject to the REIT income qualification tests, we maynot be able to do so successfully and may incur losses on these investments asa result of exchange rate fluctuations.

 

***We expect that a portion of any realestate-related securities investments we make will be illiquid, and we may notbe able to adjust our portfolio in response to changes in economic and otherconditions.***

 

Certain of the real estate-related securitiesthat we may purchase in connection with privately negotiated transactions willnot be registered under the applicable securities laws, resulting in aprohibition against their transfer, sale, pledge or other disposition except ina transaction that is exempt from the registration requirements of, or isotherwise in accordance with, those laws.  For example, mezzanine andbridge loans are particularly illiquid investments due to their short life,their unsuitability for securitization and the greater difficulty of recoupmentin the event of a borrower’s default.  Asa result, our ability to vary our portfolio in response to changes in economicand other conditions may be relatively limited.

 

***Interest rate and related risks may cause thevalue of our real estate-related securities investments to be reduced.***

 

Interest rate risk is the risk thatprevailing market interest rates change relative to the current yield on fixedincome securities such as preferred and debt securities, and to a lesser extentdividend paying common stock.  Generally, when market interest rates rise,the market value of these securities declines, and vice versa.  Inaddition, when interest rates fall, 

 

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issuers are more likely to repurchase theirexisting preferred and debt securities to take advantage of the lower cost offinancing.  As repurchases occur, principal is returned to the holders ofthe securities sooner than expected, thereby lowering the effective yield onthe investment.  On the other hand, when interest rates rise, issuers aremore likely to maintain their existing preferred and debt securities.  Asa result, repurchases decrease, thereby extending the average maturity of thesecurities.  We intend to manage interest rate risk by purchasingpreferred and debt securities with maturities and repurchase provisions thatare designed to match our investment objectives.  Failure to manage theserisks could have a material adverse effect on our business, results ofoperations, financial condition and ability to pay distributions.

 

***We may acquire real estate-related securitiesthrough tender offers, which may require us to spend significant amounts of timeand money that otherwise could be allocated to our operations.***

 

We may acquire real estate-related securitiesthrough tender offers, negotiated or otherwise, in which we solicit a target company’s stockholders to purchase theirsecurities.  The acquisition of these securities could require us to spendsignificant amounts of money that otherwise could be allocated to ouroperations.  Additionally, in order to acquire the securities, theemployees of our advisor likely will need to devote a substantial portion oftheir time to pursuing the tender offer — time that otherwise could beallocated to managing our business.

 

**Risks Associated withMortgage Lending**

 

***Our mortgage, bridge or mezzanine loans maybe impacted by unfavorable real estate market conditions, which could decreasethe value of those loans.***

 

If we make or invest in mortgage, bridge ormezzanine loans, we will be at risk of defaults on those loans caused by manyconditions beyond our control, including local and other economic conditionsaffecting real estate values and interest rate levels.  We do not knowwhether the values of the property securing the mortgage, bridge or mezzanine loans willremain at the levels existing on the dates of origination of the loans. If the values of the underlying properties drop, our risk will increase becauseof the lower value of the securities associated with the loan.

 

***Themezzanine loans in which we may invest would involve greater risks of loss thansenior loans secured by income-producing real properties.***

 

We mayinvest in mezzanine loans that take the form of subordinated loans secured bysecond mortgages on the underlying real property or loanssecured by a pledge of the ownership interests of either the entity owning thereal property or the entity that owns the interest in the entity owning thereal property.  These types ofinvestments involve a higher degree of risk than loans secured by firstmortgages on income producing real property because the investment may becomeunsecured as a result of foreclosure by the senior lender.  If borrowers of these loans are real estatedevelopers, our investments may involve additional risks, including dependencefor repayment on successful completion and operation of the project,difficulties in estimating construction or rehabilitation costs and loan termsthat often require little or no amortization. In the event of a bankruptcy of the entity providing the pledge of itsownership interests as security, we may not have full recourse to the assets ofthe entity, or the assets of the entity may not be sufficient to satisfy ourmezzanine loan.  If a borrower defaultson our mezzanine loan or debt senior to our loan, or in the event of a borrowerbankruptcy, our mezzanine loan will be satisfied only after the senior debt.  As a result, we may not recover some or allof our investment.

 

***Our mortgage, bridge or mezzanine loans willbe subject to interest rate fluctuations, which could reduce our returns ascompared to market interest rates and reduce the value of the loans if we sellthe loans.***

 

If we invest in fixed-rate,long-term mortgage, bridge or mezzanine loans and interest rates rise, themortgage, bridge or mezzanine loans could yield a return lowerthan then-current market rates.  Ifinterest rates decrease, we will be adversely affected to the extent thatmortgage, bridge or mezzanine loans are prepaid, because we may not be able tomake new loans at the previously higher interest rate.  If we invest in variable-rate loans andinterest rates decrease, our revenues will also decrease.  Finally, if we invest in variable-rate loansand interest rates increase, the value of the loans we own at such time wouldincrease.  For these reasons, if weinvest in mortgage, bridge or mezzanine loans, our returns on those loans andthe value of your investment will be subject to fluctuation in interest rates.

 

***We may experience delays in liquidatingdefaulted mortgage, mezzanine or bridge loans, which could delay our ability topay cash distributions to our stockholders.***

 

If there are defaults under ourmortgage, bridge or mezzanine loans, we may not be able to repossess and sellquickly any properties serving such loans. The resulting time delay could reduce the value of our investment in thedefaulted mortgage, bridge or mezzanine loans. An action to foreclose on a property securing a mortgage loan isregulated by state statutes and regulations and is subject to many of thedelays and expenses of any lawsuits brought in connection 

 

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with the foreclosure if thedefendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions,among other things, may impede our ability to foreclose on or sell themortgaged property or to obtain proceeds sufficient to repay all amounts due tous on the mortgage loan.

 

***Returns on our mortgage, bridge or mezzanineloans may be limited by regulations.***

 

The mortgage, bridge or mezzanine loans inwhich we invest or that we may make, may be subject to regulation by federal,state and local authorities (or regulations by foreign jurisdictions) andsubject to various laws and judicial and administrative decisions.  We maydetermine not to make mortgage, bridge or mezzanine loans in any jurisdictionin which we believe we have not complied in all material respects withapplicable requirements.  If we decide not to make mortgage, bridge ormezzanine loans in several jurisdictions, it could reduce the amount of incomewe would otherwise receive.

 

***Foreclosures create additional ownershiprisks that could adversely impact our returns on mortgage investments.***

 

If we acquire property by foreclosurefollowing defaults under our mortgage, bridge or mezzanine loans, we will havethe economic and liability risks as the owner.

 

***The liquidation of our assets may be delayed,which could delay distributions to our stockholders.***

 

The mezzanine and bridge loans we maypurchase will be particularly illiquid investments due to their short lives,their unsuitability for securitization and the greater difficulty of recoupmentin the event of a borrower’s default.  If our advisor determines that it is in our best interest to make orinvest in mortgage, bridge or mezzanine loans, any intended liquidation of usmay be delayed beyond the time of the sale of all of our properties until allmortgage, bridge or mezzanine loans expire or are sold, because we may enterinto mortgage, bridge or mezzanine loans with terms that expire after the datewe intend to have sold all of our properties.

 

**Federal Income Tax Risks**

 

***Failure to qualify as a REIT would adverselyaffect our operations and our ability to make distributions.***

 

We elected to be taxed as a REIT commencingwith our 2004 tax year.  In order for usto remain qualified as a REIT, we must satisfy certain requirements set forthin the Code and Treasury Regulations and maintain other facts and circumstancesthat are not entirely within our control. We intend to structure our activities in a manner designed to satisfyall of these requirements.  However, ifcertain of our operations were to be recharacterized by the Internal RevenueService, such recharacterization could jeopardize our ability to satisfy all ofthe requirements for qualification as a REIT and may affect our ability toqualify, or continue to qualify as a REIT. In addition, new legislation, new regulations, administrativeinterpretations or court decisions could significantly change the tax laws withrespect to qualifying as a REIT or the federal income tax consequences ofqualifying.

 

Our qualification as a REIT depends upon ourability to meet, through investments, actual operating results, distributionsand satisfaction of specific stockholder rules, the various tests imposed bythe Code.  We cannot assure you that wewill satisfy the REIT requirements in the future.

 

If we fail to qualify as a REIT for anytaxable year:

 

·                  we would not be allowed to deductdistributions paid to stockholders when computing our taxable income;

 

·                  we would be subject to federal incometax (including any applicable alternative minimum tax) on our taxable income atregular corporate rates;

 

·                  we would be disqualified from beingtaxed as a REIT for the four years following the year during which we failed toqualify, unless entitled to relief under certain statutory provisions;

 

·                  we would have less cash to paydistributions to stockholders; and

 

·                  we may be required to borrowadditional funds or sell some of our assets in order to pay corporate taxobligations.

 

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***Our investment strategy may cause us to incurpenalty taxes, lose our REIT status, or own and sell properties through taxableREIT subsidiaries, each of which would diminish the return to our stockholders.***

 

It is possible that one or moresales of our properties may be “prohibited transactions” under provisions ofthe Code.  If we are deemed to haveengaged in a “prohibited transaction” (i.e., we sell a property held by usprimarily for sale in the ordinary course of our trade or business) all profitthat we derive from such sale would be subject to a 100% penalty tax.  The Code sets forth a safe harbor for REITsthat wish to sell property without risking the imposition of the 100% penaltytax.  A principal requirement of the safeharbor is that the REIT must hold the applicable property for not less than twoyears prior to its sale.

 

If we desire to sell a property pursuant to atransaction that does not fall within the safe harbor, we may be able to avoidthe 100% penalty tax if we acquired the property through a taxable REITsubsidiary (“TRS”), or acquired the property and transferred it to a TRS for anon-tax business purpose prior to the sale (i.e., for a reason other than theavoidance of taxes).  However, there maybe circumstances that prevent us from using a TRS in a transaction that doesnot qualify for the safe harbor. Additionally, even if it is possible to effect a property dispositionthrough a TRS, we may decide to forgo the use of a TRS in a transaction thatdoes not meet the safe harbor requirements based on our own internal analysis,the opinion of counsel or the opinion of other tax advisors that thedisposition should not be subject to the 100% penalty tax.  In cases where a property disposition is noteffected through a TRS, the IRS could successfully assert that the dispositionconstitutes a prohibited transaction, in which event all of the net income fromthe sale of such property will be payable as a tax and none of the proceedsfrom such sale will be distributable by us to our stockholders or available forinvestment by us.

 

 If we acquire a property that weanticipate will not fall within the safe harbor from the 100% penalty tax upondisposition, then we may acquire such property through a TRS in order to avoidthe possibility that the sale of such property will be a prohibited transactionand subject to the 100% penalty tax.  Ifwe already own such a property directly or indirectly through an entity otherthan a TRS, we may contribute the property to a TRS if there is another, non-taxrelated business purpose for the contribution of such property to the TRS.Following the transfer of the property to a TRS, the TRS will operate theproperty and may sell such property and distribute the net proceeds from suchsale to us, and we may distribute the net proceeds distributed to us by the TRSto our stockholders.  Though a sale ofthe property by a TRS likely would eliminate the danger of the application ofthe 100% penalty tax, the TRS itself would be subject to a tax at the federallevel, and potentially at the state and local levels, on the gain realized byit from the sale of the property as well as on the income earned while theproperty is operated by the TRS.  Thistax obligation would diminish the amount of the proceeds from the sale of suchproperty that would be distributable to our stockholders. As a result, theamount available for distribution to our stockholders would be substantiallyless than if the REIT had not operated and sold such property through the TRSand such transaction was not successfully characterized as a prohibitedtransaction.  The maximum federalcorporate income tax rate currently is 35%. Federal, state and local corporateincome tax rates may be increased in the future, and any such increase wouldreduce the amount of the net proceeds available for distribution by us to ourstockholders from the sale of property through a TRS after the effective dateof any increase in such tax rates.

 

As a REIT, the value of thenon-mortgage securities we hold in TRSs may not exceed 20% (25% for our 2009taxable year and beyond) of the value of all of our assets at the end of anycalendar quarter.  If the IRS were todetermine that the value of our interests in TRSs exceeded this limit at theend of any calendar quarter, then we would fail to qualify as aREIT.  If we determine it to be in ourbest interests to own a substantial number of our properties through one ormore TRSs, then it is possible that the IRS may conclude that the value of ourinterests in our TRSs exceeds 20% (25% for our 2009 taxable year and beyond) ofthe value of our total assets at the end of any calendar quarter and thereforecause us to fail to qualify as a REIT. Additionally, as a REIT, no more than 25% of our gross income withrespect to any year may, in general, be from sources other than realestate-related assets.  Distributionspaid to us from a TRS are typically considered to be non-real estateincome.  Therefore, we may fail toqualify as a REIT if distributions from TRSs, when aggregated with all othernon-real estate income with respect to any one year, are more than 25% of ourgross income with respect to such year. We will use all reasonable efforts to structure our activities in amanner intended to satisfy the requirements for our continued qualification asa REIT.  Our failure to qualify as a REITwould adversely affect our ability to pay distributions to you and the returnon your investment.

 

***Certain fees paid to us may affect our REITstatus.***

 

Income receivedin the nature of rental subsidies or rent guarantees, in some cases, may notqualify as rental income and could be characterized by the IRS asnon-qualifying income for purposes of satisfying the “income tests” requiredfor REIT qualification.  In addition, inconnection with any Section 1031 TIC Transactions, we or one of theaffiliates of our advisor typically enters into a number of contractualarrangements with Behringer Harvard Exchange Entities that guarantee oreffectively guarantee the sale of the co-tenancy interests being offered by anyBehringer Harvard Exchange Entity.  Inconsideration for entering into these agreements, we are paid fees that couldbe characterized by the 

 

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IRS as non-qualifyingincome.  If any of our income were, infact, treated as non-qualifying, and if the aggregate of such non-qualifyingincome in any taxable year ever exceeded 5% of our gross revenues for suchyear, we could lose our REIT status for that taxable year and the four taxableyears following the year of losing our REIT status.  We use commercially reasonable efforts tostructure our activities in a manner intended to satisfy the requirements forour continued qualification as a REIT. Recharacterization of the Section 1031 TIC Transactions may resultin taxation of income from a prohibited transaction, which would diminishdistributions to our stockholders.  Inthe event that the IRS were to recharacterize the Section 1031 TICTransactions such that we, rather than the Behringer Harvard Exchange Entity,would be treated as the bona fide owner, for tax purposes, of propertiesacquired and resold by the Behringer Harvard Exchange Entity in connection withthe Section 1031 TIC Transactions, fees paid to us by the BehringerHarvard Exchange Entity would be deemed income from a prohibited transaction,in which event the fee income paid to us in connection with the Section 1031TIC Transactions would be subject to the 100% penalty tax.

 

***Certain equity participation in mortgage,bridge, and mezzanine loans may result in taxable income and gains from theseproperties, which could adversely impact our REIT status.***

 

If we participate under a loanin any appreciation of the properties securing the loan or its cash flow andthe IRS characterizes this participation as “equity,” we might have torecognize income, gains and other items from the property for federalincome tax purposes.  This could affectour ability to qualify as a REIT.

 

***Stockholders may have current tax liabilityon distributions you elect to reinvest in our common stock.***

 

Stockholders that participate in ourdistribution reinvestment plan will be deemed to have received, and for incometax purposes will be taxed on, the amount reinvested in shares of our commonstock to the extent the amount reinvested was not a tax-free return ofcapital.   In addition, thesestockholders will be treated for tax purposes as having received an additionaldistribution to the extent the shares are purchased at a discount to fairmarket value.  As a result, unless atax-exempt entity, these stockholders may have to use funds from other sourcesto pay their tax liability on the value of the shares of common stock received.

 

***If our operating partnership fails tomaintain its status as a partnership, its income may be subject to tax atcorporate rates.***

 

We intend to maintain thestatus of the operating partnership as a partnership for federal income taxpurposes.  However, if the IRS were tosuccessfully challenge the status of the operating partnership as an entitytaxable as a partnership, the operating partnership would be taxable as acorporation, reducing the amount of distributions that the operatingpartnership could make to us.  This couldalso result in our losing REIT status, which would subject us to a corporatelevel tax on our own income substantially reducing the cash available to makedistributions to our stockholders.  Inaddition, if any of the partnerships or limited liability companies throughwhich the operating partnership owns its properties, in whole or in part, losesits characterization as a partnership for federal income tax purposes, theentity would be subject to tax as a corporation, thereby reducing distributionsto the operating partnership. Recharacterization of an underlying property owner also could threatenour ability to maintain REIT status.

 

***Incertain circumstances, we may be subject to federal and state income taxes as aREIT, which would reduce our cash available to pay distributions.***

 

Even ifwe maintain our status as a REIT, we may become subject to federal income taxesand related state taxes.  For example:

 

·                  We are subject to tax on anyundistributed income.  We will be subjectto a 4% nondeductible excise tax on the amount, if any, by which distributionswe pay in any calendar year plus amounts retained for which federal income taxwas paid are less than the sum of 85% of our ordinary income, 95% of ourcapital gain net income and 100% of our undistributed income from prior years.

 

·                  If we have net income from the saleof foreclosure property that we hold primarily for sale to customers in theordinary course of business or other non-qualifying income from foreclosureproperty, we must pay a tax on that income at the highest corporate income taxrate.

 

·                  If we sell a property, other thanforeclosure property, that we hold primarily for sale to customers in theordinary course of business, our gain would be subject to the 100% “prohibitedtransaction” tax.

 

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·                  We will be subject to a 100%penalty tax on certain amounts if the economic arrangements of our tenants, ourtaxable REIT subsidiaries, and us are not comparable to similar arrangementsamong unrelated parties.

 

***Legislative or regulatory action couldadversely affect investors.***

 

In recent years, numerouslegislative, judicial and administrative changes have been made in the federalincome tax laws applicable to investments similar to aninvestment in shares of our common stock. Additional changes to the tax laws are likely to continue to occur, andwe cannot assure you that any of these changes will not adversely affect thetaxation of a stockholder.  Any suchchanges could have an adverse effect on an investment in our shares or on themarket value or the resale potential of our assets.  You are urged to consult with your own taxadvisor with respect to the impact of recent legislation on your investment inour shares and the status of legislative, regulatory or administrativedevelopments and proposals and their potential effect on an investment in ourshares.

 

Congress passed major federal tax legislationin 2003, with modifications to that legislation in 2005.  One of the changes effected by thatlegislation generally reduced the tax rate on dividends paid by corporations toindividuals to a maximum of 15% prior to 2011. REIT distributions generally do not qualify for this reduced rate.  The tax changes did not, however, reduce thecorporate tax rates.  Therefore, themaximum corporate tax rate of 35% has not been affected.  However, as a REIT, we generally would not besubject to federal or state corporate income taxes on that portion of ourordinary income or capital gain that we distribute currently to ourstockholders, and we thus expect to avoid the “double taxation” that othercorporations are typically subject to.

 

Although REITs continue to receivesubstantially better tax treatment than entities taxed as corporations, it ispossible that future legislation would result in a REIT having fewer taxadvantages, and it could become more advantageous for a company that invests inreal estate to elect to be taxed for federal income tax purposes as acorporation.  As a result, our charterprovides our board of directors with the power, under certain circumstances, torevoke or otherwise terminate our REIT election and cause us to be taxed as acorporation, without the vote of our stockholders.  Our board of directors has fiduciary dutiesto us and our stockholders and could only cause such changes in our taxtreatment if it determines in good faith that such changes are in the bestinterest of our stockholders.

 

We have acquired several of our properties by means of 1031 TICTransactions.  Changes in tax laws may result in Section 1031 TICTransactions being no longer available, which may adversely affect Section 1031TIC Transactions or cause such transactions not to achieve their intended purpose. Any changes in tax laws that result in Section 1031 Transactions no longerbeing available may have a negative impact on our investment strategy.

 

**Item 1B.         Unresolved Staff Comments.**

 

None.

 

**Item 2.            Properties.**

 

****General****

 

As of December 31,2008, we owned interests in 74 office properties located in 23 states and theDistrict of Columbia.  All of theseproperties consist of institutional quality office buildings with office spacethat is currently leased to tenants.  Inthe aggregate, these properties represent approximately 25.6 million rentablesquare feet.  As of December 31,2008, the properties in which we own an interest were approximately 91.2%leased on a weighted average basis.

 

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Thefollowing table presents certain additional information about the 71 propertieswe consolidated at December 31, 2008:

 
| ** **                        | ** ** | ** **          | ** ** | ** **        | ** ** | **Approximate**         | ** ** | ** **                | ** ** | ** **        | ** ** |
|-----------------------------------|------------|---------------------|------------|-------------------|------------|-------------------------|------------|---------------------------|------------|-------------------|------------|
| ** **                        | ** ** | ** **          | ** ** | **Date**          | ** ** | **Rentable**            | ** ** | **Encumbrances**          | ** ** | **Approximate**   | ** ** |
| **Property Name**            | ** ** | **Location**        | ** ** | **Acquired**      | ** ** | **Square Footage** | ** ** | **(in millions)(1)** | ** ** | **% Leased** | ** ** |
| Ashford Perimeter                 |       | Atlanta, GA         |       | 01/06/05          |       | 288,000                 |       | 34.5                      |       | 84%               |       |
| Lawson Commons                    |       | St. Paul, MN        |       | 06/10/05          |       | 436,000                 |       | 58.3                      |       | 100%              |       |
| Downtown Plaza                    |       | Long Beach,  CA     |       | 06/14/05          |       | 100,000                 |       | 12.6                      |       | 92%               |       |
| Gateway 12                        |       | Diamond Bar,  CA    |       | 07/20/05          |       | 41,000                  |       | 70.7                      |  (2)  | 100%              |       |
| Gateway 22                        |       | Diamond Bar,  CA    |       | 07/20/05          |       | 55,000                  |       | —                    |  (2)  | 100%              |       |
| Gateway 23                        |       | Diamond Bar,  CA    |       | 07/20/05          |       | 72,000                  |       | —                    |  (2)  | 100%              |       |
| Southwest Center                  |       | Tigard, OR          |       | 07/20/05          |       | 88,000                  |       | —                    |  (2)  | 98%               |       |
| 17655 Waterview                   |       | Richardson,  TX     |       | 07/20/05          |       | 230,000                 |       | —                    |  (2)  | 100%              |       |
| Buena Vista Plaza                 |       | Burbank, CA         |       | 07/28/05          |       | 115,000                 |       | 22.0                      |       | 100%              |       |
| One Financial Plaza               |       | Minneapolis,  MN    |       | 08/02/05          |       | 394,000                 |       | 43.0                      |       | 84%               |       |
| Riverview Tower                   |       | Knoxville,  TN      |       | 10/05/05          |       | 334,000                 |       | 30.3                      |       | 93%               |       |
| 1325 G Street                     |       | Washington,  D.C.   |       | 11/15/05          |       | 307,000                 |       | 100.0                     |       | 99%               |       |
| Woodcrest Corporate Center        |       | Cherry Hill,  NJ    |       | 01/11/06          |       | 333,000                 |       | 50.4                      |       | 99%               |       |
| Burnett Plaza                     |       | Ft Worth, TX        |       | 02/10/06          |       | 1,025,000               |       | 113.2                     |       | 85%               |       |
| AMEC Paragon I & II      |       | Houston, TX         |       | 03/14/06          |       | 227,000                 |       | 16.3                      |       | 100%              |       |
| Paces West                        |       | Atlanta, GA         |       | 04/19/06          |       | 646,000                 |       | 84.0                      |       | 87%               |       |
| 222 South Riverside Plaza         |       | Chicago, IL         |       | 06/02/06          |       | 1,184,000               |       | 202.0                     |       | 97%               |       |
| The Terrace Office Park           |       | Austin, TX          |       | 06/21/06          |       | 619,000                 |       | 131.0                     |       | 99%               |       |
| 600 & 619 Alexander      |       | Princeton,  NJ      |       | 06/28/06          |       | 97,000                  |       | 16.5                      |       | 77%               |       |
| Grandview II                      |       | Birmingham,  AL     |       | 10/20/06          |       | 149,000                 |       | 17.0                      |       | 77%               |       |
| Bank of America Plaza-Charlotte   |       | Charlotte,  NC      |       | 10/26/06          |       | 887,000                 |       | 150.0                     |       | 96%               |       |
| Three Parkway                     |       | Philadelphia,  PA   |       | 10/30/06          |       | 561,000                 |       | 67.1                      |       | 90%               |       |
| 4440 El Camino Real               |       | Los Altos,  CA      |       | 11/02/06          |       | 97,000                  |       | 27.0                      |       | 100%              |       |
| Fifth Third Center-Cleveland      |       | Cleveland,  OH      |       | 11/16/06          |       | 508,000                 |       | 49.3                      |       | 85%               |       |
| Resurgens Plaza                   |       | Atlanta, GA         |       | 11/30/06          |       | 400,000                 |       | 82.0                      |       | 95%               |       |
| 5 & 15 Wayside           |       | Burlington,  MA     |       | 12/08/06          |       | 270,000                 |       | —                    |       | 100%              |       |
| One & Two Eldridge Place |       | Houston, TX         |       | 12/13/06          |       | 519,000                 |       | 75.0                      |       | 100%              |       |
| 250 W. Pratt                      |       | Baltimore,  MD      |       | 12/17/04-12/31/06 |       | 368,000                 |       | 36.0                      |       | 83%               |       |
| Centreport Office Center          |       | Ft Worth, TX        |       | 06/14/07          |       | 133,000                 |       | —                    |       | 100%              |       |
| 200 South Wacker                  |       | Chicago, IL         |       | 11/01/07          |       | 755,000                 |       | 95.5                      |       | 84%               |       |
| One Financial Place               |       | Chicago, IL         |       | 11/01/07          |       | 1,036,000               |       | 188.6                     |       | 94%               |       |
| 10 & 120 South Riverside |       | Chicago, IL         |       | 11/01/07          |       | 1,411,000               |       | 225.0                     |       | 92%               |       |
| 111 Woodcrest                     |       | Cherry Hill,  NJ    |       | 11/20/07          |       | 53,000                  |       | —                    |       | 75%               |       |
| 1650 Arch Street                  |       | Philadelphia,  PA   |       | 12/12/07          |       | 553,000                 |       | 43.3                      |       | 100%              |       |
| United Plaza                      |       | Philadelphia,  PA   |       | 12/12/07          |       | 617,000                 |       | 66.2                      |       | 98%               |       |
| One Oxmoor Place                  |       | Louisville,  KY     |       | 12/12/07          |       | 135,000                 |       | 100.5                     |  (3)  | 97%               |       |
| Hurstbourne Place                 |       | Louisville,  KY     |       | 12/12/07          |       | 235,000                 |       | —                    |  (3)  | 78%               |       |
| Hurstbourne Park                  |       | Louisville,  KY     |       | 12/12/07          |       | 104,000                 |       | —                    |  (3)  | 83%               |       |
| Hurstbourne Plaza                 |       | Louisville,  KY     |       | 12/12/07          |       | 94,000                  |       | —                    |  (3)  | 55%               |       |
| Forum Office Park                 |       | Louisville,  KY     |       | 12/12/07          |       | 328,000                 |       | —                    |  (3)  | 77%               |       |
| Lakeview                          |       | Louisville,  KY     |       | 12/12/07          |       | 76,000                  |       | —                    |  (3)  | 90%               |       |
| Steeplechase Place                |       | Louisville,  KY     |       | 12/12/07          |       | 77,000                  |       | —                    |  (3)  | 89%               |       |
| Hunnington                        |       | Louisville,  KY     |       | 12/12/07          |       | 62,000                  |       | —                    |  (3)  | 74%               |       |
| City Hall Plaza                   |       | Manchester,  NH     |       | 12/12/07          |       | 210,000                 |       | —                    |  (3)  | 80%               |       |
| One & Two Chestnut Place |       | Worcester,  MA      |       | 12/12/07          |       | 218,000                 |       | —                    |  (3)  | 96%               |       |
| Executive Park                    |       | Louisville,  KY     |       | 12/12/07          |       | 109,000                 |       | 5.6                       |       | 74%               |       |
| Energy Centre                     |       | New Orleans,  LA    |       | 12/12/07          |       | 757,000                 |       | 50.3                      |       | 89%               |       |
| Bank of America Plaza-Las Vegas   |       | Las Vegas,  NV      |       | 12/12/07          |       | 256,000                 |       | 49.3                      |       | 97%               |       |
| KeyBank Center                    |       | Cleveland,  OH      |       | 12/12/07          |       | 478,000                 |       | 27.6                      |       | 84%               |       |
| One Edgewater Plaza               |       | Staten  Island, NY  |       | 12/12/07          |       | 252,000                 |       | 35.9                      |  (4)  | 96%               |       |
| Tice Building                     |       | Woodcliff  Lake, NJ |       | 12/12/07          |       | 120,000                 |       | —                    |  (4)  | 88%               |       |
| 222 Bloomingdale Road             |       | White  Plains, NY   |       | 12/12/07          |       | 140,000                 |       | 10.4                      |       | 84%               |       |
| Fifth Third Center-Columbus       |       | Columbus, OH        |       | 12/12/07          |       | 331,000                 |       | 52.5                      |       | 86%               |       |
| City Center                       |       | St.  Petersburg, FL |       | 12/12/07          |       | 242,000                 |       | 16.0                      |       | 92%               |       |
| 5104 Eisenhower Boulevard         |       | Tampa, FL           |       | 12/12/07          |       | 130,000                 |       | —                    |       | 100%              |       |

 

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| ** **             | ** ** | ** **        | ** ** | ** **          | ** ** | **Approximate**         | ** ** | ** **                | ** ** | ** **        |   |
|------------------------|------------|-------------------|------------|---------------------|------------|-------------------------|------------|---------------------------|------------|-------------------|--------|
| ** **             | ** ** | ** **        | ** ** | **Date**            | ** ** | **Rentable**            | ** ** | **Encumbrances**          | ** ** | **Approximate**   |   |
| **Property Name** | ** ** | **Location**      | ** ** | **Acquired**        | ** ** | **Square Footage** | ** ** | **(in millions)(1)** | ** ** | **% Leased** |   |
| Royal Caribbean Center |       | Miramar, FL       |       | 12/12/07            |       | 129,000                 |       | 28.0                      |  (5)  | 100%              |   |
| DeVry University       |       | Miramar, FL       |       | 12/12/07            |       | 94,000                  |       | —                    |  (5)  | 100%              |   |
| Crescent Center        |       | Memphis, TN       |       | 12/12/07            |       | 336,000                 |       | 43.0                      |       | 98%               |   |
| Plaza at MetroCenter   |       | Nashville,  TN    |       | 12/12/07            |       | 361,000                 |       | 25.0                      |       | 100%              |   |
| Loop Central           |       | Houston, TX       |       | 12/12/07            |       | 575,000                 |       | 46.0                      |       | 99%               |   |
| Epic Center            |       | Wichita, KS       |       | 12/12/07            |       | 289,000                 |       | 15.6                      |  (6)  | 89%               |   |
| One Brittany Place     |       | Wichita, KS       |       | 12/12/07            |       | 58,000                  |       | —                    |  (6)  | 79%               |   |
| Two Brittany Place     |       | Wichita, KS       |       | 12/12/07            |       | 58,000                  |       | —                    |  (6)  | 82%               |   |
| 801 Thompson           |       | Rockville,  MD    |       | 12/12/07            |       | 51,000                  |       | 10.7                      |       | 100%              |   |
| 500 E. Pratt           |       | Baltimore,  MD    |       | 12/12/07            |       | 280,000                 |       | 58.8                      |       | 99%               |   |
| Westway One            |       | Houston, TX       |       | 01/15/08            |       | 143,000                 |       | —                    |       | 100%              |   |
| One City Centre        |       | Houston, TX       |       | 06/19/08            |       | 609,000                 |       | 76.5                      |       | 91%               |   |
| One BriarLake Plaza    |       | Houston, TX       |       | 09/25/08            |       | 502,000                 |       | —                    |       | 97%               |   |
| Travis Tower           |       | Houston, TX       |       | 10/1/04-9/30/08     |       | 507,000                 |       | 35.5                      |       | 40%               |   |
| Minnesota Center       |       | Bloomington,  MN  |       | 10/15/2003-12/31/08 |       | 276,000                 |       | 28.1                      |       | 64%               |   |
| Colorado Building      |       | Washington,  D.C. |       | 8/10/2004-12/31/08  |       | 122,000                 |       | 28.0                      |       | 97%               |   |
|                   |       |              |       |                |       | 23,652,000              |       | $                         | 2,850.1    |              |   |   |
|                        |            |                   |            |                     |            |                         |            |                           |            |                   |        |  |

 

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(1)           Encumbrances exclude approximately $200.0million of borrowings under our credit agreement, approximately $17.4 millionof debt obligations related to our TIC properties (described below) andunamortized premiums and discounts of approximately $8.9 million and $9.9million, respectively.

 

(2)           Gateway 12, Gateway 22, Gateway 23, SouthwestCenter and 17655 Waterview are each held as collateral for this note payable.

 

(3)           One Oxmoor Place, Hurstborne Place, HurstbornePark, Hurstborne Plaza, Forum Office Park, Lakeview, Steeplechase Place, Hunnington,City Hall Plaza and One & Two Chestnut Place are each held ascollateral for this note payable.

 

(4)           One Edgewater Plaza and the Tice Building areeach held as collateral for this note payable.

 

(5)           Royal Caribbean Center and DeVry University areeach held as collateral for this note payable.

 

(6)           Epic Center, One Brittany Place and TwoBrittany Place are each held as collateral for this note payable.

 

Thefollowing table presents information about three properties in which we owninterests and account for under the equity method of accounting at December 31,2008:

 
| ** **             | ** ** | ** **        | ** ** | ** **   | ** ** | **Approximate**         | ** ** | ** **                | ** ** | ** **        | ** ** | **Our**       | ** ** |
|------------------------|------------|-------------------|------------|--------------|------------|-------------------------|------------|---------------------------|------------|-------------------|------------|---------------|------------|
| ** **             | ** ** | ** **        | ** ** | **Date**     | ** ** | **Rentable**            | ** ** | **Encumbrances**          | ** ** | **Approximate**   | ** ** | **Ownership** | ** ** |
| **Property Name** | ** ** | **Location**      | ** ** | **Acquired** | ** ** | **Square Footage** | ** ** | **(in millions)(1)** | ** ** | **% Leased** | ** ** | **Interest**  | ** ** |
| St. Louis Place        |       | St. Louis,  MO    |       | 06/30/04     |       | 337,000                 |       | 6.7                       |  (2)  | 90%               |       | 35.71%        |       |
| Alamo Plaza            |       | Denver, CO        |       | 02/24/05     |       | 191,000                 |       | 10.7                      |  (2)  | 99%               |       | 33.93%        |       |
| Wanamaker Building     |       | Philadelphia,  PA |       | 12/12/07     |       | 1,390,000               |       | 48.7                      |  (3)  | 99%               |       | 60.00%        |       |
|                   |       |              |       |         |       | 1,918,000               |       | $                         | 66.1       |              |       |          |       |   |
|                        |            |                   |            |              |            |                         |            |                           |            |                   |            |               |            |  |

 

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(1)           This amount represents our notes payable forour ownership interest only.

 

(2)           Each of the TIC investors, including us, is aborrower under the TIC notes payable. This amount represents our obligation under the debt agreements and theamounts included in our consolidated notes payable on our balance sheet.

 

(3)           Excludes approximately $0.5 million of ourportion of unamortized discounts.

 

The following information applies to all of ourproperties:

 

·                  we believe all ofour properties are adequately covered by insurance and suitable for theirintended purposes;

 

·                  we have no plansfor any material renovations, improvements or development of our properties,except in accordance with planned budgets;

 

·                  our properties arelocated in markets where we are subject to competition in attracting newtenants and retaining current tenants; and

 

·                  depreciation isprovided on a straight-line basis over the estimated useful lives of thebuildings.

 

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**Future Lease Payments Table**

 

Thefollowing table presents future minimum base rental payments due to us over thenext ten years at the properties we consolidate as of December 31, 2008(in thousands):

 

| **Year** | ** ** | **Amount** | ** ** |
|----------|------------|------------|------------|
| 2009     |       | $          | 407,919    |   |
| 2010     |       | 374,565    |       |
| 2011     |       | 321,923    |       |
| 2012     |       | 280,033    |       |
| 2013     |       | 230,943    |       |
| 2014     |       | 186,138    |       |
| 2015     |       | 148,445    |       |
| 2016     |       | 116,136    |       |
| 2017     |       | 92,236     |       |
| 2018     |       | 70,942     |       |
|          |            |            |            |  |

 

**Item 3.            Legal Proceedings.**

 

We are not party to, andnone of our properties are subject to, any material pending legal proceedings.

 

**Item 4.            Submission of Matters to a Vote ofSecurity Holders.**

 

No matters were submitted toa vote of security holders during the fourth quarter of 2008.

 

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**PART II**

 

**Item 5.            Market for Registrant’s CommonEquity, Related Stockholder Matters and Issuer Purchases of Equity Securities.**

 

**MarketInformation**

 

Thereis no established public trading market for our common stock.  Therefore, there is a risk that a stockholdermay not be able to sell our stock at a time or price acceptable to thestockholder.  Pursuant to ourdistribution reinvestment plan, we are selling shares of our common stock tothe public at $9.50 per share.  Unlessand until our shares are listed on a national securities exchange, it is notexpected that a public market for the shares will develop.

 

**Holders**

 

Asof March 13, 2009, we had approximately 291,465,075 shares of common stockoutstanding held by a total of approximately 73,000 stockholders.

 

**Distributions**

 

We made an election to qualify as a REIT for federal income taxpurposes commencing with our taxable year ended December 31, 2004.  As a REIT, we are required to distribute atleast 90% of our REIT taxable income to our stockholders annually.  In both 2008 and 2007, approximately $0.3million of distributions were declared and paid to unaffiliated holders ofBehringer OP limited partnership units which are recorded as a reduction tominority interest.  All otherdistributions were recorded to stockholders equity.  Until proceeds from our final offering arefully invested and generating cash flow from operations that are sufficient tomake the full distributions to stockholders, we have and may continue to payall or a portion of our distributions from the proceeds of our final offeringor from borrowings in anticipation of future cash flow.  For tax purposes, of the amounts distributedby us in 2008 and 2007, 100% and 82.5% represented a return of capital,respectively.  None of the distributionsin 2008 and 17.5% of the distributions in 2007 were distributions from thetaxable earnings of real estate operations. The remaining amounts were paid from sources other than the taxableearnings of real estate operations, such as offering proceeds, cash advanced tous by, or reimbursements for expenses or waiver of fees from, our advisor andproceeds from loans including those secured by our assets.

 

Weinitiated the payment of monthly distributions in November 2003 in theamount of a 7% annualized rate of return, based on an investment in our commonstock of $10.00 per share and calculated on a daily record basis of $0.0019178per share.  In August 2007, the distributions werereduced to a daily amount of $0.0017260 per share of common stock, which wasequivalent to an annual distribution rate of 6.3% assuming the share waspurchased for $10.00.  In September 2008and effective through March 2009, the distributions were increased to adaily amount of $0.0017808 per share of common stock which is equivalent to anannual distribution rate of 6.5% assuming the share was purchased for$10.00.  For further discussion regardingour ability to sustain the current level of our distributions, see “RiskFactors” and “Management’s Discussion and Analysis of Financial Condition andResults of Operations — Liquidity and Capital Resources — Distributions.”

 

Thefollowing table shows the distributions declared and paid for both our commonstock and the Behringer OP limited partnership units for the fiscal years endedDecember 31, 2008 and 2007 (in thousands):

 

| ** **  | ** ** | **Distributions** | ** ** | **Distributions** | ** ** |
|-------------|------------|-------------------|------------|-------------------|------------|
| ** **  | ** ** | **Declared**      | ** ** | **Paid**          | ** ** |
| 2008        |       |              |       |              |       |
| 1st Quarter |       | $                 | 33,168     |              | $          | 32,617 |   |
| 2nd Quarter |       | 35,280            |       | 34,839            |       |
| 3rd Quarter |       | 39,590            |       | 37,846            |       |
| 4th Quarter |       | 45,994            |       | 43,773            |       |
| Total       |       | $                 | 154,032    |              | $          | 149,075 |   |
|        |       |              |       |              |       |
| 2007        |       |              |       |              |       |
| 1st Quarter |       | 22,918            |       | 21,669            |       |
| 2nd Quarter |       | 28,788            |       | 27,028            |       |
| 3rd Quarter |       | 31,122            |       | 31,192            |       |
| 4th Quarter |       | 31,982            |       | 31,067            |       |
| Total       |       | $                 | 114,810    |              | $          | 110,956 |   |

 

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**RecentSales of Unregistered Securities**

 

Wesold 1,000 shares of our convertible stock to Behringer Advisors for $1,000 on March 22,2006, with no commissions.  Pursuant toits terms, the convertible stock is convertible into shares of our common stockwith a value equal to 15% of the amount by which (1) our enterprise value,including the total amount of distributions paid to our stockholders, exceeds (2) thesum of the aggregate capital invested by stockholders plus a 9% cumulative,non-compounded, annual return on such capital. These shares were not registered under the Securities Act of 1933, asamended, and were issued in reliance on Rule 4(2) of the SecuritiesAct.

 

**SecuritiesAuthorized for Issuance under Equity Compensation Plans**

 

Thefollowing table provides information regarding our equity compensation plans asof December 31, 2008:

 
| **Plan Category**                                      | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities remaining  available for future issuance  under equity compensation  plans** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  security holders     |       | 68,500                                                                                                                                               |       | $                                                                                                           | 9.35       |                                                                                                                                        | 11,929,500 | * |
| Equity compensation plans not approved by  security holders |       | N/A                                                                                                                                                  |       | N/A                                                                                                         |       | N/A                                                                                                                                         |       |
| Total                                                       |       | 68,500                                                                                                                                               |       | $                                                                                                           | 9.35       |                                                                                                                                        | 11,929,500 | * |

 

----

*All shares authorized for issuance pursuant to awards not yet granted under our2005 Incentive Award Plan.

 

**ShareRedemption Program**

 

Our board of directors has authorized a share redemption program forstockholders who have held their shares for more than one year.  On March 24, 2009, our board ofdirectors voted to accept all redemption requests submitted during the firstquarter of 2009 from stockholders whose requests were made on circumstances ofdeath, disability or need for long-term care. However, the board determined to not accept and to suspend until furthernotice redemptions other than those submitted in respect of a stockholder’sdeath, disability or need for long-term care. In addition, the board approved certain amendments to the program.  Under the amended and restated shareredemption program, the per share redemption price will equal:

 

·                  until 18 months have passed without usselling shares in a public primary offering (or sooner if our boarddetermines), the amount by which (a) the lesser of (i) 90% of theaverage price per share the original purchaser or purchasers of shares paid tous for all of his or her shares (as adjusted for any stock dividends,combinations, splits, recapitalizations and the like with respect to our commonstock) or (ii) 90% of the offering price of shares in our most recentpublic primary offering exceeds (b) the aggregate amount of net saleproceeds per share, if any, distributed to investors prior to the redemptiondate as a result of the sale of one or more of our properties, or

 

·                  after 18 months have passed without usselling shares in a public primary offering (or sooner if our boarddetermines), the lesser of (a) 100% of the average price per share theoriginal purchaser or purchasers of shares paid for all of his or her shares(as adjusted for any stock dividends, combinations, splits, recapitalizationsand the like with respect to our common stock) or (b) 90% of the estimatedvalue per share, as disseminated to our stockholders by way of a distributionnotice or account statement, quarterly or annual report or any otherstockholder communication.

 

For these purposes, nopurchase price is ascribed to the shares issued in respect of the 10% stockdividend and we do not consider a “public offering” to include offerings onbehalf of selling stockholders or offerings related to a distributionreinvestment plan or employee benefit plan.

 

Ourboard of directors reserves the right in its sole discretion at any time, andfrom time to time, to (1) waive the one-year holding period in the eventof the death, disability or need for long-term care, other exigentcircumstances such as

 

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bankruptcy, a mandatory distributionrequirement under a stockholder’s IRA or with respect to shares purchased underor through our DRIP or automatic purchase plan, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program. Under the terms of the plan, during any calendar year, we will notredeem in excess of 5% of the weighted average number of shares outstandingduring the prior calendar year.  Inaddition, our board of directors will determine whether we have sufficient cashfrom operations to repurchase shares, and such purchases will generally belimited to proceeds of our DRIP plus 1% of operating cash flow for the previousfiscal year.  During the quarter ended December 31,2008, we redeemed shares as follows:

 
| ** **    | ** ** | ** **               | ** ** | ** **          | ** ** | **Total Number of**          | ** ** | **Maximum**                              | ** ** |
|---------------|------------|--------------------------|------------|---------------------|------------|----------------------------------------|------------|------------------------------------------|------------|
| ** **    | ** ** | ** **               | ** ** | ** **          | ** ** | **Shares Purchased**              | ** ** | **Number of Shares**           | ** ** |
| ** **    | ** ** | **Total**                | ** ** | **Average**         | ** ** | **as Part of Publicly** | ** ** | **that May Yet Be**       | ** ** |
| ** **    | ** ** | **Number of**       | ** ** | **Price Paid** | ** ** | **Announced Plans**               | ** ** | **Purchased Under**                 | ** ** |
| ** **    | ** ** | **Shares Redeemed** | ** ** | **per Share**  | ** ** | **or Programs**                   | ** ** | **the Plans or Programs** | ** ** |
| October 2008  |       | —                   |       | $                   | —     |                                   | —     |                                     | (1)        |   |
| November 2008 |       | 1,485,262                |       | $                   | 8.79       |                                   | 1,485,262  |                                     | (1)        |   |
| December 2008 |       | —                   |       | $                   | —     |                                   | —     |                                     | (1)        |   |

 

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(1)   A description of the maximum number of sharesthat may be purchased under our redemption program is included in the narrativepreceding this table.

 

**Item 6.            Selected Financial Data.**

 

At December 31,2008, we owned interests in 74 properties; at December 31, 2007, we ownedinterests in 75 properties (34 of which were acquired in December 2007);at December 31, 2006 we owned interests in 36 properties; at December 31,2005, we owned interests in 21 properties; and at December 31, 2004, weowned interests in seven properties.  Thefollowing data should be read in conjunction with our audited consolidatedfinancial statements and the notes thereto and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” appearing elsewherein this Annual Report on Form 10-K. The selected financial data presentedbelow has been derived from our audited consolidated financial statements (inthousands, except per share amounts).

 
| **As of December 31,**           | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006**  | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|----------|------------|----------|------------|
|                                            |       |      |       |      |       |      |       |     |       |     |       |
| Total assets                                    |       | $         | 5,408,600  |      | $          | 5,172,127 |       | $        | 2,694,972  |     | $          | 900,582 |   | $ | 198,888 |   |
|                                            |       |      |       |      |       |      |       |     |       |     |       |
| Notes payable                                   |       | $         | 3,066,529  |      | $          | 3,198,143 |       | $        | 1,609,702  |     | $          | 353,555 |   | $ | 82,354 |   |
| Other liabilities                               |       | 397,529   |       | 450,338   |       | 167,756   |       | 26,224   |       | 6,613    |       |
| Minority interest (1)                           |       | 17,934    |       | 18,049    |       | 3,072     |       | 3,375    |       | —   |       |
| Stockholders’ equity                       |       | 1,926,608 |       | 1,505,597 |       | 914,442   |       | 517,428  |       | 109,921  |       |
| Total liabilities and stockholders’ equity |       | $         | 5,408,600  |      | $          | 5,172,127 |       | $        | 2,694,972  |     | $          | 900,582 |   | $ | 198,888 |   |

 
| **Year Ended December 31,**                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                |       |     |       |     |       |     |       |     |       |     |       |
| Rental revenue                                      |       | $        | 605,433    |     | $          | 304,709  |       | $        | 155,511    |     | $          | 25,900 |   | $ | — |   |
|                                                |       |     |       |     |       |     |       |     |       |     |       |
| Net loss from continuing operations                 |       | (174,054 | )          | (43,558  | )          | (22,324  | )          | (6,224   | )          | (1,644   | )          |
| Net income (loss) from discontinued  operations     |       | 13,633   |       | 1,927    |       | (108     | )          | 502      |       | 105      |       |
| Net loss                                            |       | $        | (160,421   | )        | $          | (41,631  | )          | $        | (22,432    | )        | $          | (5,722 | ) | $ | (1,539 | ) |
|                                                |       |     |       |     |       |     |       |     |       |     |       |
| Basic and diluted net income (loss) per  share: (2) |       |     |       |     |       |     |       |     |       |     |       |
| Continuing operations                               |       | $        | (0.73      | )        | $          | (0.25    | )          | $        | (0.25      | )        | $          | (0.16 | ) | $ | (0.28 | ) |
| Discontinued operations                             |       | 0.06     |       | 0.01     |       | —   |       | 0.01     |       | 0.02     |       |
| Basic and diluted loss per share                    |       | $        | (0.67      | )        | $          | (0.24    | )          | $        | (0.25      | )        | $          | (0.15 | ) | $ | (0.26 | ) |
|                                                |       |     |       |     |       |     |       |     |       |     |       |
| Distributions declared per share (2)                |       | $        | 0.64       |     | $          | 0.67     |       | $        | 0.70       |     | $          | 0.67 |   | $ | 0.64 |   |

 

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(1)          Minority interest reflects the minorityinterests related to certain of our real estate properties and includes432,586  units of limited partnershipinterests in Behringer OP.

 

(2)          Basic and diluted loss per share anddistributions declared per share for each period presented reflects the effectof the 10% stock dividend issued October 1, 2005.

 

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**Item 7.****                                  ****Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

 

Thefollowing discussion and analysis should be read in conjunction with theaccompanying consolidated financial statements and the notes thereto.

 

**CriticalAccounting Policies and Estimates**

 

Management’sdiscussion and analysis of financial condition and results of operations arebased upon our consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America (“GAAP”).  The preparation ofthese financial statements requires our management to make estimates andassumptions that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate theseestimates, including investment impairment. These estimates are based on management’s historical industry experienceand on various other assumptions that are believed to be reasonable under thecircumstances.  Actual results may differfrom these estimates.  Below is adiscussion of the accounting policies that we consider to be critical in thatthey may require complex judgment in their application or require estimatesabout matters that are inherently uncertain.

 

***Principles of Consolidation and Basis ofPresentation***

 

Ourconsolidated financial statements include our accounts, the accounts ofvariable interest entities (“VIEs”) in which we are the primary beneficiary andthe accounts of other subsidiaries over which we have control.  All inter-company transactions, balances andprofits have been eliminated in consolidation. Interests in entities acquired are evaluated for consolidation based onFinancial Accounting Standards Board Interpretation (“FIN”) 46R “Consolidationof Variable Interest Entities,” which requires the consolidation of VIEs inwhich we are deemed to be the primary beneficiary.  If the entity is determined not to be a VIEunder FIN 46R, then the entity is evaluated for consolidation under theAmerican Institute of Certified Public Accountants’ (“AICPA”) Statement ofPosition (“SOP”) 78-9, “Accounting for Investments in Real Estate Ventures,”and Emerging Issues Task Force (“EITF”) 04-5, “Determining Whether a GeneralPartner, or the General Partners as a Group, Controls a Limited Partnership orSimilar Entity When the Limited Partners Have Certain Rights.”

 

Thereare judgments and estimates involved in determining if an entity in which wehave made an investment is a VIE and if so, if we are the primarybeneficiary.  The entity is evaluated todetermine if it is a VIE by, among other things, calculating the percentage ofequity at risk compared to the total equity of the entity.  FIN 46R provides some guidelines as to whatthe minimum equity at risk should be, but the percentage can vary dependingupon the industry and/or the type of operations of the entity and it is up tomanagement to determine that minimum percentage as it relates to our businessand the facts surrounding each of our acquisitions.  In addition, even if the entity’s equity atrisk is a very low percentage, we are required by FIN 46R to evaluate theequity at risk compared to the entity’s expected future losses to determine ifthere could still in fact be sufficient equity in the entity.  Determining expected future losses involvesassumptions of various possibilities of the results of future operations of theentity, assigning a probability to each possibility and using a discount rateto determine the net present value of those future losses.  A change in the judgments, assumptions andestimates outlined above could result in consolidating an entity that shouldnot be consolidated or accounting for an investment on the equity method thatshould in fact be consolidated, the effects of which could be material to ourfinancial statements.

 

***Real Estate***

 

Uponthe acquisition of real estate properties, we allocate the purchase price ofthose properties to the tangible assets acquired, consisting of land, includingassociated rights, and buildings, any assumed debt, identified intangibleassets and asset retirement obligations based on their relative fair values inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets.” Identified intangible assets consist of the fair value of above-marketand below-market leases, in-place leases, in-place tenant improvements,in-place lease commissions and tenant relationships.

 

Uponthe completion of a business combination, we record the tangible assetsacquired, consisting of land, including associated rights, and buildings, anyassumed debt, identified intangible assets and asset retirement obligationsbased on their fair values in accordance with SFAS No. 141, “BusinessCombinations.”  Identified intangibleassets consist of the fair value of above-market and below-market leases,in-place leases, in-place tenant improvements, in-place lease commissions andtenant relationships.  Any amount paid inexcess of the fair value of the assets and liabilities acquired is recorded asgoodwill.  If the value of the assets andliabilities exceed the total purchase price, then the resulting negativegoodwill is allocated to the tangible and intangible assets acquired.

 

Initialvaluations are subject to change until our information is finalized, which isno later than twelve months from the acquisition date.

 

Wedetermine the fair value of assumed debt by calculating the net present valueof the scheduled mortgage payments using interest rates for debt with similarterms and remaining maturities that management believes we could 

 

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obtain at the date of the assumption.  Any difference between the fair value andstated value of the assumed debt is recorded as a discount or premium andamortized over the remaining life of the loan using the effective interestmethod.

 

Thefair value of the tangible assets acquired, consisting of land and buildings,is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to land and buildings. Land values are derived from appraisals, and building values arecalculated as replacement cost less depreciation or management’s estimates ofthe relative fair value of these assets using discounted cash flow analyses orsimilar methods.  The value of buildingsis depreciated over the estimated useful life of 25 years using thestraight-line method.

 

Wedetermine the value of above-market and below-market in-place leases foracquired properties based on the present value (using an interest rate thatreflects the risks associated with the leases acquired) of the differencebetween (1) the contractual amounts to be paid pursuant to the in-placeleases and (2) management’s estimate of current market lease rates for thecorresponding in-place leases, measured over a period equal to (a) theremaining non-cancelable lease term for above-market leases, or (b) theremaining non-cancelable lease term plus any fixed rate renewal options forbelow-market leases.  We record the fairvalue of above-market and below-market leases as intangible assets orintangible liabilities, respectively, and amortize them as an adjustment torental income over the determined lease term.

 

Thetotal value of identified real estate intangible assets acquired is furtherallocated to in-place lease values, in-place tenant improvements, in-placeleasing commissions and tenant relationships based on our evaluation of thespecific characteristics of each tenant’s lease and our overall relationshipwith that respective tenant.  Theaggregate value for tenant improvements and leasing commissions is based onestimates of these costs incurred at inception of the acquired leases,amortized through the date of acquisition. The aggregate value of in-place leases acquired and tenant relationshipsis determined by applying a fair value model. The estimates of fair value of in-place leases includes an estimate ofcarrying costs during the expected lease-up periods for the respective spacesconsidering current market conditions. In estimating the carrying costs that would have otherwise been incurredhad the leases not been in place, we include such items as real estate taxes,insurance and other operating expenses as well as lost rental revenue duringthe expected lease-up period based on current market conditions.  The estimates of the fair value of tenantrelationships also include costs to execute similar leases including leasingcommissions, legal and tenant improvements as well as an estimate of thelikelihood of renewal as determined by management on a tenant-by-tenant basis.

 

Weamortize the value of in-place leases, in-place tenant improvements andin-place lease commissions to expense over the initial term of the respectiveleases.  The value of tenant relationshipintangibles are amortized to expense over the initial term and any anticipatedrenewal periods, but in no event does the amortization period for intangibleassets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, theunamortized portion of the in-place lease value and tenant relationshipintangibles would be charged to expense.

 

Inallocating the purchase price of each of our properties, management makesassumptions and uses various estimates, including, but not limited to, theestimated useful lives of the assets, the cost of replacing certain assets,discount rates used to determine present values, market rental rates per squarefoot and the period required to lease the property up to its occupancy atacquisition if it were vacant.  Many ofthese estimates are obtained from independent third party appraisals.  However, management is responsible for thesource and use of these estimates.  Achange in these estimates and assumptions could result in the various categoriesof our real estate assets and/or related intangibles being overstated orunderstated which could result in an overstatement or understatement ofdepreciation and/or amortization expense and/or rental revenue.  These variances could be material to our financialstatements.

 

***Impairment of Real Estate Related Assets***

 

Forour consolidated real estate properties, we monitor events and changes incircumstances indicating that the carrying amounts of the real estate assetsmay not be recoverable.  When such eventsor changes in circumstances are present, we assess potential impairment bycomparing estimated future undiscounted operating cash flows expected to begenerated over the life of the asset and from its eventual disposition, to thecarrying amount of the asset.  In theevent that the carrying amount exceeds the estimated future undiscountedoperating cash flows, we recognize an impairment loss to adjust the carryingamount of the asset to its estimated fair value.

 

Forour unconsolidated real estate properties, including those we own through aninvestment in a joint venture, TIC interest or other similar investmentstructure, at each reporting date we compare the estimated fair value of ourinvestment to the carrying amount.  Animpairment charge is recorded to the extent the fair value of our investment isless than the carrying amount and the decline in value is determined to beother than a temporary decline.

 

Inevaluating our investments for impairment, management makes several estimatesand assumptions, including, but not limited to, the projected date ofdisposition of the properties, the estimated future cash flows of theproperties during our ownership and the projected sales price of each of theproperties.  A change in these estimatesand assumptions could result in understating or overstating the carrying amountof our investments which could be material to our financial statements.

 

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**Offering**

 

We have completed three public offerings of our common stock.  As of December 31, 2008, the date of theclose of our third public offering, we had raised a total of approximately $2.8billion of gross offering proceeds as a result of all of our offerings(inclusive of distribution reinvestments and redemptions).  Net proceeds after selling commissions,dealer manager fees and organization and offering expenses totaled approximately$2.5 billion.

 

  On January 5, 2009, we commenced apublic offering of up to 60,000,000 shares of common stock offered at a priceof $9.50 per share under our DRIP pursuant to a Registration Statement on Form S-3filed under the Securities Act.  Wegenerally are offering shares until the earlier of January 5, 2014 or thedate we sell all $570 million worth of shares in this offering.

 

**Overview**

 

Weare externally managed and advised by Behringer Advisors.  Behringer Advisors is responsible formanaging our day-to-day affairs and for identifying and making acquisitions andinvestments on our behalf.  Substantiallyall of our business is conducted through our operating partnership, BehringerOP.

 

Duringthe year ended December 31, 2008, we purchased three properties located inHouston, Texas and we increased our ownership interests to 100% in three of ourTIC properties: Minnesota Center, the Colorado Building and Travis Tower.  During the year ended December 31, 2008,we disposed of 9100 Mineral Circle located in Englewood, Colorado, 11 Stanwix Streetlocated in Pittsburg, Pennsylvania and 2383 Utah located in El Segundo,California.  Enclave on the Lake, aproperty located in Houston, Texas in which we held a 36.31% TIC interest thatwas accounted for using the equity method of accounting, was also sold duringthe year ended December 31, 2008.

 

Duringthe year ended December 31, 2007, we purchased interests in 39 real estateproperties, 38 of which were acquired in the fourth quarter of 2007.  We acquired interests in 34 propertieslocated throughout the United States on December 12, 2007 when wecompleted the purchase of the subsidiaries of IPC and we acquired threeproperties located in Chicago, Illinois on November 1, 2007.

 

Asof December 31, 2008, we owned, directly or indirectly, a portfolio of 74office properties located in 23 states and the District of Columbia.  The portfolio was approximately 91.2% leasedat December 31, 2008.

 

Asan owner of real estate, the majority of our income and cash flow is derivedfrom rental revenue received pursuant to tenant leases for space at ourproperties; and thus, our earnings would be negatively impacted by adeterioration of our rental revenue.  Oneor more factors could result in a deterioration of rental revenue including (1) ourfailure to renew or execute new leases as current leases expire, (2) ourfailure to renew or execute new leases with rental terms at or above the termsof in-place leases, and (3) tenant defaults.

 

Ourfailure to renew or execute new leases as current leases expire or to executenew leases with rental terms at or above the terms of in-place leases isdependent on factors such as (1) the local economic climate, which may beadversely impacted by business layoffs or downsizing, industry slowdowns,changing demographics and other factors and (2) local real estateconditions, such as oversupply of office space or competition within themarket.

 

Ourindustry’s performance is generally predicated on a sustained pattern of jobgrowth.  Recently, the overall UnitedStates economy experienced declines, including recent and expected future joblosses, liquidity disruptions in the capital markets and recessionaryconcerns.  Based on current marketconditions, we expect rental revenues to decline during fiscal 2009 andpossibly beyond.  In the face ofchallenging market conditions, we continue to follow a disciplined approach tomanaging our operations.

 

### **Results of Operations**

 

At December 31,2008, we owned interests in 74 office properties; at December 31, 2007, weowned interests in 75 office properties (34 of which were acquired on December 12,2007) and at December 31, 2006, we owned interests in 36 officeproperties.  Accordingly, our results ofoperations for each fiscal year presented reflect significant increases in mostcategories due to the growth of our portfolio of properties.

 

*Year ended December 31, 2008 as compared toyear ended December 31, 2007*

 

**Continuing Operations**

 

*RentalRevenue.* Rental revenue for the year ended December 31,2008 was generated by our consolidated real estate properties and wasapproximately $605.4 million as compared to approximately $304.7 million forthe year ended December 31, 2007. Approximately $272.6 million of the $300.7 million increase over theprior year was attributable to properties acquired in 2007 and 2008.  Rental revenue for the year ended December 31,2008 also included approximately $27.2 million in lease termination feesrelated to early lease terminations, primarily at our Burnett Plaza property.

 

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*PropertyOperating Expenses.* Property operating expenses for the yearended December 31, 2008 were approximately $167.2 million as compared toapproximately $74.1 million for the year ended December 31, 2007 and werecomprised of property operating expenses from our consolidated real estateproperties.  Approximately $90.3 millionof the $93.1 million increase over the prior year was attributable to propertiesacquired in 2007 and 2008.

 

*InterestExpense. *Interestexpense for the year ended December 31, 2008 was approximately $191.3million as compared to approximately $99.4 million for the year ended December 31,2007 and was comprised of interest expense and amortization of deferredfinancing fees and interest rate mark-to-market adjustments related to ournotes payable associated with our consolidated real estate properties, TICinterest investments and our credit facility. The $91.9 million increase is primarily due to the full year impact ofour borrowings.  Our notes payableincreased from approximately $1.6 billion at September 30, 2007 toapproximately $3.1 billion at December 31, 2008, resulting primarily fromour fourth quarter 2007 acquisition activity.

 

*RealEstate Taxes. *Realestate taxes for the year ended December 31, 2008 were approximately $78.3million as compared to approximately $42.1 million for the year ended December 31,2007 and were comprised of real estate taxes from our consolidated real estateproperties. The $36.2 million increase over the prior year was primarilyattributable to properties acquired in 2007 and 2008.

 

*PropertyManagement Fees.*Property management fees for the year ended December 31,2008 were approximately $17.4 million as compared to approximately $9.1 millionfor the year ended December 31, 2007 and were comprised of propertymanagement fees related to both our consolidated and unconsolidated real estateproperties.  The $8.3 million increaseover the prior year was primarily attributable to properties acquired in 2007and 2008.

 

*Asset Management Fees.* Asset management fees for the year ended December 31, 2008 wereapproximately $27.8 million as compared to approximately $13.3 million for theyear ended December 31, 2007 and were comprised of asset management feesassociated with both our consolidated and unconsolidated real estateproperties.  The $14.5 million increaseover the prior year was primarily attributable to properties acquired in 2007and 2008.  In addition, asset managementfees of approximately $1.0 million were waived for the year ended December 31,2007, while no asset management fees were waived for the year ended December 31,2008.

 

*Loss on Contract Termination. *Loss on contract termination for the yearended December 31, 2008 was approximately $5.0 million.  In September 2008, we entered into acontract to purchase a building located in Washington D.C. and paid anon-refundable deposit of $5.0 million related to this contract.  We terminated this contract in December 2008.  We did not have any loss on contracttermination in the year ended December 31, 2007.

 

*Asset Impairment losses.*  As a result of the difficulteconomic conditions that accelerated during the fourth quarter of 2008,including the significant disruption in financing available in the broadercredit markets, we evaluated all of our real estate investments for potentialimpairment at December 31, 2008. Based on tests of recoverability of long-lived assets, we recordedimpairment losses of approximately $21.1 million for the year ended December 31,2008.  We did not have any assetimpairment losses for the year ended December 31, 2007.  If our assumptions regarding the cash flowsexpected to result from the use and eventual disposition of our propertiesdecrease or our expected hold periods decrease, we may incur future impairmentcharges on our real estate related assets. In addition we may incur impairment charges on assets classified as heldfor sale in the future if the carrying amount of the asset upon classificationas held for sale exceeds the estimated fair value, less costs to sell. 

 

*General and Administrative Expense.* General and administrative expense for theyear ended December 31, 2008 was approximately $7.3 million as compared toapproximately $3.0 million for the year ended December 31, 2007 and wascomprised of corporate general and administrative expenses including directors’and officers’ insurance premiums, audit and tax fees, legal fees, otheradministrative expenses and reimbursement of certain expenses of ouradvisor.  The $4.3 million increase isprimarily due to increases in reimbursements of administrative expenses to ouradvisor and increased legal, financial reporting and printing expenses.  We expect our general and administrativeexpenses to increase in 2009 due to anticipated increased reimbursements ofadministrative expenses to our advisor.  During the earlier stages of our operations, while we were focused onraising capital and acquiring real estate assets with this capital, our advisordid not require us to reimburse it for all costs and expenses paid or incurredin providing services to us; however, as our portfolio becomes more stabilizedand the advisor implements more efficient systems and metrics for tracking itscosts and expenses, we anticipate that our advisor will require us to reimbursea larger portion of these administrative costs and expenses.

 

*Depreciation andAmortization Expense.*Depreciationand amortization expense for the year ended December 31, 2008 wasapproximately $278.2 million as compared to approximately $137.4 million forthe year ended December 31, 2007 and was comprised of depreciation andamortization expense from each of our consolidated real estate properties.  Approximately $129.7 million of the $140.8million increase over the prior year was attributable to properties acquired in2007 and 2008.  Depreciation andamortization for the year ended December 31, 2008 also includedapproximately $7.7 million in write offs of lease intangibles related to earlylease terminations at our Burnett Plaza property.

 

*InterestIncome*. Interest income for the year ended December 31,2008 was approximately $7.0 million as compared to approximately $25.5 millionfor the year ended December 31, 2007 and was comprised of interest incomeassociated with funds on deposit at banks. The $18.5 million decrease from the prior year is primarily due tooverall 

 

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reducedcash balances on deposit during the year and lower interest rates.  As of September 30, 2007, before ourfourth quarter 2007 acquisition activity, we had combined cash and restrictedcash balances of approximately $774.9 million as compared to combined cash andrestricted cash balances of approximately $539.0 million at December 31,2008.

 

*Gain ofsale of assets. *Gainon sale of assets for the year ended December 31, 2008 was approximately$5.3 million and was comprised of approximately $5.1 million from the sale ofour TIC investment in Enclave on the Lake and approximately $0.2 million fromthe sale of a land easement at our Ashford Perimeter property.  For the year ended December 31, 2007, wehad a gain on sale of assets of approximately $44,000.

 

*Gain onearly extinguishment of debt. *Gainon early extinguishment of debt for the year ended December 31, 2008 wasapproximately $1.3 million and was related to the early extinguishment, at adiscount, of approximately $19.2 million in debt in October 2008.  The debt was originally scheduled to maturein July 2009.  We did not have anygain on early extinguishment of debt for the year ended December 31, 2007.

 

* Equity in Earnings of Investments*.  Equity in earnings of investments for theyear ended December 31, 2008 was approximately $1.3 million as compared to$5.1 million for the year ended December 31, 2007 and was comprised of ourshare of equity in the earnings of unconsolidated investments.  The $3.8 million decrease from prior year isprimarily due to net losses at Travis Tower and at the Wanamaker Building, aproperty we acquired in December 2007 as part of our acquisition of thesubsidiaries of IPC.

 

**Discontinued Operations**

 

*Income(loss) from discontinued operations.*We sold 9100 MineralCircle in February 2008, in June 2008 we transferred 11 StanwixStreet to the lender associated with that property, and in August 2008 wesold 2383 Utah.  For the year ended December 31,2008, we had a loss from the discontinued operations of approximately $2.5million as compared to income from discontinued operations of approximately$1.9 million for the year ended December 31, 2007.  The income from discontinued operations forthe year ended December 31, 2007 includes approximately $3.9 million oflease termination fees received from a tenant at the 9100 Mineral Circleproperty.

 

*Gain onsale of discontinued operations.*  We recognized a gain of approximately $16.1million during the year ended December 31, 2008 for the sales of 9100Mineral Circle and 2383 Utah.  The saleof 9100 Mineral Circle resulted in a gain of approximately $6.9 million and thesale of 2383 Utah resulted in a gain of approximately $9.2 million.  There was no gain on sale of discontinuedoperations for the year ended December 31, 2007.

 

*Year ended December 31, 2007 as compared toyear ended December 31, 2006*

 

**Continuing Operations**

 

*RentalRevenue.* Rental revenue for the year ended December 31,2007 was generated by our consolidated real estate properties and wasapproximately $304.7 million as compared to approximately $155.5 million forthe year ended December 31, 2006. Approximately 25% of the increase over prior year was due to revenueattributable to properties acquired in 2007 and approximately 75% of theincrease is attributable to properties that were owned for a full year in 2007but owned for less than a full year in 2006.

 

*PropertyOperating Expenses.* Property operating expenses for the yearended December 31, 2007 were approximately $74.1 million as compared toapproximately $35.2 million for the year ended December 31, 2006 and werecomprised of property operating expenses from our consolidated real estateproperties.  Approximately 28% of theincrease over prior year was attributable to properties acquired in 2007,approximately 70% of the increase is attributable to properties that were ownedfor a full year in 2007 but only owned during part of 2006 and approximately 2%of the increase is related to properties which were held during all of 2007 and2006.

 

*InterestExpense. *Interestexpense for the year ended December 31, 2007 was approximately $99.4million as compared to approximately $49.7 million for the year ended December 31,2006 and was comprised of interest expense and amortization of deferredfinancing fees and interest rate mark-to-market adjustments related to ournotes payable associated with our real estate and TIC interestinvestments.  The increase is primarilydue to the increase in our notes payable. Our notes payable increased from $1.6 billion at December 31, 2006to $3.2 billion at December 31, 2007, resulting primarily from our fourthquarter 2007 acquisition activity.

 

*RealEstate Taxes. *Realestate taxes for the year ended December 31, 2007 were approximately $42.1million as compared to approximately $21.3 million for the year ended December 31,2006 and were comprised of real estate taxes from our consolidated real estateproperties. Approximately 27% of the increase over prior year was attributableto properties we acquired in 2007, approximately 71% of the increase isattributable to properties that were owned for a full year in 2007 but onlyowned during part of 2006 and approximately 2% of the increase is related toproperties which were held during all of 2007 and 2006.

 

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*PropertyManagement Fees.*Property management fees for the year ended December 31,2007 were approximately $9.1 million as compared to approximately $4.8 millionfor the year ended December 31, 2006 and were comprised of propertymanagement fees related to both our consolidated and unconsolidated real estateproperties.  The increase in propertymanagement fees is primarily due to properties acquired subsequent to December 31,2006.

 

*AssetManagement Fees.* Asset management fees for the year ended December 31,2007 were approximately $13.3 million as compared to approximately $4.8 millionfor the year ended December 31, 2006 and were comprised of assetmanagement fees associated with both our consolidated and unconsolidated realestate properties.  The increase in assetmanagement fees is primarily due to properties acquired subsequent to December 31,2006.  Asset management fees ofapproximately $1.0 million and $2.7 million were waived by Behringer Advisorsfor the years ended December 31, 2007 and 2006, respectively.

 

*Generaland Administrative Expense.* General and administrativeexpense for the year ended December 31, 2007 was approximately $3.0million as compared to approximately $1.6 million for the year ended December 31,2006 and was comprised of corporate general and administrative expensesincluding directors’ and officers’ insurance premiums, audit and taxpreparation fees, legal fees and other administrative expenses.  The increase is primarily due to increasedbusiness and franchise taxes, legal expenses, audit expenses, and directors’and officers insurance premiums; each was associated with the overall growth ofthe portfolio.

 

*Depreciationand Amortization Expense.*Depreciation and amortizationexpense for the year ended December 31, 2007 was approximately $137.4million as compared to approximately $70.2 million for the year ended December 31,2006 and was comprised of depreciation and amortization expense from each ofour consolidated real estate properties. Approximately 22% of the increase over prior year was attributable toproperties we acquired in 2007, and approximately 81% of the increase isattributable to properties that were owned for a full year in 2007 but onlyowned during part of 2006.  Theseincreases were offset by a decrease of approximately 3% in depreciation andamortization expense for properties which were held during all of 2007 and2006.

 

*InterestIncome*. Interest income for the year ended December 31,2007 was approximately $25.5 million as compared to approximately $5.0 millionfor the year ended December 31, 2006 and was comprised of interest incomeassociated with funds on deposit with banks. The increase is primarily due to higher cash balances on deposit withbanks.

 

*Equity inEarnings of Investments*. Equity in earnings of investments for the year ended December 31,2007 was approximately $5.1 million as compared to approximately $4.8 millionfor the year ended December 31, 2006 and was comprised of our share ofequity in the earnings of unconsolidated investments.  During 2007, we acquired additional TICinterest in two of our TIC properties and a 60% non-controlling interest in theWanamaker Building through our acquisition of the subsidiaries of IPC.

 

**Discontinued Operations**

 

*Income(loss) from discontinued operations.*We sold 9100 MineralCircle in February 2008, in June 2008 we transferred 11 StanwixStreet to the lender associated with that property, and in August 2008 wesold 2383 Utah.  For the year ended December 31,2007, we had income from the discontinued operations of approximately $1.9million as compared to a loss from discontinued operations of approximately$0.1 million for the year ended December 31, 2006.  The income from discontinued operations forthe year ended December 31, 2007 includes approximately $3.9 million oflease termination fees received from a tenant at our 9100 Mineral Circleproperty.

 

**CashFlow Analysis**

 

At December 31,2008, we owned interests in 74 office properties; at December 31, 2007, weowned interests in 75 office properties (34 of which were acquired on December 12,2007) and at December 31, 2006, we owned interests in 36 officeproperties.  Accordingly, cash flows foreach fiscal year presented reflect significant differences in most categoriesdue to the growth of our portfolio of properties.

 

*Year ended December 31, 2008 as compared toyear ended December 31, 2007*

 

Cash flows provided by operating activities totaled approximately $68.5million for the year ended December 31, 2008 compared to $63.8 million forthe year ended December 31, 2007. The change in cash flows from operating activities is attributable to (1) thefactors discussed in our analysis of results of operations for the year ended December 31,2008 compared to December 31, 2007 and (2) the timing of receipt ofrevenues and payment of expenses which is evidenced by net cash outflows inworking capital assets and liabilities of approximately $37.2 million in 2008compared to approximately $14.6 million in 2007.

 

Cashflows used in investing activities for the year ended December 31, 2008were approximately $212.5 million and were primarily comprised of the purchasesof real estate of approximately $233.6 million and capital expenditures ofapproximately $68.3 million, partially offset by proceeds from sale of assetsand discontinued operations of approximately 

 

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$46.9million.  During the year ended December 31,2007, cash flows used by investing activities were approximately $1.0 billionand were primarily comprised of purchases of real estate of approximately$895.7 million and increases in restricted cash of approximately $126.7million.  During the year ended December 31,2008, we purchased three properties and increased ownership in three of our TICproperties.  During the year ended December 31,2007, we purchased interests in 39 properties.

 

Cashflows provided by financing activities for the year ended December 31,2008 were approximately $386.5 million and were comprised primarily of fundsreceived from the issuance of stock, net of redemptions and offering costs, ofapproximately $665.2 million and proceeds from our credit facility ofapproximately $280.0 million, partially offset by payments on notes payable ofapproximately $448.9 million and distributions to our stockholders ofapproximately $70.5 million.  Some or allof our distributions have been, and may continue to be, paid from sources otherthan operating cash flow, such as offering proceeds, cash advanced to us by, orreimbursements for expenses or waiver of fees from, our advisor and proceedsfrom loans including those secured by our assets.  During the year ended December 31, 2007,cash flows provided by financing activities were approximately $952.6 millionand were comprised primarily of funds received from the issuance of stock, netof redemptions and offering costs, of approximately $692.9 million and netborrowings of approximately $337.9 million.

 

*Year ended December 31, 2007 as compared toyear ended December 31, 2006*

 

Cashflows provided by operating activities for the year ended December 31,2007 were approximately $63.8 million and were primarily comprised of the netloss of approximately $41.6 million and changes in working capital ofapproximately $14.6 million and changes in lease intangibles of approximately$14.0 million, adjusted for depreciation and amortization of approximately$134.6 million.  During the year ended December 31,2006, cash flows provided by operating activities were approximately $49.2million and were primarily comprised of the net loss of approximately $22.4million adjusted for depreciation and amortization of approximately $69.5million.

 

Cashflows used in investing activities for the year ended December 31, 2007were approximately $1.0 billion and were primarily comprised of the purchase ofreal estate investments, excluding any assumed debt.  During 2007, we acquired interests in 39office properties.  During the year endedDecember 31, 2006, cash flows used in investing activities wereapproximately $1.6 billion and were comprised primarily of the purchase of realestate investments.  During 2006, weacquired interests in 15 office properties.

 

Cashflows provided by financing activities for the year ended December 31,2007 were approximately $952.6 million and were comprised primarily of fundsreceived from the issuance of stock, net of redemptions and offering costs, ofapproximately $692.9 million and proceeds from new notes payable, net of notepayments, of approximately $337.9 million. During the year ended December 31,2006, cash flows provided by financing activities were approximately $1.5billion and were comprised primarily of proceeds from notes payable and fundsreceived from the issuance of stock.

 

**Fundsfrom Operations**

 

Funds from operations (“FFO”) is a non-GAAP financial measure that iswidely recognized as a measure of REIT operating performance.  FFO is defined by the National Association ofReal Estate Investment Trusts as net income (loss), computed in accordance withGAAP excluding extraordinary items, as defined by GAAP, and gains (or losses)from sales of property, plus depreciation and amortization on real estateassets, and after adjustments for unconsolidated partnerships, joint venturesand subsidiaries.  We believe that FFO ishelpful to investors and our management as a measure of operating performancebecause it excludes depreciation and amortization, gains and losses fromproperty dispositions, and extraordinary items, and as a result, when comparedyear to year, reflects the impact on operations from trends in occupancy rates,rental rates, operating costs, development activities, general andadministrative expenses, and interest costs, which is not immediately apparentfrom net income.  Historical costaccounting for real estate assets in accordance with GAAP implicitly assumesthat the value of real estate diminishes predictably over time.  Since real estate values have historicallyrisen or fallen with market conditions, many industry investors and analystshave considered the presentation of operating results for real estate companiesthat use historical cost accounting alone to be insufficient.  As a result, our management believes that theuse of FFO, together with the required GAAP presentations, provide a morecomplete understanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delay inbuying assets, lower yields on cash held in accounts pending investment, incomefrom portfolio properties and other portfolio assets, interest rates on acquisitionfinancing and operating expenses.  FFOshould not be considered as an alternative to net income (loss), as anindication of our liquidity, nor is it indicative of funds available to fundour cash needs, including our ability to make distributions.

 

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Ourcalculations of FFO for the years ended December 31, 2008 and 2007 arepresented below (in thousands):

 
| ** **                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------|------------|----------|------------|----------|------------|
| Net loss (1)                                         |       | $        | (160,421   | )        | $          | (41,631 | ) |
|                                                 |       |     |       |     |       |
| Real estate depreciation and amortization (2)        |       | 295,626  |       | 150,533  |       |
| Minority interest (3)                                |       | (2,149   | )          | (379     | )          |
| Gain on sale of depreciable real estate (4)          |       | (21,204  | )          | —   |       |
| Funds from operations (FFO)                          |       | $        | 111,852    |     | $          | 108,523 |   |
|                                                 |       |     |       |     |       |
| Weighted average shares                              |       | 240,188  |       | 171,544  |       |
|                                                 |       |     |       |     |       |
| FFO per share                                        |       | $        | 0.47       |     | $          | 0.63 |   |
|                                                 |       |     |       |     |       |
| Cash distributions declared to common  shareholders  |       | $        | 70,962     |     | $          | 56,006 |   |
| DRIP distributions declared to common  shareholders  |       | 82,795   |       | 58,514   |       |
| Total distributions declared to common  shareholders |       | $        | 153,757    |     | $          | 114,520 |   |

 

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(1)     Includes impairments of real estate and realestate investments of approximately $21.1 million which is not added back inthe calculation of FFO.

 

(2)     This represents the depreciation andamortization expense of the properties we consolidate and our share ofdepreciation and amortization expense of the properties which we account forunder the equity method of accounting. The expenses of our unconsolidated interests are reflected in our equityin earnings of investments.

 

(3)     Reflects the minority interest adjustment forthe third-party partners’ proportionate share of the real estate depreciationand amortization and adjustment for the limited partnership interests issued byBehringer OP to third parties.

 

(4)     Includes the sale of 9100 Mineral Circle, 2383Utah and Enclave on the Lake.

 

*Non-cash Items Included in Net Loss:*

 

Providedbelow is additional information related to selected non-cash items included innet loss above, which may be helpful in assessing our operating results.  Straight-line rental revenue, amortization ofintangible lease assets and liabilities, amortization of lease incentives andbad debt expense of our investment interests are reflected in our equity inearnings of investments and are included in the amounts presented below.

 

·                  Straight-line rental revenue ofapproximately $28.8 million and $22.5 million was recognized for the year endedDecember 31, 2008 and 2007, respectively;

 

·                  Amortization of intangible leaseassets and liabilities was recognized as a net increase to rental revenues ofapproximately $13.8 million and $9.9 million for the year ended December 31,2008 and 2007, respectively;

 

·                  Amortization of lease incentives ofapproximately $1.7 million and $1.3 million was recognized as a decrease torental revenues for the year ended December 31, 2008 and 2007,respectively;

 

·                  Bad debt expense of approximately$1.5 million and $0.4 million was recognized for the year ended December 31,2008 and 2007, respectively; and

 

·                  Amortization of deferred financingcosts and interest rate mark-to-market adjustments of approximately $8.5million and $2.2 million was recognized as interest expense for the year ended December 31,2008 and 2007, respectively.

 

In addition, FFO may beused to fund certain capitalizable items that are excluded from FFO, such ascapital expenditures and payments of principal on debt, each of whichmay impact the amount of cash available for distribution to our stockholders.

 

Giventhe uncertainty arising from numerous factors, including both the raising andplacing of capital in the current real estate environment, ultimate FFOperformance cannot be predicted with certainty. For example, if we are not able to timely invest net proceeds of ouroffering at favorable yields, future distributions declared and paid may exceedFFO.

 

**NetOperating Income**

 

Netoperating income (“NOI”) is defined as rental revenue, less property operatingexpenses, real estate taxes and property management fees.  We believe that NOI provides a supplemental measureof our operating performance because NOI

 

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reflects the operating performance of ourproperties and excludes certain items that are not associated with managementof the properties.  To facilitate anunderstanding of this financial measure, a reconciliation of NOI to net loss,as computed in accordance with GAAP, has been provided.  Our calculations of NOI for the years ended December 31,2008, 2007 and 2006 are presented below (in thousands):

 
| ** **                                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Rental revenue                             |       | $        | 605,433    |     | $          | 304,709  |       | $ | 155,511 |   |
|                                       |       |     |       |     |       |     |       |
| Operating expenses:                        |       |     |       |     |       |     |       |
| Property operating expenses                |       | 167,179  |       | 74,106   |       | 35,153   |       |
| Real estate taxes                          |       | 78,287   |       | 42,101   |       | 21,321   |       |
| Property management fees                   |       | 17,430   |       | 9,072    |       | 4,786    |       |
| Total operating expenses                   |       | 262,896  |       | 125,279  |       | 61,260   |       |
|                                       |       |     |       |     |       |     |       |
| Net operating income                       |       | $        | 342,537    |     | $          | 179,430  |       | $ | 94,251 |   |
|                                       |       |     |       |     |       |     |       |
| Reconciliation to net loss                 |       |     |       |     |       |     |       |
| Net operating income                       |       | $        | 342,537    |     | $          | 179,430  |       | $ | 94,251 |   |
|                                       |       |     |       |     |       |     |       |
| Interest expense                           |       | (191,328 | )          | (99,376  | )          | (49,725  | )          |
| Asset management fees                      |       | (27,811  | )          | (13,324  | )          | (4,815   | )          |
| Loss on contract termination               |       | (5,000   | )          | —   |       | —   |       |
| Asset impairment losses                    |       | (21,114  | )          | —   |       | —   |       |
| General and administrative expense         |       | (7,333   | )          | (2,969   | )          | (1,614   | )          |
| Depreciation and amortization              |       | (278,213 | )          | (137,417 | )          | (70,179  | )          |
| Interest income                            |       | 7,027    |       | 25,524   |       | 4,954    |       |
| Gain on sale of assets                     |       | 5,253    |       | 44       |       | —   |       |
| Gain on early extinguishment of debt       |       | 1,258    |       | —   |       | —   |       |
| Provision for income taxes                 |       | (892     | )          | (571     | )          | —   |       |
| Minority interest                          |       | 231      |       | (16      | )          | —   |       |
| Equity in earnings of investments          |       | 1,331    |       | 5,117    |       | 4,804    |       |
| Income (loss) from discontinued operations |       | (2,503   | )          | 1,927    |       | (108     | )          |
| Gain on sale of discontinued operations    |       | 16,136   |       | —   |       | —   |       |
|                                       |       |     |       |     |       |     |       |
| Net loss                                   |       | $        | (160,421   | )        | $          | (41,631  | )          | $ | (22,432 | ) |

 

**Liquidity and Capital Resources**

 

***General***

 

Ourprincipal demands for funds will continue to be for the acquisition anddevelopment of real estate-related assets, capital improvements, payment ofoperating expenses and distributions, and payment of principal and interest onour outstanding indebtedness.  Generally,cash needs for items other than the acquisition and development of realestate-related assets are expected to be met from operations and financingactivities, components of which may include borrowings (including borrowingssecured by our assets) and proceeds from our previous offerings.  Cash needs for the acquisition anddevelopment of real-estate related assets are expected to be met from the netproceeds of the previous offerings and borrowings.  However, there may be a delay between thesale of our shares, which ceased with the end of our primary offering on December 31,2008, and our purchase of real-estate related assets and receipt of income fromsuch investments, which could result in a delay in the benefits to ourstockholders of returns generated from our operations.  During this period, we may decide to temporarilyinvest any uninvested proceeds in investments that could yield lower returnsthan our targeted investments in real-estate related assets.  These lower returns may affect our ability tomake distributions or the amount actually distributed.

 

Therecent turbulent financial markets and disruption in the banking system havecreated a severe lack of credit and a rising cost of any available debt.  Fortunately, we have limited risks related tonear-term maturities.  As of December 31, 2008, all of our $3.1billion in debt was long-term fixed rate debt, inclusive of $200.0 million ofdebt associated with the term loan under our credit agreement, which bearsinterest at a variable rate, but which we have hedged through use of aninterest rate swap.  As of December 31,2008, the effective rate on this debt, as hedged, was 5.79%.  We have no debt maturing in 2009, and in 2010we have approximately $260.1 million, or 8%, of our loans maturing, $200million of which represents the term loan under our credit agreement whichmatures in December 2010 and can be extended for one year.  In 2011, we have approximately $542.8million, or 18%, of our loans secured by various properties maturing.  We have diversified our cash and cashequivalents amongst numerous banking institutions in an attempt to minimizeexposure to any one of these entities. We regularly monitor the financial stability of these financialinstitutions, and we believe that we have placed our deposits with creditworthyfinancial institutions.

 

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AtDecember 31, 2008, our portfolio was approximately 91.2% leased and wecollected 99% of our base rent from tenants during the fourth quarter of2008.  We believe this is a goodindication of credit quality and stability. We can provide no assurance that these trends will continue in thefuture.

 

***Notes Payable***

 

At December 31,2008, we had notes payable of approximately $3.1 billion consisting of $2.9billion of mortgage loans collateralized by our properties and the $200 millionterm loan described below.  At December 31,2008, the stated interest rates on our notes payable ranged from 5.02% to8.33%, with an effective weighted average interest rate of approximately5.75%.  As of December 31, 2008, allof our $3.1 billion in debt is long-term fixed rate debt, including the $200.0million term loan which is fixed through interest rate swap agreements.  At December 31, 2008, our notes payablehad maturity dates that range from October 2010 to May 2017.  Our loan agreements generally require us tocomply with certain reporting and financial covenants.  At December 31, 2008, we believe we werein compliance with each of the debt covenants under our loan agreements.

 

Ifdebt financing is not available on acceptable terms and conditions, we may notbe able to obtain financing for investments. Recently, domestic and international financial markets have experiencedunusual volatility and uncertainty.  Ifthis volatility and uncertainty persists, our ability to borrow monies tofinance the purchase of, or other activities related to, real estate assetswill be significantly impacted.  If weare unable to borrow monies on acceptable terms and conditions, we likely willhave to reduce the number of properties we can purchase, and the return on theproperties we do purchase will likely be lower. In addition, we may find it difficult, costly or impossible to refinanceindebtedness upon maturity.  If interestrates are higher when the properties are refinanced, our income could bereduced.  In addition, if we pay fees tolock-in a favorable interest rate, falling interest rates or other factorscould require us to forfeit these fees to take advantage of lower interest rates.

 

On December 11, 2007,Behringer OP entered into a secured credit agreement providing for up to $500million of secured borrowings with KeyBanc Capital Markets and WachoviaSecurities as co-lead arrangers and KeyBank National Association asadministrative agent (referred to herein as “Lender” and as the “Agent,” intheir respective roles), and other lending institutions that are parties to thecredit facility (collectively, the “Lenders”).  This credit facilityallows Behringer OP to borrow up to $300 million of revolving loans and up to$200 million in a secured term loan.  Subject to Lenders’ approval andpayments of certain activation fees to the Agent and Lenders, the amount of therevolving loans may be increased up to $600 million.  In addition to drawingon $200 million of the term loan and $140 million of the revolving loans forthe purchase price and closing costs of acquiring the subsidiaries of IPC, weare using the facility for general corporate and working capitalpurposes.  The Company is a guarantor of the credit facility.

 

The credit facility matureson December 11, 2010.  The revolving loans may be extended oneadditional year upon payment of an extension fee in an amount equal to fifteenbasis points on the total amount of the revolving credit facility in effect onthe original maturity date. The term loan also may be extended one additionalyear upon payment of an extension fee in an amount equal to ten basis points onthe total amount of the term loan outstanding on the original maturity date.

 

Loansunder the credit facility bear interest at an annual rate that is equal toeither (1) the “base rate” (calculated as the greater of (i) theAgent’s “prime rate” or (ii) 0.5% above the Federal Funds Effective Rate)plus the applicable margin or (2) LIBOR plus the applicable margin. The applicable margin for base rate loans was initially 0.5% and, depending onthe ratio of our consolidated total indebtedness to our gross asset value, mayvary from 0.5% to 0%; the applicable margin for LIBOR loans was initially 2.0%and, depending on the ratio of our consolidated total indebtedness to our grossasset value, may vary from 2.0% to 1.5%.  Behringer OP has the right toprepay the outstanding amount of any revolving loans or term loan under the creditfacility, in whole or in part, at any time without penalty, provided that anypartial payment is in a minimum amount of $1 million.  As of December 31,2008, there was approximately $200.0 million outstanding under the term loanand none outstanding under any revolving loans. As of December 31, 2008, as a result of the interest rate swapagreements, the term loan effectively bore interest at a fixed rate ofapproximately 5.79%.

 

**ContractualObligations**

 

Wehave debt obligations related to our notes payable and convertibledebentures.  We have certain propertiesthat are subject long-term ground leases where a third party owns and hasleased the underlying land to us. Excluded from the table below are commitments of approximately $36.3million for tenant improvements and leasing commissions which are generally duein 12 to 36 months and approximately $27.0 million expected to be paid relatedto the development of Three Eldridge, which is expected to be completed in2009.

 

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Thefollowing table summarizes our primary contractual obligations as of December 31,2008 (in thousands):

 
| ** **                  | ** ** | **Total** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** |
|-----------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Notes payable principal (1) |       | $         | 3,067,505  |     | $          | 13,319   |       | $        | 275,701    |     | $          | 564,511  |       | $              | 127,892    |   | $ | 96,312 |   | $ | 1,989,770 |   |
| Convertible debentures      |       | 51,653    |       | —   |       | —   |       | —   |       | 36,666   |       | —   |       | 14,987         |       |
| Interest expense(2)         |       | 996,105   |       | 179,483  |       | 178,287  |       | 150,414  |       | 123,564  |       | 116,947  |       | 247,410        |       |
| Ground leases               |       | 30,694    |       | 884      |       | 884      |       | 884      |       | 884      |       | 884      |       | 26,274         |       |
| Total                       |       | $         | 4,145,957  |     | $          | 193,686  |       | $        | 454,872    |     | $          | 715,809  |       | $              | 289,006    |   | $ | 214,143 |   | $ | 2,278,441 |   |

 

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(1)   Excludesunamortized net discounts of approximately $1.0 million.

 

(2)   Includesinterest payments on our notes payable and debenture liability.

 

**ShareRedemption Program**

 

Ourboard of directors has authorized a share redemption program for stockholderswho have held their shares for more than one year.  On March 24, 2009, our board ofdirectors suspended, until further notice, redemptions other than thosesubmitted in respect of a stockholder’s death, disability or need for long-termcare.

 

**Distributions**

 

Distributionsare authorized at the discretion of our board of directors based on itsanalysis of our earnings, cashflow, anticipated cash flow, capital expenditure requirements, generalfinancial condition and other factors that our board deems relevant.  Theboard’s decisions are influenced, in substantial part, by the requirementsnecessary to maintain our REIT status. In light of the pervasive and fundamental disruptions in the globalfinancial and real estate markets, we cannot provide assurance that we will beable to achieve expected cash flowsnecessary to continue to pay distributions as they may be established ormaintain distributions at any particular level, or that distributions willincrease over time.  If thecurrent economic conditions continue, our board may determine to reduce ourcurrent distribution rate in order to conserve cash.  If funds from operations are not sufficientto fully fund the payment of distributions, the level of our distributions maynot be sustainable and some or all of our distributions will be paid from othersources.  We may generate cash to paydistributions from financing activities, components of which may includeborrowings (including borrowings secured by our assets) in anticipation offuture operating cash flow.  In addition, from time to time, ouradvisor and its affiliates may agree to waive or defer all, or a portion, ofthe acquisition, asset management or other fees or other incentives due tothem, enter into lease agreements for unleased space, pay generaladministrative expenses or otherwise supplement investor returns in order toincrease the amount of cash available to make distributions to ourstockholders.

 

We expect to fund ourshort-term liquidity requirements by using the net proceeds realized from ourpublic offerings, short-term borrowings and cash flow from the operationsgenerated by our current investments.  For both our short-term andlong-term liquidity requirements, other potential future sources of capital mayinclude proceeds from secured or  unsecured financings from banks or otherlenders, proceeds from the sale of our investments, if and when any are sold,and undistributed funds from operations.  If necessary, we may usefinancings or other sources of capital to fund our short-term liquidityrequirements in the event of unforeseen significant capital expenditures.

 

Thedistributions declared to common stockholders during the year ended December 31,2008 and 2007 were approximately $153.8 million and $114.5 million,respectively.  For both the year ended December 31,2008 and 2007, distributions declared and recorded as a reduction to minorityinterest in connection with the Behringer OP limited partnership units wereapproximately $0.3 million.  Totaldistributions declared to common stockholders exceeded FFO for the yearended December 31, 2008 and 2007 by approximately $41.9 million and $6.0million, respectively.  Accordingly, forthe year ended December 31, 2008 and 2007, approximately 72.8% and 94.8%,respectively, of the total distributions declared to common stockholders werefunded from FFO.  Amounts distributed to stockholders in excessof FFO were funded from our borrowings and offering proceeds.

 

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Thefollowing are the distributions declared and paid for both our common stock andthe Behringer OP limited partnership units during the year ended December 31,2008 and 2007 (in thousands):

 

| ** **  | ** ** | **Distributions** | ** ** | **Distributions** | ** ** |
|-------------|------------|-------------------|------------|-------------------|------------|
| ** **  | ** ** | **Declared**      | ** ** | **Paid**          | ** ** |
| 2008        |       |              |       |              |       |
| 1st Quarter |       | $                 | 33,168     |              | $          | 32,617 |   |
| 2nd Quarter |       | 35,280            |       | 34,839            |       |
| 3rd Quarter |       | 39,590            |       | 37,846            |       |
| 4th Quarter |       | 45,994            |       | 43,773            |       |
| Total       |       | $                 | 154,032    |              | $          | 149,075 |   |
|        |       |              |       |              |       |
| 2007        |       |              |       |              |       |
| 1st Quarter |       | 22,918            |       | 21,669            |       |
| 2nd Quarter |       | 28,788            |       | 27,028            |       |
| 3rd Quarter |       | 31,122            |       | 31,192            |       |
| 4th Quarter |       | 31,982            |       | 31,067            |       |
| Total       |       | $                 | 114,810    |              | $          | 110,956 |   |

 

Operatingperformance cannot be accurately predicted due to numerous factors includingour ability to invest capital at favorable yields, the financial performance ofour investments in the current uncertain real estate environment, the types andmix of investments in our portfolio and the accounting treatment of ourinvestments in accordance with GAAP and our accounting policies.  As aresult, future distributions declared and paid may continue to exceed FFO.** **FFO is a non-GAAP financial measure that iswidely recognized as a measure of REIT operating performance.  See “Funds from Operations” on Page 41for a reconciliation of our net loss to FFO.

 

**Off-BalanceSheet Arrangements**

 

Wehave no off-balance sheet arrangements that are reasonably likely to have acurrent or future material effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources.

 

**NewAccounting Pronouncements**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157establishes a single authoritative definition of fair value, sets out aframework for measuring fair value, and requires additional disclosures aboutfair value measurements.  SFAS No. 157applies only to fair value measurements that are already required or permittedby other accounting standards.  In February 2008,the FASB staff issued Staff Position No. 157-2 “Effective Date of FASBStatement No. 157” (“FSP SFAS 157-2”). FSP SFAS 157-2 delays the effectivedate of SFAS No. 157 to fiscal years beginning after November 15,2008, for non-financial assets and non-financial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  Webelieve the adoption of FSP SFAS No. 157-2 will have no material effect onthe disclosures related to non-financial assets and liabilities in ourfinancial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an Amendment ofFASB Statement No. 115.”  The fairvalue option established by SFAS No. 159 permits all entities tochoose to measure eligible items at fair value at specified electiondates.  A business entity will reportunrealized gains and losses on items for which the fair value option has beenelected in earnings (or another performance indicator if the business entitydoes not report earnings) at each subsequent reporting date.  We adopted this standard effective January 1,2008 and have not elected the fair value measurement option for any financialassets or liabilities at the present time; however, we may elect to measurefuture eligible financial assets or liabilities at fair value.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  This Statement replaces SFAS No. 141 “Business Combinations”but retains the fundamental requirement that the acquisition method ofaccounting (which SFAS No. 141 called the purchase method) be used for allbusiness combinations and for an acquirer to be identified for each businesscombination.  This Statement is broader in scope than that of Statement141, which applied only to business combinations in which control was obtainedby transferring consideration. SFAS No. 141(R) applies theacquisition method to all transactions and other events in which one entityobtains control over one or more other businesses.  This Statement alsomakes certain other modifications to Statement 141, including a broaderdefinition of a business, recognition requirements for contractual and certainnoncontractual contingencies, gain recognition resulting from

 

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a bargain purchase and the requirement thatacquisition related costs be expensed as incurred.  This statement appliesto business combinations occurring on or after the beginning of the firstannual reporting period beginning on or after December 15, 2008.  Early adoption is not permitted.  The acquisition of a real estate property hasbeen determined to meet the definition of a business combination as defined inSFAS No. 141(R).  Therefore, SFAS No. 141(R) willhave a material effect on our accounting for future acquisitions of properties,primarily as acquisition costs will no longer be capitalized, but will beexpensed beginning January 1, 2009.

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements - An amendment of ARB No. 51.” This Statement amends Accounting Research Bulletin No. 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interestin a subsidiary, which is sometimes referred to as minority interest, is anownership interest in the consolidated entity that should be reported as equityin the consolidated financial statements.  Among other requirements, thisStatement requires consolidated net income to be reported, on the face of theconsolidated income statement, at amounts that include the amounts attributableto both the parent and the noncontrolling interest.  This Statement iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. Early adoption is not permitted. This Statement shall be applied prospectively as of the beginning of thefiscal year in which this Statement is initially adopted, except for thepresentation and disclosure requirements. The presentation and disclosure requirements shall be appliedretrospectively for all periods presented. The adoption of SFAS No. 160 will likely increase our stockholders’equity and net income (loss) will no longer include income or losses allocatedto minority interests which will cause our net income (loss) to increase ordecrease.  However, income available tocommon stockholders should not be affected.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.”  SFASNo. 161 requires entities to provide greater transparency about how andwhy the entity uses derivative instruments, how the instruments and relatedhedged items are accounted for under SFAS 133, and how the instruments andrelated hedged items affect the financial position, results of operations, andcash flows of the entity.  SFAS No. 161 is effective for fiscalyears and interim periods beginning after November 15,2008.  The principal impact to us will be to expand our disclosuresregarding derivative instruments.

 

InMay 2008, the FASB issued Staff Position APB 14-1, “Accounting forConvertible Debt Instruments That May Be Settled in Cash upon Conversion(Including Partial Cash Settlement)” (“FSP APB 14-1”).  FSP APB 14-1 applies to convertible debtinstruments that, by their stated terms, may be settled in cash (or otherassets) upon conversion, including partial cash settlement, unless the embeddedconversion option is required to be separately accounted for as a derivativeunder SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  FSP APB 14-1 requires thatthe issuer of a convertible debt instrument within its scope separately accountfor the liability and equity components in a manner that will reflect theissuer’s nonconvertible debt borrowing rate when interest cost is recognized insubsequent periods.  The excess of theprincipal amount of the liability component over its initial fair value shallbe amortized to interest cost using the effective interest method.  FSP APB 14-1 is effective for financialstatements issued for fiscal years and interim periods beginning after December 15,2008.  Early adoption is notpermitted.  FSP APB 14-1 will be appliedretrospectively to all periods presented. We believe the adoption of FSP APB14-1 will have no material effect on our consolidated results of operations orfinancial position.

 

**Inflation**

 

Thereal estate market has not been affected significantly by inflation in the pastseveral years due to the relatively low inflation rate.  The majority of our leases contain inflationprotection provisions applicable to reimbursement billings for common areamaintenance charges, real estate tax and insurance reimbursements on a persquare foot basis, or in some cases, annual reimbursement of operating expensesabove a certain per square foot allowance.

 

**Item 7A.****                ****Quantitative and QualitativeDisclosures About Market Risk.**

 

Weare exposed to interest rate changes primarily as a result of our long-termdebt used to acquire properties that bears interest at variable rates.  Our interest rate risk management objectivesare to limit the impact of interest rate changes on earnings and cash flows andto lower overall borrowing costs. To achieve these objectives, we seek toborrow primarily at fixed rates or variable rates with the lowest marginsavailable and in some cases, the ability to convert variable rates to fixedrates. With regard to variable rate financing, we will assess interest rate cashflow risk by continually identifying and monitoring changes in interest rateexposures that may adversely impact expected future cash flows and byevaluating hedging opportunities.  Wehave entered into derivative financial instruments to mitigate our interestrate risk on certain financial instruments and effectively lock the interestrate portion of our variable rate debt.

 

AtDecember 31, 2008, all of our approximately $3.1 billion in notes payablebears interest at fixed rates; inclusive of the approximately $200.0 term loanunder the credit agreement, which has a variable interest rate hedged againstrises in interest costs and therefore effectively bears interest at fixedrates.  A 100 basis point decrease ininterest rates would result

 

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in a net decrease in the fair value of ourinterest rate swaps of approximately $3.9 million.  A 100 basis point increase in interest rateswould result in a net increase in the fair value of our interest rate swaps ofapproximately $3.8 million.

 

Wedo not have any foreign operations and thus we are not exposed to foreigncurrency fluctuations.

 

**Item 8.****                ****Financial Statements andSupplementary Data.**

 

Theinformation required by this Item 8 is hereby incorporated by reference to ourConsolidated Financial Statements beginning on page F-1 of this AnnualReport on Form 10-K.

 

**Item 9.****                ****Changes in and Disagreements WithAccountants on Accounting and Financial Disclosure.**

 

None.

 

**Item 9A(T).****        ****Controls and Procedures.**

 

*Evaluation of Disclosure Controls and Procedures*

 

As required by Rule 13a-15(b) and Rule 15d-15(b) underthe Exchange Act, our management, including our Chief Executive Officer andChief Financial Officer, evaluated as of December 31, 2008, theeffectiveness of our disclosure controls and procedures as defined in ExchangeAct Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation,our Chief Executive Officer and Chief Financial Officer, concluded that ourdisclosure controls and procedures, as of December 31, 2008, wereeffective for the purpose of ensuring that information required to be disclosedby us in this report is recorded, processed, summarized and reported within thetime periods specified by the rules and forms of the Exchange Act and isaccumulated and communicated to management, including the Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures.

 

We believe, however, that a controls system, nomatter how well designed and operated, cannot provide absolute assurance thatthe objectives of the controls systems are met, and no evaluation of controlscan provide absolute assurance that all control issues and instances of fraudor error, if any, within a company have been detected.

 

*Management’s Annual Report on Internal Control over Financial Reporting*

 

Managementis responsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)).  Our management, includingour Chief Executive Officer and Chief Financial Officer, evaluated as of December 31,2008, the effectiveness of our internal control over financial reporting usingthe framework in *Internal Control — Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission.  Based on that evaluation, our management,including our Chief Executive Officer and Chief Financial Officer, concludedthat our internal controls, as of December 31, 2008, were effective inproviding reasonable assurance regarding reliability of financial reporting.

 

This annual report does not include an attestation report of thecompany’s independent registered public accounting firm regarding internalcontrol over financial reporting. Management’s report was not subject toattestation by the Company’s independent registered public accounting firmpursuant to temporary rules of the Securities and Exchange Commission thatpermit the Company to provide only management’s report in this annual report.

 

*Changes in Internal Control over Financial Reporting*

 

There has been no change in internal control over financial reportingthat occurred during the quarter ended December 31, 2008 that hasmaterially affected, or is reasonably likely to materially affect, our internalcontrol over financial reporting.

 

**Item 9B.****             ****Other Information.**

 

None.

 

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**PART III**

 

**Item10.               Directors,Executive Officers and Corporate Governance.**

 

**Directors**

 

**Robert M.Behringer, 60,** has served as our Chairman ofthe Board of Directors since June 2002. He has also served as the sole manager and Chief Executive Officer ofBehringer Harvard Holdings, the indirect parent company of Behringer Advisors,since December 2001.  Mr. Behringeralso serves as the Chairman of the Board of Behringer Harvard Opportunity REITI, Inc., since June 2006, Behringer Harvard Opportunity REIT II, Inc.since January 2007 and Behringer Harvard Multifamily REIT I, Inc.since December 2007, each a publicly registered real estate investmenttrust, and Behringer Harvard REIT II, Inc. since April 2007, a newlyformed real estate investment trust. Since 2002, Mr. Behringer has been a general partner of BehringerHarvard Short-Term Opportunity Fund I LP and Behringer Harvard Mid-Term ValueEnhancement Fund I LP, each a publicly registered real estate limitedpartnership.  Mr. Behringer alsocontrols the general partners of Behringer Harvard Strategic Opportunity Fund ILP and Behringer Harvard Strategic Opportunity Fund II LP, both private realestate limited partnerships.

 

From 1995 until 2001, Mr. Behringer wasChief Executive Officer of Harvard Property Trust, Inc., a privately heldREIT formed by Mr. Behringer that was liquidated with a net asset value ofapproximately $200 million before liquidation. Before forming Harvard Property Trust, Inc., Mr. Behringerinvested in commercial real estate as Behringer Partners, a sole proprietorshipformed in 1989 that invested in single asset limited partnerships.  From 1985 until 1993, Mr. Behringer wasVice President and Investment Officer of Equitable Real Estate InvestmentManagement, Inc. (since acquired by, and now known as, Lend Lease RealEstate Investments, Inc.), one of the largest real estate pension managersand advisors in the United States.  Whileat Equitable, Mr. Behringer was responsible for its General Account RealEstate Assets located in the South Central United States.  The portfolio included institutional qualityoffice, industrial, retail, apartment and hotel properties exceeding 17 millionsquare feet with a value of approximately $2.8 billion.  Although Mr. Behringer was a significantparticipant in acquisitions, management, leasing, redevelopment anddispositions, his primary responsibility was to increase net operating incomeand the overall value of the portfolio.

 

Mr. Behringer has over 25 years ofexperience in real estate investment, management and finance activities,including experience with approximately 140 different properties with over 24million square feet of office, retail, industrial, apartment, hotel andrecreational properties.  In addition tobeing our Chairman of the Board, he is currently the general partner or aco-general partner in several real estate limited partnerships formed for thepurpose of acquiring, developing and operating office buildings and othercommercial properties located in the United States and other countries,including Germany, the Netherlands, England, the Bahamas and Australia.  Mr. Behringer is a Certified PropertyManager, Real Property Administrator and Certified Hotel Administrator, holdsFinancial Industry Regulatory Authority (“FINRA”) Series 7, 24 and 63registrations and is a member of the Institute of Real Estate Management, theBuilding Owners and Managers Association, the Urban Land Institute and the RealEstate Council.  Mr. Behringer alsowas a licensed certified public accountant for over 20 years.  Mr. Behringer received a Bachelor ofScience degree from the University of Minnesota.

 

**RobertS. Aisner, 62****,**  has been our ChiefExecutive Officer since June 2008 and our President since May 2005,and is one of our directors.  Mr. Aisnerserved as an independent director from June 2002 until February 2003,at which time he was elected our Chief Operating Officer, a position he helduntil June 2008, and then served as a director from June 2003 untilpresent.  In addition, Mr. Aisnerserves as President (since November 2004), Chief Executive Officer (since June 2008)and a director (since June 2006) of Behringer Harvard Opportunity REIT I, Inc.  Mr. Aisner also has served as President,Chief Executive Officer and a director of Behringer Harvard Opportunity REIT II, Inc.since January 2007, as Chief Executive Officer and a director of BehringerHarvard Multifamily REIT I, Inc. since August 2006 and as President(since April 2007) and Chief Executive Officer (since September 2008)of Behringer Harvard REIT II, Inc. Mr. Aisner is also President ofthe other Behringer Harvard companies.

 

Mr. Aisner has over 30 years of commercialreal estate experience with acquiring, managing and disposing of propertieslocated in the United States and other countries, including Germany, theNetherlands, England, the Bahamas and Australia.  From 1996 until joining Behringer Harvard in2003, Mr. Aisner served as (1) Executive Vice President of AMLIResidential Properties Trust, formerly a New York Stock Exchange listed REITfocused on the development, acquisition and management of upscale apartmentcommunities, which serves as advisor and asset manager for institutionalinvestors with respect to their multifamily real estate investment activities, (2) Presidentof AMLI Management Company that oversees all of AMLI’s apartment operations in80 communities, (3) President of the AMLI Corporate Homes division that 

 

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manages AMLI’s corporate housing properties, (4) VicePresident of AMLI Residential Construction, a division of AMLI that performsreal estate construction services, and (5) Vice President of AMLIInstitutional Advisors, the AMLI division that serves as institutional advisorand asset manager for institutional investors with respect to their multifamilyreal estate activities.  Mr. Aisneralso served on AMLI’s Executive Committee and Investment Committee.  From 1994 until 1996, Mr. Aisner ownedand operated Regents Management, Inc., which had both a multifamilydevelopment and construction group and a general commercial property managementgroup.  From 1984 to 1994, he wasemployed by HRW Resources, Inc., a real estate development and managementcompany, where he served as Vice President. Mr. Aisner received a Bachelor of Arts degree from Colby Collegeand a Masters of Business Administration degree from the University of NewHampshire.

 

**Charles G.Dannis, 59,**has been an independent directorof Behringer Harvard REIT I, Inc. since January 2003.  Mr. Dannis has been a commercial realestate appraiser and consultant since 1972. Mr. Dannis co-founded the firm Crosson Dannis, Inc., a realestate consulting firm, in 1977 and has been employed by the firm since thattime.  He is past Treasurer and Member ofthe Board of the National Council of Real Estate Investment Fiduciaries andpast Chairman of its Valuation Committee. He has been an active member of the Pension Real Estate Association,American Real Estate Society and Urban Land Institute.  Since 1988, Mr. Dannis has been anadjunct professor/lecturer in Real Estate and Urban Land Economics at the CoxSchool of Business at Southern Methodist University in both the undergraduateand graduate schools; he also is an award-winning teacher for the MortgageBankers Association of America’s School of Mortgage Banking.  He is a Member of the AppraisalInstitute.  Mr. Dannis received aBachelor of Business Administration degree from Southern Methodist University.

 

**Steven W.Partridge, 51,** has been an independent directorof Behringer Harvard REIT I, Inc. since October 2003.  Mr. Partridge has over 20 years ofcommercial real estate and related accounting experience.  Since October 1997, Mr. Partridgehas served as Chief Financial Officer and Senior Vice President of CoyoteManagement, LP, a real estate limited partnership that owns, manages and leasesregional shopping malls.  From December 1983to September 1997, Mr. Partridge served as a Director of Accountingand Finance, Asset Manager, and then Vice President of Asset Management withLend Lease Real Estate Investments, a commercial real estate investmentcompany, and its predecessor, Equitable Real Estate Investment Management.  Mr. Partridge has been licensed as acertified public accountant for over 25 years and during that time has been amember of American Institute of CPAs, Texas Society of CPAs, InternationalCouncil of Shopping Centers, and the CCIM Institute with a Certified CommercialInvestment Member designation.  Mr. Partridgeearned a Bachelor of Accountancy degree, cum laude, and a Master of Accountancydegree from the University of Mississippi.

 

**G.Ronald Witten, 58,**has been an independent director of Behringer Harvard REIT I, Inc.since April 2004.  Since January 2001,Mr. Witten has served as President of Witten Advisors LLC, a marketadvisory firm providing ongoing market advisory services to apartmentdevelopers, investors and lenders nationwide to identify the location andtiming of future development and acquisition opportunities for the nation’s 40major apartment markets.  Mr. Wittenbegan his career in 1973 at M/PF Research, Inc., a national leader inapartment market data and market analysis, and served as its President from1978 to 2000.  Mr. Witten has beenan active member of the Urban Land Institute, where he served as Chairman of boththe Multi-Family Silver Council and the Multi-Family Gold Council, and theNational Multi Housing Council and its Research Advisory Group.  Mr. Witten received his Bachelor ofBusiness Administration degree from Texas Tech University and has completed graduateclasses in statistics and economics at Southern Methodist University.

 

**ExecutiveOfficers**

 

In addition to Robert M.Behringer and Robert S. Aisner, the following individuals serve as ourexecutive officers:

 

**Thomas F. August, 60,**has served as ourChief Operating Officer since June 2008 and the Chief Operating Officer of Behringer Advisors and HPT Managementsince February 2008.  Prior to joining Behringer Harvard, Mr. August servedas a trustee of Brandywine Realty Trust (NYSE: BDN) from January 2006 to February 2008.Mr. August is also a director of DCT Industrial Trust Inc. (NYSE:DCT), having served in that capacity since January 2006. From October 1999to January 2006, Mr. August served as president, chief executiveofficer and a trustee of Prentiss Properties Trust. Prior to that time, he waspresident and chief operating officer of Prentiss from Prentiss’ initial publicoffering in October 1996.  From 1992to 1996, Mr. August served as president and chief operating officerof a Prentiss affiliate, Prentiss Properties Limited, Inc.  From 1987 to 1992, he served as executivevice president and chief financial officer of Prentiss’ predecessor company.From 1985 to 1987, Mr. August served in executive capacities withCadillac Fairview Urban Development, Inc.  Prior to joining CadillacUrban in 1985, Mr. August was senior vice president of finance forOxford Properties, Inc., in Denver, Colorado, an affiliate of a privatelyheld Canadian real estate firm. Previously, he was a vice president of Citibank,responsible for real estate lending activities in the Midwest.  

 

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Mr. August holdsa Bachelor of Arts degree from Brandeis University and a Masters of BusinessAdministration degree from Boston University.

 

**GeraldJ. Reihsen, III, 50,** has been our Executive Vice President — Corporate Development &Legal since June 2002.  He alsoserves in this capacity with Behringer Advisors, and in this and similarexecutive capacities with other entities sponsored by Behringer HarvardHoldings, including Behringer Harvard Opportunity REIT I, Inc. (since January 2004),Behringer Harvard Opportunity REIT II, Inc. (since January 2007),Behringer Harvard Multifamily REIT I, Inc. (since August 2006) andBehringer Harvard REIT II, Inc. (since April 2007).  Mr. Reihsen also has served as Presidentof Behringer Securities LP since February 2003.

 

For over 20 years, Mr. Reihsen’sbusiness and legal background has centered on sophisticated financial andtransactional matters, including commercial real estate transactions, realestate partnerships, and public and private securities offerings.  Prior to joining Behringer Harvard in 2001, forthe period from 1985 to 2000, Mr. Reihsen practiced as an outsidecorporate securities attorney.  Afterserving from 1986 to 1995 in the corporate department of Gibson, Dunn &Crutcher, LLP, a leading international commercial law firm, Mr. Reihsenestablished his own firm, Travis & Reihsen, where he served as acorporate/securities partner until 1998. In 1998, Mr. Reihsen became the lead partner in thecorporate/securities section of the law firm Novakov Davis, where he serveduntil 2000.  In 2000, he practiced law asa principal of Block & Balestri, PC, a corporate and securities lawfirm.  In 2000 and 2001, Mr. Reihsenwas employed as the Vice President — Corporate Development and Legal ofXybridge Technologies, Inc., a telecommunications software company that Mr. Reihsenhelped guide through venture funding, strategic alliances with internationaltelecommunications leaders and its ultimate sale to Zhone Technologies, Inc.  Mr. Reihsen holds FINRA Series 7,24, 27 and 63 registrations.  Mr. Reihsenreceived a Bachelor of Arts degree, magna cum laude, from the University ofMississippi and a Juris Doctorate degree, cum laude, from the University ofWisconsin.

 

**Gary S. Bresky, 42,** has been our Executive Vice President andChief Financial Officer since June 2002. Mr. Bresky also isthe Executive Vice President and Chief Financial Officer of Behringer Advisorsand serves in these and similar executive capacities with other entitiessponsored by Behringer Harvard Holdings, including Behringer Harvard OpportunityREIT I, Inc. (since January 2004), Behringer Harvard Opportunity REITII, Inc. (since January 2007), Behringer Harvard Multifamily REIT I, Inc.(since August 2006) and Behringer Harvard REIT II, Inc. (since April 2007).

 

Mr. Bresky has been active in commercial real estate and relatedfinancial activities for over 15 years. Prior to joining Behringer Harvard, Mr. Bresky served as a SeniorVice President of Finance with Harvard Property Trust, Inc. from 1997 to2001.  In this capacity, Mr. Breskywas responsible for directing all accounting and financial reporting functionsand overseeing all treasury management and banking functions of thecompany.  Mr. Bresky also wasintegral in analyzing deal and capital structures as well as participating inall major decisions related to any acquisition or sale of assets.  From 1995 until 1996, Mr. Bresky workedin the Real Estate Group at Coopers & Lybrand LLP in Dallas, where hefocused on finance and accounting for both public and private real estateinvestment trusts.  His experienceincluded conducting annual audits, preparing public securities reportingcompliance filings and real estate securities registration statements for hisclients.  From 1989 to 1994, Mr. Breskyworked with Ten West Associates, Ltd. and Westwood Financial Corporation in LosAngeles, California as a real estate analyst and asset manager for twocommercial real estate portfolios totaling in excess of $185 million.  From 1988 until 1989, Mr. Bresky workedas an analysts’ assistant for both Shearson-Lehman Bros., Inc. andHambrecht and Quist Inc. assisting brokers in portfolio management.  Mr. Bresky holds FINRA Series 7,24, 27 and 63 registrations.  Mr. Breskyreceived a Bachelor of Arts degree from the University of California — Berkeleyand a Masters of Business Administration degree from the University of Texas atAustin.

 

**M. Jason Mattox, 33,** has served as our Executive Vice Presidentsince March 2006.  Mr. Mattox also serves as an ExecutiveVice President of Behringer Advisors and serves in these and similar executivecapacities with other entities sponsored by Behringer Harvard Holdings,including Behringer Harvard Opportunity REIT I, Inc. (since March 2006),Behringer Harvard Opportunity REIT II, Inc. (since January 2007),Behringer Harvard Multifamily REIT I (since August 2006) and BehringerHarvard REIT II, Inc. (since April 2007).

 

From 1997 until joining BehringerHarvard REIT I, Inc., Mr. Mattox served as a Vice President ofHarvard Property Trust, Inc. and became a member of its InvestmentCommittee in 1998.  From 1999 until 2001,Mr. Mattox served as Vice President of Sun Resorts International, Inc.,a recreational property investment company, coordinating marina acquisitionsthroughout the southern United States and the U.S. Virgin Islands.  From 1999 until 2001, in addition toproviding services related to investing, acquisition, disposition andoperational activities, Mr. Mattox served as an asset manager withresponsibility for over one million square feet of Harvard Property Trust, Inc.’scommercial office assets in Texas and Minnesota, overseeing propertyperformance, management offices, personnel and outsourcing relationships.

 

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Mr. Mattox is a continuing member of the BuildingOwners and Managers Association and the National Association of Industrial andOffice Properties.  Mr. Mattox holdsFINRA Series 7, 24 and 63 registrations.  Mr. Mattox receivedboth a Bachelor of Business Administration degree, with honors, and a Bachelorof Science degree, cum laude, from Southern Methodist University.

 

**Jon L. Dooley, 57,** hasbeen our Executive Vice President — Real Estate since April 2004.  Mr. Dooleyholds a similar position with our Behringer Advisors and serves in these andsimilar executive capacities with other entities sponsored by Behringer HarvardHoldings, including Behringer Harvard Opportunity REIT I, Inc. (since March 2006),Behringer Harvard Opportunity REIT II, Inc. (since January 2007) andBehringer Harvard REIT II, Inc. (since April 2007).

 

Mr. Dooley has over 25 years of commercial real estateexperience.  From June 2002 until May 2003,he served as one of our independent directors. In 2002, he served as a Senior Vice President with Trammell CrowCompany, formerly a New York Stock Exchange listed diversified commercial realestate pension company (since acquired by CB Richard Ellis Group, Inc.).  For the 13 years prior to joining TrammellCrow, Mr. Dooley held various senior management positions with Lend LeaseReal Estate Investments, a commercial real estate investment company, and itspredecessor, Equitable Real Estate Investment Management.  In 1997, Mr. Dooley became a principalwith Lend Lease.  Prior to that, Mr. Dooleyserved as a Senior Vice President of Asset Management from 1991 to 1996 whileat Equitable.  Mr. Dooley received aBachelor of Business Administration degree from Southern MethodistUniversity.  Mr. Dooley is alicensed real estate broker in Texas, Georgia and Colorado.

 

**Key Personnel**

 

Thefollowing individuals are non-executive personnel of our advisor and propertymanager and their affiliates and are important to our success:

 

**Michael A. Ernst** is Executive Vice President — Finance of Harvard Property Trust, themanaging member of our advisor, Behringer Advisors and HPT Management.  Mr. Ernsthas over ten years of experience in the REIT industry, including capitalplanning, financial strategy, corporate accounting, raising capital, evaluatingnew investment opportunities and investor relations.  Prior to joiningBehringer Harvard in September 2008, Mr. Ernst was Executive VicePresident and Chief Financial Officer of UDR, Inc., a publicly tradedREIT. In this position, which he assumed in July 2006, Mr. Ernstoversaw the areas of corporate accounting, financial planning and analysis,investor relations, treasury operations and SEC reporting for UDR.  From 1997 to 2006, Mr. Ernst served asan Executive Vice President and as the Chief Financial Officer of PrentissProperties Trust. Prior to that, Mr. Ernst served as a Senior VicePresident in Bank of America’s Real Estate Finance Group, where he managed ateam of lenders covering national accounts including many public real estatecompanies. Mr. Ernst received a Bachelor degree and a Masters of BusinessAdministration degree, with a focus on Real Estate and Finance, from theUniversity of Virginia.

 

**James D. Fant**is Senior Vice President — Real Estate of Harvard Property Trust, the managingmember of our advisor, and Behringer Advisors and joined Behringer Harvard in April 2005. Mr. Fant has been in the commercial real estate business since 1983primarily in investment advisory services, project development, and investmentsales.  From October 2002 until March 2005, Mr. Fant wasthe founder of an advisory business providing financial and real estateservices to small businesses.  From March 2000 until September 2002,Mr. Fant served as Vice President of Acquisitions for the pension advisoryfirm Kennedy Associates, sourcing opportunity acquisitions and ground updevelopment transactions with local development partners in the mid continentregion of the country.  From October 1998 until February 2000,he served as Vice President for Metro-American Developers and Investorssourcing development and investment opportunities.  Mr. Fant servedin multiple capacities for MEPC American Properties from December 1983until September 1998.  As Senior Vice President, his responsibilitiesincluded acquisitions and dispositions, project development and assetmanagement in markets throughout the country.  Mr. Fant hasexperience in a variety of product types including office, industrial, andretail.  Mr. Fant received a Bachelor of Business Administrationdegree from the University of Texas at Arlington, is a Certified PublicAccountant licensed in the state of Texas and is a Licensed Real EstateSalesman.

 

**Scott W. Fordham** is Senior Vice President — Accounting ofHarvard Property Trust, the managing member of our advisor, Behringer Advisorsand HPT Management.  Mr. Fordham has more than 15 years of experiencein corporate finance and accounting with emphasis on accounting practices,financial statements for public companies, and financial forecasting andstrategy. His experience includes over 10 years in the REIT industry. From January 2007until joining Behringer Harvard in May 2008, he served as Senior VicePresident and Chief Accounting Officer for Apartment Investment and ManagementCompany (Aimco), an S&P 500 company operating as a publicly traded REIT(NYSE: AIV) with assets of approximately $10.6 billion. From November 1992to December 2006, he held various finance and accounting positions withPrentiss Properties Trust and its successor, Brandywine Realty Trust, apublicly traded REIT (NYSE: BDN), and served as Chief Accounting Officer from May 2004to December 2006. Mr. Fordham also previously 

 

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worked in public accounting withPricewaterhouseCoopers LLP. Mr. Fordham received a Bachelor of BusinessAdministration degree in Accounting from Baylor University and is a CertifiedPublic Accountant in the state of Texas.

 

**Terry Kennon** is Senior Vice President — Asset Management of Harvard Property Trust,the managing member of our advisor, Behringer Advisors and HPTManagement.  Mr. Kennon joined Behringer Harvard in February 2004and has over 30 years of commercial real estate experience.  From September 2002until February 2004, he was Senior Vice President — Asset Management withKBS Realty Advisors, a pension fund advisor.  As such, he was responsiblefor 2.5 million square feet of office space in the Central and NortheasternU.S. markets.  From July 2001 until August 2002, Mr. Kennonserved as Regional Vice President — Property Management for PM Realty Group, anational property management and leasing company.  From August 2000until July 2001, he served as Senior Vice President — Marketing for SafecoTitle Company, a regional title company, and from June 1997 until August 2000,he was Managing Director of Landauer Associates, a national real estatecounselor and a subsidiary of Aegon Insurance Company.  The majority ofhis career, he held the position of Vice President of The Prudential RealEstate Group which included both the general account and pension advisorydivisions.  He has extensive experience in institutional property ownershiphaving been responsible for asset management, acquisitions and dispositions foroffice, industrial, multi-family and retail properties.  Mr. Kennonholds a Bachelor of Business Administration and Masters of BusinessAdministration degrees from the University of Memphis.  He is a CertifiedProperty Manager.

 

 **Gerald D. Oliver, Jr.** is Senior Vice President —Property Management of HPT Management, our property manager.  Mr. Oliver has more than twenty-fiveyears of broad-based experience in asset, property and facilities management.Most recently, Mr. Oliver served as Regional Senior Vice President forGrubb & Ellis Management Services, Inc. In this role, he wasresponsible for asset services operations in the central United States andmanaged 100 clients with 250 properties, representing 50 million square feet ofcommercial space. Prior to the beginning of his tenure at Grubb &Ellis in 1997, Mr. Oliver held various senior management positions withPremisys Real Estate Services, a unit of the Prudential Insurance Co., ZellerRealty, Miglin-Beitler Developments and Roosevelt National Life.  Mr. Oliver holds a Bachelor of Sciencedegree in accounting from Olivet Nazarene University and is a licensed realestate broker in the state of Illinois.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

** **

Section 16(a) of the Securities Exchange Act of1934, as amended, requires each director, officer and individual beneficiallyowning more than 10% of a registered security of the Company to file initialstatements of beneficial ownership (Form 3) and statements of changes inbeneficial ownership (Forms 4 and 5) of common stock of the Company with theSEC. Officers, directors and greater than 10% beneficial owners are required bySEC rules to furnish the Company with copies of all such forms they file.Based solely on a review of the copies of such forms furnished to the Companyduring and with respect to the fiscal year ended December 31, 2008, orwritten representations that no additional forms were required, the Company believesthat its officers, directors and greater than 10% beneficial owners compliedwith these filing requirements and filed on a timely basis in 2008.

 

**Code of Ethics**

** **

Our board of directors has adopted a Code of BusinessConduct Policy that is applicable to all members of our board of directors, ourexecutive officers and employees of our advisor and its affiliates.  We have posted the policy on the websitemaintained for us at *www.behringerharvard.com*.  If in the future we amend, modify or waive aprovision in the Code of Business Conduct Policy, we may, rather than filing aCurrent Report on Form 8-K, satisfy the disclosure requirement by postingsuch information on the website maintained for us as necessary.

 

**Audit CommitteeFinancial Expert**

** **

Our board has established a permanent Audit Committee,which consists of independent directors Steven W. Partridge, the chairman,Charles G. Dannis and G. Ronald Witten. Our board of directors has determined that Mr. Partridge is an “auditcommittee financial expert,” as defined by the rules of the SEC.  The biography of Mr. Partridge, including his relevantqualifications, is previously described in this Item 10.  Mr. Partridgeis “independent” under New York Stock Exchange rules and applicable SECrules.

 

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**Item11.                ExecutiveCompensation.**

 

**Compensation Discussionand Analysis**

** **

We do not directly compensate our named executive officersfor services rendered to us.  Ourexecutive officers also are officers of Harvard Property Trust, the managingmember of our advisor, Behringer Advisors, HPT Management and their affiliatesand are compensated directly by these entities for providing services tous.  The fees that we pay to our advisor,property manager and their affiliates are described in the “CertainRelationships and Related Transactions” section below.

 

If we determine to compensate our named executive officersin the future, the Compensation Committeewill review all forms of compensation and approve all incentive awards, stockoption grants, warrants, stock appreciation rights and other current ordeferred compensation payable with respect to the current or future value ofour shares.

 

**Directors’ Compensation**

** **

We pay each of our directors who are not employees of theCompany or Behringer Advisors or its affiliates an annual retainer of $40,000per year.  In addition, we pay thechairman of our Audit Committee an annual retainer of $15,000 per year and thechairmen of our Compensation and Nominating Committees annual retainers of$7,500 per year.  These retainers are paidquarterly in arrears.  In addition, wepay each of our directors who are not employees of the Company or BehringerAdvisors or its affiliates (1) $2,000 for each board or committee meetingattended in person and (2) $1,000 for each board or committee meetingattended by telephone and for each written consent considered by thedirector.   All directors who are notemployees of the Company or Behringer Advisors or its affiliates receivereimbursement of reasonable out-of-pocket expenses incurred in connection withattendance at meetings of our board of directors.  If a director also is an employee of us, oran employee of Behringer Advisors or its affiliates, we do not pay compensationfor services rendered as a director.

 

Under our 2005 Incentive Award Plan, each non-employeedirector also is automatically granted an option to purchase 5,000 shares ofcommon stock on the date he first becomes a director and upon each reelectionas a director.  The board of directorsdetermines the fair market value of our shares under the 2005 Incentive AwardPlan to determine exercise price and, as of May 2008, has determined thatthe exercise price for such options should be $10.00 per share.  Future options granted to non-employeedirectors under the 2005 Incentive Award Plan will become exercisable on thefirst anniversary of the date of grant.

 

The following table further summarizes compensation paid tothe non-employee directors during 2008.

 

 
| ** **          | ** ** | **Fees Earned  or  Paid in Cash** | ** ** | **Option  Awards****(1)** | ** ** | **Total** | ** ** |
|---------------------|------------|--------------------------------------------------|------------|---------------------------|------------|-----------|------------|
| Charles G. Dannis   |       | $                                                | 95,500     |                      | $          | 150       |       | $ | 95,650 |   |
| Steven W. Partridge |       | 103,000                                          |       | 150                       |       | 103,150   |       |
| G. Ronald Witten    |       | 93,500                                           |       | 150                       |       | 93,650    |       |
|                     |            |                                                  |            |                           |            |           |            |  |  |  |

 

----

| (1) | The value of  option awards represents the amount of compensation cost under Statement of  Financial Accounting Standards 123R. |
|-----|---------------------------------------------------------------------------------------------------------------------------------|

 

**2005 Incentive AwardPlan**

 

The 2005 Incentive Award Plan was approved by our board ofdirectors on March 28, 2005 and our stockholders on May 31,2005.  The 2005 Incentive Award Plan isadministered by our Compensation Committee and provides for equity awards toour employees, directors and consultants and those of any affiliates of ouradvisor.  As of December 31, 2008,options to acquire 20,500 shares of our common stock had been granted under the2005 Incentive Award Plan to each of Messrs. Dannis, Partridge andWitten.  For the grants made in 2005,2006 and 2007 under the 2005 Incentive Award Plan, the options are exercisableas follows:  25% during 2010, 25% during2011 and 50% during 2012.  For the grantsmade in 2008 under the 2005 Incentive Award Plan, the options becomeexercisable one year after the date of grant.

 

**Non-Employee Director StockOption Plan**

** **

The Behringer Harvard REIT I, Inc. Non-EmployeeDirector Stock Option Plan (“Director Option Plan”) was approved by our boardof directors and stockholders on June 26, 2002.  As of December 31, 2008, options toacquire 3,000 shares of our common stock had been granted under the DirectorOption Plan to each of Messrs. Dannis, Partridge and Witten.  The Director Option Plan was terminated on May 31,2005 upon approval of the 2005 Incentive Award Plan at the 

 

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2005 Annual Meeting of Stockholders.  Options granted under the Director OptionPlan, however, remain outstanding and subject to the terms of the DirectorOption Plan.

 

**Compensation CommitteeInterlocks and Insider Participation**

** **

No member of our Compensation Committee served as an officeror employee of the Company or any of our subsidiaries during the fiscal yearended December 31, 2008 or formerly served as an officer of the Company orany of our subsidiaries.  In addition,during the fiscal year ended December 31, 2008, none of our executiveofficers served as a member of a board of directors or compensation committeeof any entity that has one or more executive officers serving as a member ofour board of directors or Compensation Committee.

 

**Compensation CommitteeReport**

** **

The Compensation Committee has reviewed and discussed theCompensation Discussion and Analysis contained in this Annual Report on Form 10-K(“CD&A”) with management.  Based onthe Compensation Committee’s review of the CD&A and the CompensationCommittee’s discussions regarding the CD&A with management, theCompensation Committee recommended to the board of directors, and the board hasapproved, the inclusion of the CD&A in this Annual Report on Form 10-K.

 

COMPENSATION COMMITTEE:

 

CharlesG. Dannis, Chairman

StevenW. Partridge

G.Ronald Witten

 

*The foregoing report shall not be deemed incorporated byreference by any general statement incorporating by reference this AnnualReport on Form 10-K into any filing under the Securities Act of 1933, asamended, or under the Securities Exchange Act of 1934, as amended, except tothe extent that we specifically incorporate this information by reference, andshall not otherwise be deemed filed under such Acts.*

 

**Item12.                SecurityOwnership of Certain Beneficial Owners and Management and Related StockholderMatters.**

 

**Equity Compensation PlanInformation**

** **

The following table givesinformation about our common stock that may be issued upon the exercise of theoptions under both equity compensation plans as of December 31, 2008:

 
| **Plan Category**                                      | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities remaining  available for future issuance  under equity compensation  plans** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  security holders     |       | 68,500                                                                                                                                               |       | $                                                                                                           | 9.35       |                                                                                                                                        | 11,929,500 | * |
| Equity compensation plans not approved by  security holders |       | N/A                                                                                                                                                  |       | N/A                                                                                                         |       | N/A                                                                                                                                         |       |
| Total                                                       |       | 68,500                                                                                                                                               |       | $                                                                                                           | 9.35       |                                                                                                                                        | 11,929,500 | * |

 

----

* All shares authorized for issuance pursuantto options not yet granted under our 2005 Incentive Award Plan.

 

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**Security Ownership ofCertain Beneficial Owners**

** **

Thefollowing table sets forth information as of March 13,2009, regarding the beneficial ownership ofour common stock by each person known by us to own 5% or more of theoutstanding shares of our common stock, each of our directors, each namedexecutive officer, and our directors and executive officers as a group.  The percentage of beneficial ownership iscalculated based on 291,465,075 shares of common stock outstanding as of March 13,2009.

 

 
| **Name of Beneficial Owner**                           | ** ** | **Amount and Nature  of Beneficial  Ownership (1)** | ** ** | **Percentage  of  Class** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------|------------|
| Robert M. Behringer (2)(3)                                            |       | 32,093                                                                  |       | *                         |       |
| Robert S. Aisner (3)(4)                                               |       | —                                                                  |       | —                    |       |
| Charles G. Dannis (5)                                                 |       | 5,532                                                                   |       | *                         |       |
| Steven W. Partridge (6)                                               |       | 6,650                                                                   |       | *                         |       |
| G. Ronald Witten (7)                                                  |       | 6,626                                                                   |       | *                         |       |
| Thomas F. August (3)                                             |       | —                                                                  |       | —                    |       |
| Gerald J. Reihsen, III (3)(8)                                    |       | 2,417                                                                   |       | *                         |       |
| Gary S. Bresky (3)(9)                                                 |       | 3,021                                                                   |       | *                         |       |
| M. Jason Mattox (3)(10)                                               |       | 384                                                                     |       | *                         |       |
| Jon L. Dooley (3)                                                     |       | 800                                                                     |       | *                         |       |
| All current directors and executive  officers as a group (10 persons) |       | 57,523                                                                  |       | *                         |       |

 

----

| *      | Represents less than 1%                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (1)    | For  purposes of calculating the percentage beneficially owned, the number of  shares of common stock deemed outstanding includes (1) 291,465,075  shares of common stock outstanding as of March 13, 2009 and  (2) shares of common stock issuable pursuant to options held by the  respective person or group which may be exercised within 60 days following  March 13, 2009; it does not include 1,000 shares of convertible stock  owned by Behringer Advisors. Beneficial ownership is determined in accordance  with the rules of SEC that deem shares to be beneficially owned by any  person or group who has or shares voting and investment power with respect to  such shares. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (2)    | Includes  22,000 shares of common stock owned by Behringer Harvard Holdings but does  not include 1,000 shares of convertible stock owned by Behringer Advisors, an  indirect subsidiary of Behringer Harvard Holdings. As of March 13, 2009,  Mr. Behringer controlled the disposition of approximately 40% of the  outstanding limited liability company interests and the voting of 85% of the  outstanding limited liability company interests of Behringer Harvard  Holdings.                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (3)    | The address of Messrs. Behringer, Aisner, August,  Reihsen, Bresky, Mattox and Dooley is c/o Behringer Harvard REIT  I, Inc., 15601 Dallas Parkway, Suite 600, Addison, Texas 75001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (4)    | Does not include 22,000 shares of common stock owned  by Behringer Harvard Holdings, of which Mr. Aisner controls the  disposition of 4% of the limited liability company interests, or 1,000 shares  of convertible stock owned by Behringer Advisors, an indirect subsidiary of  Behringer Harvard Holdings. Mr. Behringer has the right to vote  Mr. Aisner’s interest in Behringer Harvard Holdings.                                                                                                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (5)    | Includes vested options exercisable into 3,000 shares  of common stock. The address of Mr. Dannis is Campbell Center II, 8150  North Central Expressway, Suite 950, Dallas, Texas 75206.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (6)    | Includes vested options exercisable into 3,000 shares  of common stock. The address of Mr. Partridge is 16475 Dallas Parkway,  Suite 250, Addison, Texas 75001.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (7)    | Includes vested options exercisable into 3,000 shares  of common stock. The address of Mr. Witten is 8235 Douglas Avenue,  Suite 420, Dallas, Texas 75225.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (8)    | Does not include 22,000  shares of common stock owned by Behringer Harvard Holdings, of which  Mr. Reihsen controls the disposition of 4.5% of the limited liability  company interests, or 1,000 shares of convertible stock owned by Behringer  Advisors, an indirect subsidiary of Behringer Harvard Holdings.  Mr. Behringer has the right to vote Mr. Reihsen’s interest in  Behringer Harvard Holdings.                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (9)    | Does not include 22,000  shares of common stock owned by Behringer Harvard Holdings, of which  Mr. Bresky controls the disposition of 3% of the limited liability  company interests, or 1,000 shares of convertible stock owned by Behringer  Advisors, an indirect subsidiary of Behringer Harvard Holdings.  Mr. Behringer has the right to vote Mr. Bresky’s interest in  Behringer Harvard Holdings.                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (10)   | Does not include 22,000  shares of common stock owned by Behringer Harvard Holdings, of which  Mr. Mattox controls the disposition of 1.5% of the limited liability  company interests, or 1,000 shares of convertible stock owned by Behringer  Advisors, an indirect subsidiary of Behringer Harvard Holdings.  Mr. Behringer has the right to vote Mr. Mattox’s interest in  Behringer Harvard Holdings.                                                                                                                                                                                                                                                                                     |

 

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**Item13.                CertainRelationships and Related Transactions, and Director Independence.**

 

Ouradvisor and certain of its affiliates have earned fees and compensation inconnection with each of our public offerings and earn fees and compensation inconnection with the acquisition, management and sale of our assets.

 

BehringerSecurities LP (“Behringer Securities”), an affiliate of our advisor, served asthe dealer manager for each of our public offerings and received commissions ofup to 7% of gross offering proceeds (1% for sales under our DRIP) beforereallowance of commissions earned by participating broker-dealers.  In connection with our third public offering,up to 2.5% of gross proceeds before reallowance to participating broker-dealerswere paid to Behringer Securities as a dealer manager fee; except that nodealer manager fee was paid on purchases made pursuant to our DRIP.  In our third public offering, BehringerSecurities reallowed all of its commissions to participating broker-dealers andreallowed a portion of its dealer manager fee of up to 2.0% of the grossoffering proceeds to be paid to such participating broker-dealers; provided,however, that Behringer Securities did not reallow, in the aggregate, more than1.5% of gross offering proceeds for marketing fees and expenses, bona fidetraining and educational meetings and non-itemized, non-invoiced due diligenceefforts, and more than 0.5% of gross offering proceeds for bona fide,separately invoiced due diligence expenses incurred as fees, costs and otherexpenses from third parties.  During theyear ended December 31, 2008, Behringer Securities’ commissions and dealermanager fees totaled approximately $54.1 million and approximately $19.6million, respectively, and were recorded as a reduction of additional paid-incapital.  During the year ended December 31,2007, Behringer Securities’ commissions and dealer manager fees totaledapproximately $54.8 million and approximately $20.0 million, respectively, andwere recorded as a reduction of additional paid-in capital.

 

Ouradvisor, Behringer Advisors, or its affiliates, received up to 1.5% of grossoffering proceeds for reimbursement of offering expenses incurred in connectionwith our third pubic offering, except that no offering expenses were reimbursedwith respect to purchases made pursuant to our DRIP.  During the years ended December 31, 2008and 2007, offering expenses of approximately $11.8 million and approximately$12.0 million, respectively, were reimbursable by us and were recorded as areduction of additional paid-in capital.

 

BehringerAdvisors, or its affiliates, receives acquisition and advisory fees of up to2.5% of (1) the purchase price of real estate investments acquireddirectly by us, including any debt attributable to these investments, or (2) whenwe make an investment indirectly through another entity, our pro rata share ofthe gross asset value of real estate investments held by that entity.  Behringer Advisors or its affiliates alsoreceives up to 0.5% of the contract purchase price of each asset purchased orthe principal amount of each loan made by us for reimbursement of expensesrelated to making the investment. Behringer Advisors earned approximately $13.7 million and approximately$67.5 million in acquisition and advisory fees and reimbursement of expensesfor the investments we acquired in the years ended December 31, 2008 and2007, respectively.  We capitalize thesefees as part of our real estate, goodwill or investments in unconsolidatedentities.

 

HPTManagement, our property manager and an affiliate of our advisor, receives feesfor management, leasing and construction supervision of our properties, whichmay be subcontracted to unaffiliated third parties.  The management fees are generally equal to approximately3% of gross revenues of the respective property, plus leasing commissions basedupon the customary leasing commission applicable to the geographic location ofthe respective property.  In the eventthat we contract directly with a non-affiliated third party property manager inthe management of a property, we pay HPT Management an oversight fee equal to0.5% of gross revenues of the property managed. In no event will we pay both a property management fee and an oversightfee to HPT Management with respect to any particular property.  We incurred and expensed fees ofapproximately $17.6 million, $8.5 million and approximately $4.3 million in theyears ended December 31, 2008, 2007 and 2006, respectively, for theservices provided by HPT Management in connection with our real estate andinvestment properties. Property management fees associated with our soldproperties are classified in discontinued operations.

 

Dependingon the nature of the asset at the time the fee is incurred, we pay BehringerAdvisors an annual asset management fee of either (1) 0.6% of aggregateasset value for operating assets or (2) 0.6% of total contract purchaseprice plus budgeted improvement costs for development or redevelopment assets(each fee payable monthly in an amount equal to one-twelfth of 0.6% of suchtotal amount as of the date it is determinable).  For the year ended December 31, 2008, weincurred and expensed approximately $28.0 million of asset management fees ascompared to approximately $13.6 million for the year ended December 31,2007 and approximately $5.1 million of the years ended December 31,2006.  Asset management fees of approximately$1.0 million and $2.7 million were waived for the year ended December 31,2007 and 2006, respectively.  Assetmanagement fees associated with our sold properties are classified indiscontinued operations.

 

BehringerAdvisors may require us to reimburse it for costs and expenses paid or incurredto provide services to us including the costs of goods, services or materialsused by us and the salaries and benefits of persons employed by these entitiesand performing services for us; provided, however, no reimbursement is made forcosts of personnel to the extent the advisor receives a separate fee for theirservices.  For the year ended December 31,2008, we incurred and expensed approximately $1.7 million for these costs and expenses.  For the year ended December 31, 2007, we didnot incur and expense any of these costs and expenses.

 

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Wepay Behringer Advisors or its affiliates a debt financing fee equal to 1% ofthe amount of any debt made available to us. We incurred approximately $0.9 million and $17.8 million in debtfinancing fees for the years ended December 31, 2008 and 2007,respectively.

 

AtDecember 31, 2008, we had payables to related parties of approximately$8.3 million consisting primarily of acquisition and advisory fees, assetmanagement fees, offering costs and operating expense reimbursements payable toBehringer Advisors and property management fees payable to HPT Management.  At December 31, 2007, we had payables torelated parties of approximately $8.2 million consisting primarily of offeringcosts payable to Behringer Advisors and property management fees payable to HPTManagement.  At December 31, 2008,we had no receivables from related parties and at December 31, 2007 we hadreceivables from related parties of approximately $1.0 consisting primarily ofreimbursements due from HPT Management.

 

BehringerAdvisors or its affiliates will be paid disposition fees if the advisor or itsaffiliates provides a substantial amount of services, as determined by ourindependent directors, in connection with the sale of one or moreproperties.  In such event, we will paythe advisor an amount equal to the lesser of (subject to the limitation setforth below): (a) one-half of the brokerage commission paid, or (b) 3%of the sales price of each property sold. This fee will not be earned or paid unless and until our stockholdershave received total distributions (excluding the 10% stock dividend) in anamount equal to or greater than the sum of the aggregate capital contributed bystockholders plus a 9% annual, cumulative, non-compounded return thereon.  Subordinated disposition fees that are notearned and payable at the date of sale are reflected as a contingent liabilitywhich will be earned and paid when the above condition has been satisfied, ifever.  As of December 31, 2008,assuming all the conditions above are met, Behringer Advisors would be paid approximately$0.8 million in disposition fees.

 

Weare dependent on Behringer Securities, Behringer Advisors, and HPT Managementfor certain services that are essential to us, including the sale of shares ofour common stock, asset acquisition and disposition decisions, propertymanagement and leasing services and other general administrativeresponsibilities.  In the event thatthese companies were unable to provide us with the respective services, wewould be required to obtain such services from other sources.

 

**Policies and Procedures with Respect to Related PartyTransactions**

 

Ourcharter contains provisions setting forth our ability to engage in certainrelated party transactions. Our board reviews all of these transactions and, asa general rule, any related party transactions must be approved by a majorityof the directors not otherwise interested in the transaction. In determiningwhether to approve or authorize a particular related party transaction, ourdirectors will consider whether the transaction between us and the relatedparty is fair and reasonable to us and has terms and conditions no lessfavorable to us than those available from unaffiliated third parties.  We believe that our general policies and proceduresregarding related party transactions are evidenced by the disclosuresabove.  We may in the future adoptwritten policies and procedures regarding related party transactions.

 

**Independence**

** **

As required by our charter, a majority of the members of ourboard of directors must qualify as “independent” as affirmatively determined bythe board.  The board consults with ourlegal counsel to ensure that the board’s determinations are consistent withapplicable New York Stock Exchange and SEC rules regarding the definitionof “independent.”

 

Consistent with these considerations, after review of allrelevant transactions or relationships between each director, or any of hisfamily members, and Behringer Harvard REIT I, our senior management and ourindependent registered public accounting firm, the board has determined that Messrs. Dannis,Partridge and Witten, constituting the majority of the members of our board andall of the members of our Audit Committee, Compensation Committee andNominating Committee, are independent.

 

**Item14.                PrincipalAccounting Fees and Services.**

 

** IndependentRegistered Public Accounting Firm**

** **

Deloitte & Touche LLP has served as our independentregistered public accounting firm since September 2, 2005.  Our management believes that Deloitte &Touche LLP is knowledgeable about our operations and accounting practices andis well qualified to act as our independent registered public accounting firm.

 

**Audit and Other Fees**

** **

The following tablepresents (in thousands) fees for professional services rendered by ourindependent registered public accounting firm, Deloitte & Touche LLP,the member firms of Deloitte Touche Tohmatsu, and their respective 

 

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affiliates (collectively, “Deloitte Entities”) for theaudits of our annual financial statements for the years ended December 31,2008 and 2007 (in thousands):

 
| ** **             | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------|------------|----------|------------|----------|------------|
| Audit Fees (1)         |       | $        | 933        |     | $          | 661 |   |
| Audit-Related Fees (2) |       | 116      |       | 599      |       |
| Tax Fees (3)           |       | 442      |       | 683      |       |
| All Other Fees         |       | —   |       | —   |       |
| Total Fees             |       | $        | 1,491      |     | $          | 1,943 |   |

 

----

| (1)    | Audit  fees consist principally of fees for the audit of our annual financial  statements and review of our financial statements included in our quarterly  reports on Form 10-Q.                                                                                                                                                                                             |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                               |   |
| (2)    | Audit-related  fees consist of fees for professional services performed in connection with a  review of our financial statements that were included in the registration  statements, as amended, for the public offerings of our common stock and  review of pro forma financial statements for property acquisitions and  Sarbanes-Oxley Act, Section 404 advisory services. |
|   |                                                                                                                                                                                                                                                                                                                                                                               |   |
| (3)    | Tax  fees consist principally of fees for assistance with matters related to tax  compliance, tax planning and tax advice.                                                                                                                                                                                                                                                         |

 

**Audit Committee’s Pre-Approval Policies andProcedures**

 

TheAudit Committee must approve any fee for services to be performed by theCompany’s independent registered public accounting firm in advance of theservice being performed. For proposed projects using the services of theCompany’s independent registered public accounting firm that are expected tocost under $25,000, the Audit Committee will be provided information to reviewand must approve each project prior to commencement of any work.  For proposed projects using the services ofthe Company’s independent registered public accounting firm that are expectedto cost $25,000 and over, the Audit Committee will be provided with a detailedexplanation of what services are being included, and asked to approve a maximumamount for specifically identified services in each of the followingcategories: (a) audit fees; (b) audit-related fees; (c) taxfees; and (d) all other fees for any services allowed to be performed bythe independent registered public accounting firm.  If additional amounts are needed, the AuditCommittee must approve the increased amounts prior to the previously approvedmaximum being reached and before the additional work may continue.  Approval by the Audit Committee may begranted at its regularly scheduled meetings or otherwise, including bytelephonic or other electronic communications. The Company will report the status of the various types of approvedservices and fees, and cumulative amounts paid and owed, to the Audit Committeeon a regular basis.

 

The Audit Committee approvedall of the services provided by, and fees paid to, the Deloitte Entities duringthe years ended December 31, 2008 and 2007.

 

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**PART IV**

 

**Item 15.****                ****Exhibits, Financial StatementSchedules.**

 

(a)           *List of Documents Filed.*

 

1.             *Financial Statements*

 

The list of the financial statements filed as part of this AnnualReport on Form 10-K is set forth on page F-1 herein.

 

2.*            **Financial Statement Schedules*

 

Report of Independent Registered Public Accounting Firm

 

Schedule II Valuation and Qualifying Accounts

 

Schedule III Real Estate and Accumulated Depreciation

 

3.             *Exhibits*

 

The list of exhibits filed as part of this Annual Report on Form 10-Kis set forth in the Exhibit Index following the financial statements inresponse to Item 601 of Regulation S-K.

 

(b)           *Exhibits.*

 

Theexhibits filed in response to Item 601 of Regulation S-K are listed on the Exhibit Indexattached hereto.

 

(c)           *Financial Statement Schedules.*

 

Allfinancial statement schedules, except for Schedule II and III (see (a) 2.above), have been omitted because the required information of such schedules isnot present, is not present in amounts sufficient to require a schedule or isincluded in the financial statements.

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities ExchangeAct of 1934, the registrant has duly caused this report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 
| ** **                             | ** ** | **Behringer  Harvard REIT I, Inc.** |
|----------------------------------------|------------|------------------------------------------|
|                                   |       |                                     |
|                                   |       |                                     |
| Dated:  March 31,  2009 |       | By:                                      | /s/  Robert S. Aisner |
|                                   |       |                                     | Robert  S. Aisner |
|                                   |       |                                     | Chief  Executive Officer |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 

 
| March 31,  2009 |   |   | /s/  Robert M. Behringer              |
|----------------------|--------|--------|---------------------------------------|
|                 |   |   | Robert  M. Behringer                  |
|                 |   |   | Chairman  of the Board of Directors   |
|                 |   |   |                                  |
| March 31,  2009 |   |   | /s/  Robert S. Aisner                 |
|                 |   |   | Robert  S. Aisner                     |
|                 |   |   | Chief  Executive Officer and Director |
|                 |   |   | (Principal  Executive Officer)        |
|                 |   |   |                                  |
| March 31,  2009 |   |   | /s/  Gary S. Bresky                   |
|                 |   |   | Gary  S. Bresky                       |
|                 |   |   | Chief  Financial Officer              |
|                 |   |   | (Principal  Financial Officer)        |
|                 |   |   |                                  |
| March 31,  2009 |   |   | /s/  Kimberly Arianpour               |
|                 |   |   | Kimberly  Arianpour                   |
|                 |   |   | Chief  Accounting Officer             |
|                 |   |   | (Principal  Accounting Officer)       |
|                 |   |   |                                  |
| March 31,  2009 |   |   | /s/  Charles G. Dannis                |
|                 |   |   | Charles  G. Dannis                    |
|                 |   |   | Director                              |
|                 |   |   |                                  |
| March 31,  2009 |   |   | /s/  Steven W. Partridge              |
|                 |   |   | Steven  W. Partridge                  |
|                 |   |   | Director                              |
|                 |   |   |                                  |
| March 31,  2009 |   |   | /s/  G. Ronald Witten                 |
|                 |   |   | G.  Ronald Witten                     |
|                 |   |   | Director                              |

 

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**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS**

 
|                                                                                                                                    |   | **Page** |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------|
|                                                                                                                                    |   |     |
| **Financial Statements**                                                                                                                |   |     |
|                                                                                                                                    |   |     |
| Report  of Independent Registered Public Accounting Firm                                                                                |   | F-2      |
|                                                                                                                                    |   |     |
| Consolidated Balance Sheets as of December 31,  2008 and 2007                                                                      |   | F-3      |
|                                                                                                                                    |   |     |
| Consolidated Statements of Operations for the Years  Ended December 31, 2008,  2007 and 2006                                       |   | F-4      |
|                                                                                                                                    |   |     |
| Consolidated Statements of Stockholders’ Equity and Comprehensive  Loss for the Years Ended December 31,  2008, 2007 and 2006 |   | F-5      |
|                                                                                                                                    |   |     |
| Consolidated Statements of Cash Flows for the Years  Ended December 31, 2008,  2007 and 2006                                       |   | F-6      |
|                                                                                                                                    |   |     |
| Notes to  Consolidated Financial Statements                                                                                             |   | F-7      |
|                                                                                                                                    |   |     |
| **Financial Statement Schedules**                                                                                                       |   |     |
|                                                                                                                                    |   |     |
| Report of  Independent Registered Public Accounting Firm                                                                                |   | F-27     |
|                                                                                                                                    |   |     |
| Schedule  II — Valuation and Qualifying Accounts                                                                                   |   | F-28     |
|                                                                                                                                    |   |     |
| Schedule  III — Real Estate and Accumulated Depreciation                                                                           |   | F-29     |

 

F-1

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Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM

 

 

To the Board of Directors and Stockholders of

Behringer Harvard REIT I, Inc.

Addison, Texas

 

We have audited the accompanying consolidatedbalance sheets of Behringer Harvard REIT I, Inc. and subsidiaries (the “Company”)as of December 31, 2008 and 2007 and the related consolidated statementsof operations, stockholders’ equity and comprehensive loss and cash flows foreach of the three years in the period ended December 31, 2008. Thesefinancial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reportingas a basis for designing audit procedures that are appropriate in thecircumstances, but not for the purpose of expressing an opinion on theeffectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofthe Company at December 31, 2008 and 2007, and the results of itsoperations and its cash flows for each of the three years in the period ended December 31,2008, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/ Deloitte &Touche LLP

 

Dallas, Texas

March 31,2009

 

F-2

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Table of Contents

 

**Behringer Harvard REIT I, Inc.**

**ConsolidatedBalance Sheets**

**As of December 31, 2008 and 2007**

**(in thousands, except share and per share amounts)**

 
| ** **                                                                                                                                                                                              | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| **Assets**                                                                                                                                                                                              |       |                  |       |                  |       |
| **Real estate**                                                                                                                                                                                         |       |                  |       |                  |       |
| Land                                                                                                                                                                                                    |       | $                     | 546,700    |                  | $          | 514,520 |   |
| Buildings, net                                                                                                                                                                                          |       | 3,529,309             |       | 3,359,152             |       |
| Real estate under development                                                                                                                                                                           |       | 28,924                |       | 7,038                 |       |
| **Total real estate**                                                                                                                                                                                   |       | 4,104,933             |       | 3,880,710             |       |
|                                                                                                                                                                                                    |       |                  |       |                  |       |
| Cash and cash equivalents                                                                                                                                                                               |       | 337,458               |       | 94,947                |       |
| Restricted cash                                                                                                                                                                                         |       | 201,546               |       | 229,803               |       |
| Accounts receivable, net                                                                                                                                                                                |       | 96,579                |       | 48,030                |       |
| Receivables from related parties                                                                                                                                                                        |       | —                |       | 1,023                 |       |
| Prepaid expenses and other assets                                                                                                                                                                       |       | 9,213                 |       | 10,244                |       |
| Goodwill                                                                                                                                                                                                |       | 11,655                |       | 19,922                |       |
| Investments in unconsolidated entities                                                                                                                                                                  |       | 77,256                |       | 203,212               |       |
| Deferred financing fees, net                                                                                                                                                                            |       | 34,229                |       | 42,668                |       |
| Notes receivable                                                                                                                                                                                        |       | 13,089                |       | 13,854                |       |
| Lease intangibles, net                                                                                                                                                                                  |       | 522,642               |       | 627,714               |       |
| **Total assets**                                                                                                                                                                                        |       | $                     | 5,408,600  |                  | $          | 5,172,127 |   |
|                                                                                                                                                                                                    |       |                  |       |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                           |       |                  |       |                  |       |
|                                                                                                                                                                                                    |       |                  |       |                  |       |
| **Liabilities**                                                                                                                                                                                         |       |                  |       |                  |       |
| Notes payable                                                                                                                                                                                           |       | $                     | 3,066,529  |                  | $          | 3,198,143 |   |
| Accounts payable                                                                                                                                                                                        |       | 13,596                |       | 7,889                 |       |
| Payables to related parties                                                                                                                                                                             |       | 8,300                 |       | 8,190                 |       |
| Acquired below-market leases, net                                                                                                                                                                       |       | 152,870               |       | 175,589               |       |
| Distributions payable                                                                                                                                                                                   |       | 15,910                |       | 10,951                |       |
| Accrued liabilities                                                                                                                                                                                     |       | 125,986               |       | 126,789               |       |
| Convertible debentures                                                                                                                                                                                  |       | 51,653                |       | 91,180                |       |
| Subscriptions for common stock                                                                                                                                                                          |       | —                |       | 2,984                 |       |
| Deferred tax liabilities                                                                                                                                                                                |       | 3,450                 |       | 3,869                 |       |
| Other liabilities                                                                                                                                                                                       |       | 25,764                |       | 22,897                |       |
| **Total liabilities**                                                                                                                                                                                   |       | 3,464,058             |       | 3,648,481             |       |
|                                                                                                                                                                                                    |       |                  |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                       |       |                  |       |                  |       |
|                                                                                                                                                                                                    |       |                  |       |                  |       |
| **Minority interest**                                                                                                                                                                                   |       | 17,934                |       | 18,049                |       |
|                                                                                                                                                                                                    |       |                  |       |                  |       |
| **Stockholders’ equity**                                                                                                                                                                           |       |                  |       |                  |       |
| Preferred stock, $.0001 par value per  share; 17,500,000 shares authorized, none outstanding                                                                                                            |       | —                |       | —                |       |
| Convertible stock, $.0001 par value per  share; 1,000 shares authorized, 1,000 shares issued and outstanding                                                                                            |       | —                |       | —                |       |
| Common stock, $.0001 par value per share; 382,499,000  shares authorized, 288,807,752 and 205,562,785 shares issued and outstanding  at December 31, 2008 and December 31, 2007, respectively |       | 29                    |       | 21                    |       |
| Additional paid-in capital                                                                                                                                                                              |       | 2,579,030             |       | 1,834,477             |       |
| Cumulative distributions and net loss                                                                                                                                                                   |       | (641,704              | )          | (327,527              | )          |
| Accumulated other comprehensive loss                                                                                                                                                                    |       | (10,747               | )          | (1,374                | )          |
| **Total stockholders’ equity**                                                                                                                                                                     |       | 1,926,608             |       | 1,505,597             |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                     |       | $                     | 5,408,600  |                  | $          | 5,172,127 |   |

 

*See Notes to Consolidated Financial Statements.*

 

F-3

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Tableof Contents

 

**Behringer Harvard REIT I, Inc.**

**ConsolidatedStatements of Operations**

**For theYears Ended December 31, 2008, 2007 and 2006**

**(in thousands, except share and per share amounts)**

 
| ** **                                                                              | ** ** | **2008**    | ** ** | **2007**    | ** ** | **2006**   | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|------------|------------|
|                                                                                    |       |        |       |        |       |       |       |
| **Rental revenue**                                                                      |       | $           | 605,433    |        | $          | 304,709    |       | $ | 155,511 |   |
|                                                                                    |       |        |       |        |       |       |       |
| **Expenses**                                                                            |       |        |       |        |       |       |       |
| Property operating expenses                                                             |       | 167,179     |       | 74,106      |       | 35,153     |       |
| Interest expense                                                                        |       | 191,328     |       | 99,376      |       | 49,725     |       |
| Real estate taxes                                                                       |       | 78,287      |       | 42,101      |       | 21,321     |       |
| Property management fees                                                                |       | 17,430      |       | 9,072       |       | 4,786      |       |
| Asset management fees                                                                   |       | 27,811      |       | 13,324      |       | 4,815      |       |
| Loss on contract termination                                                            |       | 5,000       |       | —      |       | —     |       |
| Asset impairment losses                                                                 |       | 21,114      |       | —      |       | —     |       |
| General and administrative                                                              |       | 7,333       |       | 2,969       |       | 1,614      |       |
| Depreciation and amortization                                                           |       | 278,213     |       | 137,417     |       | 70,179     |       |
| **Total expenses**                                                                      |       | 793,695     |       | 378,365     |       | 187,593    |       |
|                                                                                    |       |        |       |        |       |       |       |
| Interest income                                                                         |       | 7,027       |       | 25,524      |       | 4,954      |       |
| Gain on sale of assets                                                                  |       | 5,253       |       | 44          |       | —     |       |
| Gain on early extinguishment of debt                                                    |       | 1,258       |       | —      |       | —     |       |
| **Loss before income taxes, minority  interest, and equity in earnings of investments** |       | (174,724    | )          | (48,088     | )          | (27,128    | )          |
|                                                                                    |       |        |       |        |       |       |       |
| Provision for income taxes                                                              |       | (892        | )          | (571        | )          | —     |       |
| Minority interest                                                                       |       | 231         |       | (16         | )          | —     |       |
| Equity in earnings of investments                                                       |       | 1,331       |       | 5,117       |       | 4,804      |       |
| **Loss from continuing operations**                                                     |       | (174,054    | )          | (43,558     | )          | (22,324    | )          |
|                                                                                    |       |        |       |        |       |       |       |
| **Discontinued operations:**                                                            |       |        |       |        |       |       |       |
|                                                                                    |       |        |       |        |       |       |       |
| Income (loss) from discontinued operations                                              |       | (2,503      | )          | 1,927       |       | (108       | )          |
| Gain on sale of discontinued operations                                                 |       | 16,136      |       | —      |       | —     |       |
| **Income (loss) from discontinued operations**                                          |       | 13,633      |       | 1,927       |       | (108       | )          |
|                                                                                    |       |        |       |        |       |       |       |
| **Net loss**                                                                            |       | $           | (160,421   | )           | $          | (41,631    | )          | $ | (22,432 | ) |
|                                                                                    |       |        |       |        |       |       |       |
| **Basic and diluted weighted average shares  outstanding**                              |       | 240,187,641 |       | 171,544,399 |       | 89,637,553 |       |
|                                                                                    |       |        |       |        |       |       |       |
| **Basic and diluted net income (loss) per  share:**                                     |       |        |       |        |       |       |       |
| Continuing operations                                                                   |       | $           | (0.73      | )           | $          | (0.25      | )          | $ | (0.25 | ) |
| Discontinued operations                                                                 |       | 0.06        |       | 0.01        |       | —     |       |
| **Basic and diluted loss per share**                                                    |       | $           | (0.67      | )           | $          | (0.24      | )          | $ | (0.25 | ) |

 

*See Notes to Consolidated Financial Statements.*

 

F-4

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Table of Contents

 

**Behringer Harvard REIT I, Inc.**

**ConsolidatedStatements of Stockholders’ Equity and Comprehensive Loss**

**For the Years Ended December 31, 2008, 2007 and2006**

**(in thousands)**

 
| ** **                              | ** ** | ** **                 | ** ** | ** **            | ** ** | ** **         | ** ** | ** **        | ** ** | ** **                 | ** ** | **Cumulative**    | ** ** | ** **        | ** ** | ** **             | ** ** |
|-----------------------------------------|------------|----------------------------|------------|-----------------------|------------|--------------------|------------|-------------------|------------|----------------------------|------------|-------------------|------------|-------------------|------------|------------------------|------------|
| ** **                              | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | **Distributions** | ** ** | **Accumulated Other** | ** ** | **Total**         | ** ** |
| ** **                              | ** ** | **Number**                 | ** ** | **Par**               | ** ** | **Number**         | ** ** | **Par**           | ** ** | **Paid-in**                | ** ** | **and**           | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                              | ** ** | **of Shares**         | ** ** | **Value**             | ** ** | **of Shares** | ** ** | **Value**         | ** ** | **Capital**                | ** ** | **Net Loss** | ** ** | **Loss**          | ** ** | **Equity**             | ** ** |
| Balance at  January 1, 2006        |       | —                     |       | $                     | —     |               | 67,863     |              | $          | 7                          |       | $                 | 603,452    |              | $          | (86,031                | )          |   |   | $ | 517,428 |   |
| Net loss                                |       |                       |       |                  |       |               |       |              |       |                       |       | (22,432           | )          |              |       | (22,432                | )          |
| Issuance of  common stock, net          |       | —                     |       | —                |       | 51,569             |       | 5                 |       | 458,288                    |       | —            |       |              |       | 458,293                |       |
| Redemption of  common stock             |       | —                     |       | —                |       | (680               | )          | —            |       | (5,913                     | )          | —            |       |              |       | (5,913                 | )          |
| Issuance of  convertible stock, net     |       | 1                          |       | —                |       | —             |       | —            |       | 1                          |       | —            |       |              |       | 1                      |       |
| Distributions  declared on common stock |       | —                     |       | —                |       | —             |       | —            |       | —                     |       | (62,913           | )          |              |       | (62,913                | )          |
| Shares issued  pursuant to Distribution |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Reinvestment  Plan,net                  |       | —                     |       | —                |       | 3,132              |       | —            |       | 29,978                     |       | —            |       |              |       | 29,978                 |       |
| Balance at  December 31, 2006      |       | 1                          |       | —                |       | 121,884            |       | 12                |       | 1,085,806                  |       | (171,376          | )          | —            |       | 914,442                |       |
|                                    |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Comprehensive  loss:                    |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Net loss                                |       |                       |       |                  |       |               |       |              |       |                       |       | (41,631           | )          | —            |       | (41,631                | )          |
| Unrealized loss  on interest rate swap  |       |                       |       |                  |       |               |       |              |       |                       |       | —            |       | (1,374            | )          | (1,374                 | )          |
| Total  comprehensive loss               |       | —                     |       | —                |       | —             |       | —            |       | —                     |       | (41,631           | )          | (1,374            | )          | (43,005                | )          |
|                                    |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Issuance of  common stock, net          |       | —                     |       | —                |       | 80,029             |       | 9                 |       | 712,756                    |       | —            |       | —            |       | 712,765                |       |
| Redemption of  common stock             |       | —                     |       | —                |       | (2,291             | )          | —            |       | (19,984                    | )          | —            |       | —            |       | (19,984                | )          |
| Distributions  declared on common stock |       | —                     |       | —                |       | —             |       | —            |       | —                     |       | (114,520          | )          | —            |       | (114,520               | )          |
| Shares issued  pursuant to Distribution |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Reinvestment  Plan, net                 |       | —                     |       | —                |       | 5,941              |       | —            |       | 55,899                     |       | —            |       | —            |       | 55,899                 |       |
|                                    |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Balance at  December 31, 2007      |       | 1                          |       | —                |       | 205,563            |       | 21                |       | 1,834,477                  |       | (327,527          | )          | (1,374            | )          | 1,505,597              |       |
|                                    |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Comprehensive  loss:                    |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Net loss                                |       |                       |       |                  |       |               |       |              |       |                       |       | (160,421          | )          | —            |       | (160,421               | )          |
| Unrealized loss  on interest rate swap  |       |                       |       |                  |       |               |       |              |       |                       |       | —            |       | (9,373            | )          | (9,373                 | )          |
| Total  comprehensive loss               |       | —                     |       | —                |       | —             |       | —            |       | —                     |       | (160,421          | )          | (9,373            | )          | (169,794               | )          |
|                                    |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Issuance of  common stock, net          |       | —                     |       | —                |       | 78,556             |       | 8                 |       | 698,589                    |       | —            |       | —            |       | 698,597                |       |
| Redemption of  common stock             |       | —                     |       | —                |       | (3,710             | )          | —            |       | (33,040                    | )          | —            |       | —            |       | (33,040                | )          |
| Distributions  declared on common stock |       | —                     |       | —                |       | —             |       | —            |       | —                     |       | (153,756          | )          | —            |       | (153,756               | )          |
| Shares issued  pursuant to Distribution |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Reinvestment  Plan, net                 |       | —                     |       | —                |       | 8,399              |       | —            |       | 79,004                     |       | —            |       | —            |       | 79,004                 |       |
|                                    |       |                       |       |                  |       |               |       |              |       |                       |       |              |       |              |       |                   |       |
| Balance at  December 31, 2008      |       | 1                          |       | $                     | —     |               | 288,808    |              | $          | 29                         |       | $                 | 2,579,030  |              | $          | (641,704               | )          | $ | (10,747 | ) | $ | 1,926,608 |   |
|                                         |            |                            |            |                       |            |                    |            |                   |            |                            |            |                   |            |                   |            |                        |            |  |  |  |  |  |  |

 

*See Notes to Consolidated Financial Statements.*

 

F-5

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Table of Contents

 

**Behringer Harvard REIT I, Inc.**

**ConsolidatedStatements of Cash Flows**

**For the Years Ended December 31, 2008, 2007 and 2006**

**(in thousands)**

 
| ** **                                                                             | ** ** | **2008** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|------------|------------|------------|------------|
| **Cash flows from operating activities**                                               |       |     |       |       |       |       |       |
| Net loss                                                                               |       | $        | (160,421   | )          | $          | (41,631    | )          | $ | (22,432 | ) |
| Adjustments to reconcile net loss to net  cash flows provided by operating activities: |       |     |       |       |       |       |       |
| Minority interest                                                                      |       | (231     | )          | 16         |       | —     |       |
| Gain on sale of assets                                                                 |       | (5,253   | )          | (44        | )          | —     |       |
| Gain on sale of discontinued operations                                                |       | (16,136  | )          | —     |       | —     |       |
| Gain on early extinguishment of debt                                                   |       | (1,258   | )          | —     |       | —     |       |
| Loss on contract termination                                                           |       | 5,000    |       | —     |       | —     |       |
| Depreciation and amortization                                                          |       | 277,586  |       | 134,602    |       | 69,470     |       |
| Asset impairment losses                                                                |       | 21,114   |       | —     |       | —     |       |
| Interest income capitalized to notes  receivable                                       |       | (77      | )          | (530       | )          | —     |       |
| Equity in earnings of investments                                                      |       | (1,331   | )          | (5,117     | )          | (4,804     | )          |
| Distributions from investments                                                         |       | 1,331    |       | 5,117      |       | 4,804      |       |
| Change in accounts receivable                                                          |       | (25,375  | )          | (18,193    | )          | (16,914    | )          |
| Change in prepaid expenses and other assets                                            |       | (1,654   | )          | 2,134      |       | 5,373      |       |
| Change in lease intangibles                                                            |       | (14,673  | )          | (13,986    | )          | (2,838     | )          |
| Change in accounts payable                                                             |       | (1,024   | )          | 2,502      |       | 1,282      |       |
| Change in accrued liabilities                                                          |       | (14,278  | )          | (1,981     | )          | 14,395     |       |
| Change in payables to related parties                                                  |       | 5,164    |       | 905        |       | 842        |       |
| **Cash provided by operating activities**                                              |       | 68,484   |       | 63,794     |       | 49,178     |       |
|                                                                                   |       |     |       |       |       |       |       |
| **Cash flows from investing activities**                                               |       |     |       |       |       |       |       |
| Return of investments                                                                  |       | 8,306    |       | 5,812      |       | 6,226      |       |
| Purchases of real estate                                                               |       | (233,638 | )          | (895,701   | )          | (1,480,037 | )          |
| Investments in unconsolidated entities                                                 |       | (49      | )          | (4,430     | )          | (19,565    | )          |
| Escrow deposits, pre-acquisition and  pre-disposition costs                            |       | (5,000   | )          | (922       | )          | 2,890      |       |
| Capital expenditures for real estate                                                   |       | (68,302  | )          | (24,471    | )          | (8,059     | )          |
| Investment in variable rate demand notes                                               |       | (80,000  | )          | —     |       | —     |       |
| Proceeds from investment in variable rate  demand notes                                |       | 80,000   |       | —     |       | —     |       |
| Notes receivable advances                                                              |       | —   |       | (36,000    | )          | (3,013     | )          |
| Proceeds from notes receivable                                                         |       | 4        |       | 36,533     |       | —     |       |
| Insurance proceeds received                                                            |       | 5,057    |       | —     |       | —     |       |
| Proceeds from sale of discontinued  operations                                         |       | 40,281   |       | —     |       | —     |       |
| Receivable from related parties                                                        |       | —   |       | (500       | )          | —     |       |
| Proceeds from sale of assets                                                           |       | 6,628    |       | —     |       | —     |       |
| Change in restricted cash                                                              |       | 34,242   |       | (126,693   | )          | (76,217    | )          |
| **Cash used in investing activities**                                                  |       | (212,471 | )          | (1,046,372 | )          | (1,577,775 | )          |
|                                                                                   |       |     |       |       |       |       |       |
| **Cash flows from financing activities**                                               |       |     |       |       |       |       |       |
| Financing costs                                                                        |       | (1,328   | )          | (27,420    | )          | (14,594    | )          |
| Proceeds from notes payable                                                            |       | 280,000  |       | 340,000    |       | 1,112,449  |       |
| Payments on notes payable                                                              |       | (448,858 | )          | (2,102     | )          | (701       | )          |
| Payments on capital lease obligations                                                  |       | (5,438   | )          | (24        | )          | —     |       |
| Loan deposits on real estate to be acquired                                            |       | —   |       | —     |       | 2,576      |       |
| Issuance of common and convertible stock                                               |       | 782,540  |       | 799,125    |       | 514,004    |       |
| Redemptions of common stock                                                            |       | (33,040  | )          | (19,984    | )          | (3,648     | )          |
| Offering costs                                                                         |       | (84,334  | )          | (86,208    | )          | (55,518    | )          |
| Distributions                                                                          |       | (70,454  | )          | (55,293    | )          | (30,313    | )          |
| Conversion of debentures                                                               |       | (26,251  | )          | (270       | )          | —     |       |
| Change in subscriptions for common stock                                               |       | (2,984   | )          | (232       | )          | 2,162      |       |
| Change in subscription cash received                                                   |       | 2,984    |       | 232        |       | (2,162     | )          |
| Change in payables to related parties                                                  |       | (6,339   | )          | 4,753      |       | 548        |       |
| **Cash provided by financing activities**                                              |       | 386,498  |       | 952,577    |       | 1,524,803  |       |
|                                                                                   |       |     |       |       |       |       |       |
| Net change in cash and cash equivalents                                                |       | 242,511  |       | (30,001    | )          | (3,794     | )          |
| Cash and cash equivalents at beginning of  year                                        |       | 94,947   |       | 124,948    |       | 128,742    |       |
| Cash and cash equivalents at end of year                                               |       | $        | 337,458    |       | $          | 94,947     |       | $ | 124,948 |   |

 

*See Notes to Consolidated Financial Statements.*

 

F-6

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Table of Contents

 

Behringer Harvard REIT I, Inc.Notes to Consolidated Financial Statements

 

1.             Business

 

***Organization***

 

BehringerHarvard REIT I, Inc. (which, along with our subsidiaries, may be referredto as the “Company,” “we,” “us,” or “our”) was incorporated in June 2002as a Maryland corporation and has elected to be taxed, and currently qualifies,as a real estate investment trust, or REIT, for federal income taxpurposes.  We acquire and operateinstitutional quality real estate.  Inparticular, we focus primarily on acquiring institutional quality officeproperties that we believe have premier business addresses, desirable locationsand high quality construction, and offer personalized amenities, with highlycreditworthy commercial tenants.  Todate, we have focused all of our investments in institutional quality officeproperties, or in development of these types of properties, located inmetropolitan cities and suburban markets in the United States.  We completed our first property acquisitionin October 2003 and, as of December 31, 2008, we owned interests in74 office properties located in 23 states and the District of Columbia.

 

Weare externally managed and advised by Behringer Advisors, LLC (referred toherein as “Behringer Advisors” or “our advisor”), a Texas limited liabilitycompany that was organized in June 2007. Behringer Advisors is responsible for managing our day-to-day affairsand for identifying and making acquisitions and investments on our behalf.  Prior to June 30, 2007, we were advisedby Behringer Advisors LP, a Texas limited partnership, which was merged intoBehringer Advisors solely to change the type of entity.

 

Substantiallyall of our business is conducted through Behringer Harvard OperatingPartnership I LP, a Texas limited partnership organized in 2002 (“Behringer OP”).  Our wholly-owned subsidiary, BHR, Inc.,a Delaware corporation, is the sole general partner of Behringer OP.  Our direct and indirect wholly-ownedsubsidiaries, BHR Business Trust, a Maryland business trust, and BHR Partners,LLC, a Delaware limited liability company, are limited partners holdingsubstantially all of Behringer OP.

 

***Public Offerings***

 

Wehave completed three public offerings of our common stock at a price of $10.00per share.  As of December 31, 2008,the close of our third public offering, we had raised a total of approximately$2.8 billion of gross offering proceeds as a result of these offerings(inclusive of distribution reinvestments and redemptions).  We terminated the third primary publicoffering on December 31, 2008 and terminated the Distribution ReinvestmentPlan (“DRIP”) portion of our third public offering in January 2009.  We de-registered the remaining shares on March 31,2009.

 

OnJanuary 5, 2009, we commenced a public offering of up to 60,000,000 sharesof common stock offered at a price of $9.50 per share under our DRIP pursuantto a Registration Statement on Form S-3 filed under the SecuritiesAct.  We are offering shares under ourDRIP until the earlier of January 5, 2014 or the date we sell all $570million worth of shares in this offering.

 

Asof December 31, 2008, we had 288,807,752 shares of our common stockoutstanding, which includes the effect of a 10% stock dividend issued on October 1,2005 and the effect of distribution reinvestments, redemptions, and 22,000shares issued to Behringer Harvard Holdings, LLC (“Behringer Harvard Holdings”).  As of December 31, 2008, we had noshares of preferred stock issued and outstanding and options to purchase 68,500shares of common stock outstanding at a weighted average exercise price of$9.35.  At December 31, 2008,Behringer OP had 432,586 units of limited partnership interest held by thirdparties, after giving effect to the 10% stock dividend issued October 1,2005.  These units of limited partnershipinterest are convertible into an equal number of shares of our commonstock.  We sold 1,000 shares of ournon-participating, non-voting convertible stock to Behringer Advisors for$1,000 on March 22, 2006.  Pursuantto its terms, the convertible stock is convertible into shares of our commonstock with a value equal to 15% of the amount by which (1) our enterprisevalue, including the total amount of distributions paid to our stockholders,exceeds (2) the sum of the aggregate capital invested by stockholders plusa 9% cumulative, non-compounded, annual return on such capital.  At the date of issuance of the shares ofconvertible stock, management determined the fair value under accountingprinciples generally accepted in the United States of America (“GAAP”) was lessthan the nominal value paid for the shares; therefore, the difference is notmaterial. The weighted average number of shares and earnings per share data foreach reported period throughout this report reflect the effects of the stockdividend issued on October 1, 2005.

 

Subscriptionproceeds were used for payment or reimbursement of dealer manager fees, sellingcommissions, offering expenses and operating expenses and may be utilized asconsideration for investments.  Untilrequired for such purposes, net offering proceeds are held in short-term,liquid investments.

 

F-7

 

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Table of Contents

 

BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

Ourcommon stock is not currently listed on a national exchange.  However, management anticipates by 2017either listing the common stock on a national securities exchange orliquidating our assets.  Depending uponthen prevailing market conditions, it is the intention of our management toconsider beginning the process of listing (or liquidating) prior to 2013.  In the event we do not obtain listing priorto 2017, our charter requires us to begin selling our properties andliquidating our assets, unless a majority of the board of directors and amajority of the independent directors extend such date.

 

**2.             Summary of Significant AccountingPolicies**

 

***Use of Estimates in the Preparation of FinancialStatements***

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates include such items as the purchase price allocation for real estateacquisitions, impairment of assets, depreciation and amortization and allowancefor doubtful accounts.  Actual resultscould differ from those estimates.

 

***Principles of Consolidation and Basis ofPresentation***

 

Ourconsolidated financial statements include our accounts, the accounts ofvariable interest entities (“VIEs”) in which we are the primary beneficiary andthe accounts of other subsidiaries over which we have control.  All inter-company transactions, balances andprofits have been eliminated in consolidation. Interests in entities acquired are evaluated based on FinancialAccounting Standards Board Interpretation (“FIN”) 46R “Consolidation ofVariable Interest Entities,” which requires the consolidation of VIEs in whichwe are deemed to be the primary beneficiary. If the interest in the entity is determined to not be a VIE under FIN46R, then the entity is evaluated for consolidation under the AmericanInstitute of Certified Public Accountants’ (“AICPA”) Statement of Position (“SOP”)78-9, “Accounting for Investments in Real Estate Ventures,” and Emerging IssuesTask Force (“EITF”) 04-5, “Determining Whether a General Partner, or theGeneral Partners as a Group, Controls a Limited Partnership or Similar EntityWhen the Limited Partners Have Certain Rights.”

 

***Real Estate***

 

Uponthe acquisition of real estate properties, we allocate the purchase price ofthose properties to the tangible assets acquired, consisting of land, includingassociated rights, and buildings, any assumed debt, identified intangibleassets and asset retirement obligations based on their relative fair values inaccordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets.” Identified intangible assets consist of the fair value of above-marketand below-market leases, in-place leases, in-place tenant improvements,in-place leasing commissions and tenant relationships.

 

Uponthe completion of a business combination, we record the tangible assetsacquired, consisting of land, including associated rights, and buildings, anyassumed debt, identified intangible assets and asset retirement obligationsbased on their fair values in accordance with SFAS No. 141, “BusinessCombinations.”  Identified intangibleassets consist of the fair value of above-market and below-market leases,in-place leases, in-place tenant improvements, in-place leasing commissions andtenant relationships.  Any amount paid inexcess of the fair value of the acquired assets and liabilities is recorded asgoodwill.  If the value of the assets andliabilities exceeds the total purchase price, then the resulting negativegoodwill is allocated to the tangible and intangible assets acquired.  Initial valuations are subject to changeuntil our information is finalized, which is no later than twelve months fromthe acquisition date.

 

Wedetermine the fair value of assumed debt by calculating the net present valueof the scheduled mortgage payments using interest rates for debt with similarterms and remaining maturities that management believes we could obtain at thedate of the assumption.  Any differencebetween the fair value and stated value of the assumed debt is recorded as adiscount or premium and amortized over the remaining life of the loan using theeffective interest method.

 

Thefair value of the tangible assets acquired, consisting of land and buildings,is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to land and buildings. Land values are derived from appraisals, and building values arecalculated as replacement cost less depreciation or management’s estimates ofthe relative fair value of these assets using discounted cash flow analyses orsimilar methods.  The value of buildingsis depreciated over the estimated useful life of 25 years using thestraight-line method.

 

Wedetermine the value of above-market and below-market in-place leases foracquired properties based on the present value (using an interest rate thatreflects the risks associated with the leases acquired) of the differencebetween (1) the contractual amounts to be paid pursuant to the in-placeleases and (2) management’s estimate of current market lease rates for thecorresponding in-place leases, measured over a period equal to (a) theremaining non-cancelable lease term for

 

F-8

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Table of Contents

 

BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

above-marketleases, or (b) the remaining non-cancelable lease term plus any fixed raterenewal options for below-market leases. We record the fair value of above-market and below-market leases asintangible assets or intangible liabilities, respectively, and amortize them asan adjustment to rental income over the determined lease term.

 

Thetotal value of identified real estate intangible assets acquired is furtherallocated to in-place lease values, in-place tenant improvements, in-placeleasing commissions and tenant relationships based on our evaluation of thespecific characteristics of each tenant’s lease and our overall relationshipwith that respective tenant.  Theaggregate value for tenant improvements and leasing commissions is based onestimates of these costs incurred at inception of the acquired leases,amortized through the date of acquisition. The aggregate value of in-place leases acquired and tenant relationshipsis determined by applying a fair value model. The estimates of fair value of in-place leases includes an estimate ofcarrying costs during the expected lease-up periods for the respective spacesconsidering current market conditions. In estimating the carrying costs that would have otherwise been incurredhad the leases not been in place, we include such items as real estate taxes,insurance and other operating expenses as well as lost rental revenue duringthe expected lease-up period based on current market conditions.  The estimates of the fair value of tenantrelationships also include costs to execute similar leases including leasingcommissions, legal fees and tenant improvements as well as an estimate of thelikelihood of renewal as determined by management on a tenant-by-tenant basis.

 

Weamortize the value of in-place leases, in-place tenant improvements andin-place leasing commissions to expense over the initial term of the respectiveleases.  The value of tenant relationshipintangibles are amortized to expense over the initial term and any anticipatedrenewal periods. In no event does the amortization period for intangible assetsexceed the remaining depreciable life of the building.  Should a tenant terminate its lease, theunamortized portion of the in-place lease value and tenant relationship intangibleswould be charged to expense.  Theestimated remaining average useful lives for acquired lease intangibles rangefrom less than one year to more than ten years. Anticipated amortization associated with the acquired lease intangiblesfor each of the following five years is as follows (in thousands):

 
| 2009 |   | $      | 79,262 |   |
|------|--------|--------|--------|--------|
| 2010 |   | 62,738 |   |
| 2011 |   | 46,027 |   |
| 2012 |   | 35,975 |   |
| 2013 |   | 28,525 |   |

 

Asof December 31, 2008 and 2007, accumulated depreciation and amortizationrelated to our consolidated real estate properties and related leaseintangibles were as follows (in thousands):

 
| ** **                                      | ** ** | ** **             | ** ** | **Lease Intangibles** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | ** **             | ** ** | **Assets**                 | ** ** | **Liabilities** | ** ** |
| ** **                                      | ** ** | ** **             | ** ** | ** **                 | ** ** | **Acquired** | ** ** | **Acquired** | ** ** |
| ** **                                      | ** ** | **Buildings and** | ** ** | **Other Lease**       | ** ** | **Above-Market** | ** ** | **Below-Market** | ** ** |
| **as of December 31, 2008** | ** ** | **Improvements**       | ** ** | **Intangibles**            | ** ** | **Leases** | ** ** | **Leases** | ** ** |
| Cost                                            |       | $                      | 3,793,103  |                       | $          | 656,673 |   | $ | 70,450 |   | $ | (195,364 | ) |
| Less: depreciation and amortization             |       | (263,794               | )          | (179,519                   | )          | (24,962 | ) | 42,494 |   |
| Net                                             |       | $                      | 3,529,309  |                       | $          | 477,154 |   | $ | 45,488 |   | $ | (152,870 | ) |

 
| ** **                                      | ** ** | ** **             | ** ** | **Lease Intangibles** | ** ** |
|-------------------------------------------------|------------|------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | ** **             | ** ** | **Assets**                 | ** ** | **Liabilities** | ** ** |
| ** **                                      | ** ** | ** **             | ** ** | ** **                 | ** ** | **Acquired** | ** ** | **Acquired** | ** ** |
| ** **                                      | ** ** | **Buildings and** | ** ** | **Other Lease**       | ** ** | **Above-Market** | ** ** | **Below-Market** | ** ** |
| **as of December 31, 2007** | ** ** | **Improvements**       | ** ** | **Intangibles**            | ** ** | **Leases** | ** ** | **Leases** | ** ** |
| Cost                                            |       | $                      | 3,475,898  |                       | $          | 653,176 |   | $ | 74,696 |   | $ | (198,516 | ) |
| Less: depreciation and amortization             |       | (116,746               | )          | (89,132                    | )          | (11,026 | ) | 22,927 |   |
| Net                                             |       | $                      | 3,359,152  |                       | $          | 564,044 |   | $ | 63,670 |   | $ | (175,589 | ) |

 

***Cash and Cash Equivalents***

 

Weconsider investments in highly-liquid money market funds to be cashequivalents.

 

F-9

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Tableof Contents

 

BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

***Restricted Cash***

 

Restrictedcash as of December 31, 2008 and 2007 includes restricted money marketaccounts, as required by our lenders, for anticipated tenant expansions andimprovements, property taxes and insurance for our consolidatedproperties.  Restricted cash alsoincludes monies held by a trustee that are used for the purpose of payinginterest and principal amounts due on the convertible debentures as well as forthe payment of any future conversions as allowed under the original indentureagreements.

 

***Accounts Receivable***

 

Accountsreceivable primarily consists of straight-line rental revenue receivables ofapproximately $59.0 million and $30.1 million as of December 31, 2008 and2007, respectively and also includes anticipated insurance proceeds andreceivables from tenants of our consolidated real estate properties.  Our allowance for doubtful accounts wasapproximately $1.7 million and $0.5 million as of December 31, 2008 and2007, respectively.

 

***Prepaid Expenses and Other Assets***

 

Prepaidexpenses and other assets include prepaid directors’ and officers’ insurance,as well as prepaid insurance and real estate taxes of the properties weconsolidate.

 

***Goodwill***

 

Goodwillconsists of goodwill created in association with our purchase of thesubsidiaries of IPC US Real Estate Investment Trust (“IPC”) through a businesscombination that was completed on December 12, 2007.  In accordance with SFAS No. 142, ourgoodwill is not amortized, but instead is evaluated for impairment at leastannually.  Based on our analysis, weconcluded that no impairment in the value of goodwill occurred for the yearended December 31, 2008.

 

***Investments in Unconsolidated Entities***

 

Investmentsin unconsolidated entities consists of our undivided tenant-in-common (“TIC”)interests in various office buildings and our non-controlling 60% interest inthe Wanamaker Building.  Consolidation ofthese investments is not required as the entities do not qualify as VIEs asdefined in FIN 46R and do not meet the control requirement required forconsolidation under SOP 78-9 or EITF 04-5.

 

Weaccount for these investments using the equity method of accounting inaccordance with SOP 78-9 and EITF 04-5. The equity method of accounting requires these investments to beinitially recorded at cost and subsequently increased (decreased) for our shareof net income (loss), including eliminations for our share of inter-companytransactions, and increased (decreased) for contributions (distributions).  We use the equity method of accountingbecause the shared decision-making involved in these investments creates anopportunity for us to have some influence on the operating and financialdecisions of these investments and thereby creates some responsibility by usfor a return on our investment. Therefore, it is appropriate to include our proportionate share of theresults of operations of these investments in our earnings or losses.

 

***Impairment of Real Estate Related Assets***

 

Forour consolidated properties, management monitors events and changes incircumstances indicating that the carrying amounts of the real estate assetsmay not be recoverable.  When such eventsor changes in circumstances are present, we assess potential impairment bycomparing estimated future undiscounted operating cash flows expected to begenerated over the life of the asset including its eventual disposition, to thecarrying amount of the asset.  In theevent that the carrying amount exceeds the estimated future undiscountedoperating cash flows, we recognize an impairment loss to adjust the carryingamount of the asset to estimated fair value.

 

Forour unconsolidated real estate properties, including those we own through aninvestment in a limited partnership, joint venture, TIC interest or othersimilar investment structure, at each reporting date, management compares theestimated fair value of our investment to the carrying amount.  An impairment charge is recorded to theextent the fair value of our investment is less than the carrying amount andthe decline in value is determined to be other than a temporary decline.

 

Asa result of the difficult economic conditions that accelerated during thefourth quarter of 2008, including the significant disruption in financingavailable in the broader credit markets, we evaluated all of our real estateinvestments for potential impairment at December 31, 2008.  Based on tests of recoverability oflong-lived assets, we recorded impairment losses of approximately $21.1 millionfor the year ended December 31, 2008. We did not record any impairment losses for the years ended December 31,2007 or 2006.

 

F-10

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Tableof Contents

 

BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

***Deferred Financing Fees***

 

Deferredfinancing fees are recorded at cost and are amortized to interest expense usinga straight-line method that approximates the effective interest method over thelife of the related debt.  Accumulatedamortization of deferred financing fees was approximately $12.3 million and approximately$4.2 million as of December 31, 2008 and December 31, 2007,respectively.

 

***Notes Receivable***

 

Wehold a $10.0 million mezzanine loan on the Galleria Office Towers in Houston,Texas.  This investment earns interestmonthly at the London Interbank Offer Rate (“LIBOR”) plus 750 basis points andhas a maturity date of December 31, 2009. Monthly payments of interest only are required with principal due atmaturity.  As of December 31, 2008,the loan was earning interest at a rate of 8.54%.

 

Notesreceivable includes approximately $3.0 million representing a mortgage loan wemade related to raw land held by third parties for future development ofadditional office buildings in the Terrace Office Park located in Austin,Texas.  We have the exclusive right offirst offer to participate in the future development of the raw land.  The annual interest rate under the loan isfixed at 7.75% through the maturity date of June 21, 2013.  Initial monthly payments of interest only ata rate of 6.50% per annum are required through the maturity date.  The difference between the annual interestrate and 6.50% is accrued and added to the principal amount annually on eachanniversary date of the note.  Wepurchased the developed portion of the Terrace Office Park, an office park thatcurrently includes four buildings, in June 2006 from parties related tothe borrower of this mortgage loan.

 

***Convertible Debentures***

 

As part of our acquisition of the subsidiaries of IPC, we assumed aliability for convertible debentures that had not been converted as of the dateof the acquisition.  There are two seriesof debentures referred to herein as “Series A” and “Series B.”  Series A debentures pay semi-annualinterest payments at a rate of 6.0% per annum and have a maturity date of November 2014,but are redeemable without penalty in November 2010.  Series B debentures pay semi-annualinterest payments at a rate of 5.75% per annum and  have a maturity date of September 2012,but are redeemable without penalty in September 2010.  Restricted cash, which is held by a trustee,is used by the trustee for the purpose of paying interest and principal amountsdue on the debentures as well as for the payment of any future conversions asallowed for in the original indenture agreements.

 

***Asset Retirement Obligations***

 

Werecord the fair value of any conditional asset retirement obligations inaccordance with FIN No. 47, “Accounting for Conditional Asset RetirementObligations,” if they can be reasonably estimated.  As part of the anticipated renovation ofacquired properties, we will incur costs for the abatement of regulatedmaterials, primarily asbestos-containing materials, as required underenvironmental regulations.  Our estimateof the fair value of the liabilities is based on future anticipated costs to beincurred for the legal removal or remediation of the regulated materials.  As of December 31, 2008 and December 31,2007, the balance of our asset retirement obligations was approximately $9.7million and approximately $12.6 million, respectively, and is included in otherliabilities.

 

***Derivative Financial Instruments***

 

Ourobjective in using derivative financial instruments is to add stability tointerest expense and to manage our exposure to interest rate movements or otheridentified risks.  To accomplish thisobjective, we use interest rate swaps as part of our cash flow hedgingstrategy.  Interest rate swaps designatedas cash flow hedges are entered into to limit our exposure to increases in theLIBOR above a “strike rate” on our floating-rate debt.

 

Wemeasure our derivative instruments and hedging activities at fair value andrecord them as an asset or liability, depending on our rights or obligationsunder the applicable derivative contract. For derivatives designated as fair value hedges, the changes in the fairvalue of both the derivative instrument and the hedged items are recorded inearnings. Derivatives used to hedge the exposure to variability in expectedfuture cash flows, or other types of forecasted transactions, are consideredcash flow hedges.  For derivativesdesignated as cash flow hedges, the effective portions of changes in fair valueof the derivative are reported in stockholders’ equity and are subsequentlyreclassified into earnings when the hedged item affects earnings.  Changes in fair value of derivativeinstruments not designated as hedges and ineffective portions of hedges arerecognized in earnings in the affected period. We assess the effectiveness of each hedging relationship by comparingthe changes in fair value or cash flows of the derivative hedging instrumentwith the changes in fair value or cash flows of the designated hedged item ortransaction.

 

F-11

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Tableof Contents

 

BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

InDecember 2007, we entered into interest rate swap agreements designated ascash flow hedges related to our credit agreement.  As of December 31, 2008 and 2007, we donot have any derivatives designated as fair value hedges or hedges of netinvestments in foreign operations, nor are derivatives being used for tradingor speculative purposes.

 

***Revenue Recognition***

 

Werecognize rental income generated from all leases on real estate assets that weconsolidate on a straight-line basis over the terms of the respective leases,including the effect of rent holidays, if any. The total net increase to rental revenues due to straight-line rentadjustments for the years ended December 31, 2008, 2007 and 2006 wasapproximately $28.2 million, $21.9 million and $6.7 million, respectively.  As discussed above, our rental revenue alsoincludes amortization of above- and below-market leases.  The total net increase to rental revenues dueto the amortization of above- and below-market leases for the years ended December 31,2008, 2007 and 2006 was approximately $13.9 million, $9.6 million and $4.9million, respectively.  Revenues relatingto lease termination fees are recognized at the time that a tenant’s right tooccupy the leased space is terminated and we have satisfied all obligationsunder the agreement.

 

***Offering Costs***

 

Ouradvisor funded certain organization and offering costs on our behalf.  We were required to reimburse our advisor forsuch organization and offering costs up to 1.5% of the gross offering proceedsin connection with the our third public offering, provided that no organizationand offering costs were paid with respect to sales under the DRIP.  Our advisor received up to 2.5% and 2.0% ofgross offering proceeds for reimbursement of organization and offering expensesincurred in connection with our initial and second public offerings,respectively.  Organization and offeringcosts include items such as legal and accounting fees, marketing, promotionaland printing costs.  All offering costswere recorded as an offset to additional paid-in capital, and all organizationcosts were recorded as an expense at the time we became liable for the paymentof these amounts.

 

***Income Taxes***

 

Wehave elected to be taxed as a REIT under Sections 856 through 860 of theInternal Revenue Code of 1986, as amended (the “Code”), and have qualified as aREIT since the year ended December 31, 2004.  To qualify as a REIT, we must meet a numberof organizational and operational requirements, including a requirement that wedistribute at least 90% of our REIT taxable income to our stockholders.  As a REIT, we generally will not be subjectto federal income tax at the corporate level. We are organized and operate in such a manner as to qualify for taxationas a REIT under the Code, and we intend to continue to operate in such amanner, but no assurance can be given that we will operate in a manner so as toqualify or remain qualified as a REIT.

 

Weacquired the subsidiaries of IPC on December 12, 2007 and intend to makean election for IPC (US), Inc. to be taxed as a REIT for federal incometax purposes for the tax year ended December 31, 2008.  We believe IPC (US), Inc. is organizedand operates in a manner to qualify for this election.  Prior to acquisition, IPC (US), Inc. wasa taxable C-Corporation, and for the year ended December 31, 2007, IPC(US), Inc. was treated as a taxable REIT subsidiary of the Company forfederal income tax purposes.  We believewe can recover the cost of our investment in the subsidiaries of IPC withoutultimately incurring a tax liability attributable to any underlying differencebetween the tax basis of the acquired assets and the financial reporting basisas a result of applying fair value in purchase accounting.  Accordingly, we have not recorded an incometax provision, or deferred taxes, except for the net operating losscarry-forward and other deferred tax liabilities discussed below, with respectto IPC.

 

On December 31,2001, the IRS released revised temporary and proposed regulations concerningthe treatment of net built-in gains of C-corporation assets that become assetsof a REIT in a carryover basis transaction. The regulations generally requirethe C-corporation to recognize gains and be subject to corporate-level tax asif it had sold all the assets transferred at fair market value. In lieu of thistreatment, the regulations permit the REIT to elect to be subject to the rules ofSection 1374 of the Code. These rules generally subject the REIT tothe maximum corporate-level tax rate on these built-in gains if recognized fromthe sale of the acquired assets within ten years of the transaction.  We have determined that the regulations areapplicable to the assets held by IPC (US), Inc. and subsidiaries and haveelected to be subject to the rules of Section 1374 of the Code forany built-in gains recognized within ten years of the acquisition of IPC (US), Inc.and subsidiaries.  However, we do notintend to dispose of any of the assets subject to these built-in gains in amanner that would trigger the tax liability.

 

Postacquisition net operating losses (“NOL”) do not reduce the built-in gainsubject to the Section 1374 tax. However, any NOL carryovers that existed within IPC (US), Inc. andsubsidiaries at the time of acquisition are generally available for future useand can offset any realized built-in gain subject to tax.  As of December 31, 2008, IPC (US), Inc.and subsidiaries had approximately $56.6 million of federal and state NOLcarryovers, and the deferred tax assets associated with the NOL carryovers isapproximately $23.0 million at December 31, 2008.  Based on our expectation to

 

F-12

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

electREIT status for IPC (US), Inc. for 2008 and not to recognize any built-ingain during the ten year period after the IPC acquisition, a valuationallowance has been established for approximately $23.0 million, as we do notexpect to realize the acquired NOL carryover deferred tax asset.  The NOL carry-forwards will begin to expire in2023.  In addition, at December 31,2008, we have deferred tax liabilities of approximately $3.5 million related tovarious state taxing jurisdictions.

 

Wehave reviewed our tax positions under FIN 48, “Accounting for Uncertainty inIncome Taxes, an interpretation of FASB Statement No. 109,” (“FIN 48”).  FIN48 clarifies the relevant criteria and approach for the recognition andmeasurement of uncertain tax positions.  The interpretationprescribes a recognition threshold and measurement attribute for the financialstatement recognition of a tax position taken, or expected to be taken, in atax return.  A tax position may only be recognized in the financialstatements if it is more likely than not that the tax position will besustained upon examination.  We believe it is more likely than notthat our tax positions related to our status as a REIT will be sustained in anytax examination.  In addition, we believethat it is more likely than not that our tax positions related to the taxableREIT subsidiaries will be sustained in any tax examination.

 

Forthe year ended December 31, 2008 and 2007 we recognized a provision forincome taxes of approximately $0.9 million and $0.6 million, respectively,related to certain state and local income taxes.

 

***Stock Based Compensation***

 

Wehave a stock-based incentive award plan for our directors and consultants andfor employees, directors and consultants of our affiliates.  We account for this plan under the modifiedprospective method of SFAS No. 123R, “Share-Based Payment.” In the modified prospectivemethod, compensation cost is recognized for all share-based payments grantedafter the effective date and for all unvested awards granted prior to theeffective date.  In accordance with SFAS No. 123R,prior period amounts were not restated. SFAS No. 123R also requires thetax benefits associated with these share-based payments to be classified asfinancing activities in the Consolidated Statements of Cash Flows, rather thanas operating cash flows as required under previous regulations. For the yearsended December 31, 2008, 2007 and 2006, we had no significant compensationcost related to these share-based payments.

 

***Redeemable Common Stock***

 

Ourboard of directors has authorized a share redemption program for investors who holdtheir shares for more than one year.  Ourboard of directors reserves the right in its sole discretion at any time, andfrom time to time, to (1) waive the one-year holding period in the eventof the death, disability, need for long-term care, or other exigentcircumstances such as bankruptcy, a mandatory distribution requirement under astockholder’s IRA or with respect to shares purchased under or through our DRIPor automatic purchase plan, (2) reject any request for redemption, (3) changethe purchase price for redemptions, or (4) terminate, suspend or amend theshare redemption program.

 

Weaccount for the possible redemption of our shares under FAS 150 “Accounting forCertain Financial Instruments with Characteristics of both Liabilities andEquity” which requires that securities that are convertible for cash at theoption of the holder to be classified outside of equity.  In accordance with FAS 150, we do not reclassify the shares to be redeemedfrom equity to a liability until such time as the redemption has been formallyapproved.

 

***Concentration of Credit Risk***

 

AtDecember 31, 2008 and December 31, 2007, we had cash and cashequivalents and restricted cash deposited in certain financial institutions inexcess of federally insured levels.  Wehave diversified our cash and cash equivalents between several bankinginstitutions in an attempt to minimize exposure to any one of theseentities.  We regularly monitor thefinancial stability of these financial institutions and believe that we are notexposed to any significant credit risk in cash and cash equivalents orrestricted cash.  The Federal DepositInsurance Corporation, or “FDIC,” generally only insures limited amounts perdepositor per insured bank.  Through December 31, 2009, the FDIC willinsure up to $250,000 per depositor per insured bank; on January 1, 2010,the standard coverage limit will return to $100,000 for most depositcategories.  Unlimited deposit insurancecoverage will be available to our non-interest bearing transaction accounts heldat those institutions participating in FDIC’s Temporary Liquidity GuaranteeProgram through December 31, 2009.

 

***Minority Interest***

 

Wehold a direct or indirect majority interest in certain real estate partnershipsand thus, consolidate their accounts with and into our accounts.  Minority interest in partnerships representsthe third-party partners’ proportionate share of the equity in consolidatedreal estate partnerships.  Income andlosses are allocated to minority interest holders based on their weightedaverage percentage ownership during the period.

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

Minorityinterest also includes units of limited partnership interests issued byBehringer OP to third parties.  Inconjunction with the July 28, 2005 acquisition of Buena Vista Plaza,393,260 units of limited partnership interests in Behringer OP were issued at$8.90 per unit.  At December 31,2008 and December 31, 2007, Behringer OP had 432,586 units of limitedpartnership interest held by third parties, after giving effect to the 10%stock dividend issued October 1, 2005. These units of limited partnership interest are convertible into anequal number of shares of our common stock.

 

***Earnings per Share***

 

Earningsper share is calculated based on the weighted average number of common sharesoutstanding during each period.  As of December 31,2008, we had options to purchase 68,500 shares of common stock outstanding at aweighted average exercise price of $9.35, and at December 31, 2008,Behringer OP had 432,586 units of limited partnership interest held by thirdparties, after giving effect to the 10% stock dividend issued October 1,2005.  These units of limited partnershipinterest are convertible into an equal number of shares of our commonstock.  The weighted average shares andearnings per share for all periods presented in this report reflect the effectsof the stock dividend.  The options andunits of limited partnership interest are excluded from the calculation ofearnings per share for all periods presented in this report because the effectwould be anti-dilutive.

 

***Reportable Segments***

 

SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,”establishes standards for reporting financial and descriptive information aboutan enterprise’s reportable segments.  Our current business consists of owning,operating, acquiring, developing, investing in and disposing of real estateassets.  All of our consolidated revenuesare from our consolidated real estate properties.  Our chief operating decision maker evaluatesoperating performance on an individual property level and views all of our realestate assets as one industry segment, and, accordingly, all of our propertiesare aggregated into one reportable segment.

 

**3.****                                     ****New Accounting Pronouncements**

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157establishes a single authoritative definition of fair value, sets out aframework for measuring fair value, and requires additional disclosures aboutfair value measurements.  SFAS No. 157applies only to fair value measurements that are already required or permittedby other accounting standards.  In February 2008,the FASB staff issued Staff Position No. 157-2 “Effective Date of FASBStatement No. 157” (“FSP SFAS 157-2”). FSP SFAS 157-2 delays the effectivedate of SFAS No. 157 to fiscal years beginning after November 15,2008, for non-financial assets and non-financial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  Webelieve the adoption of FSP SFAS No. 157-2 will have no material effect onthe disclosures related to non-financial assets and liabilities in ourfinancial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an Amendment ofFASB Statement No. 115.”  The fairvalue option established by SFAS No. 159 permits all entities tochoose to measure eligible items at fair value at specified election dates.  A business entity will report unrealizedgains and losses on items for which the fair value option has been elected inearnings (or another performance indicator if the business entity does notreport earnings) at each subsequent reporting date.  We adopted this standard effective January 1,2008 and have not elected the fair value measurement option for any financialassets or liabilities at the present time; however, we may elect to measurefuture eligible financial assets or liabilities at fair value.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  This Statement replaces SFAS No. 141 “BusinessCombinations” but retains the fundamental requirement that the acquisitionmethod of accounting (which SFAS No. 141 called the purchase method) beused for all business combinations and for an acquirer to be identified foreach business combination.  This Statement is broader in scope than thatof Statement 141, which applied only to business combinations in which controlwas obtained by transferring consideration. SFAS No. 141(R) appliesthe acquisition method to all transactions and other events in which one entityobtains control over one or more other businesses.  This Statement alsomakes certain other modifications to Statement 141, including a broaderdefinition of a business, recognition requirements for contractual and certainnoncontractual contingencies, gain recognition resulting from a bargainpurchase and the requirement that acquisition related costs be expensed as incurred. This statement applies to business combinations occurring on or after thebeginning of the first annual reporting period beginning on or after December 15,2008.  Early adoption is notpermitted.  The acquisition of a realestate property has been determined to meet the definition of a businesscombination as defined in SFAS No. 141(R). Therefore, SFAS No. 141(R) will have a material effect on ouraccounting for future acquisitions of properties, primarily as acquisitioncosts will no longer be capitalized, but will be expensed beginning January 1,2009.

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements - An amendment of ARB No. 51.” This Statement amends Accounting Research Bulletin No. 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interestin a subsidiary, which is sometimes referred to as minority interest, is anownership interest in the consolidated entity that should be reported as equityin the consolidated financial statements.  Among other requirements, thisStatement requires consolidated net income to be reported, on the face of theconsolidated income statement, at amounts that include the amounts attributableto both the parent and the noncontrolling interest.  This Statement iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. Early adoption is not permitted.  This Statement shall be applied prospectivelyas of the beginning of the fiscal year in which this Statement is initiallyadopted, except for the presentation and disclosure requirements.  The presentation and disclosure requirementsshall be applied retrospectively for all periods presented.  The adoption of SFAS No. 160 will likelyincrease our stockholders’ equity and net income (loss) will no longer includeincome or losses allocated to minority interests which will cause our netincome (loss) to increase or decrease. However, income available to common stockholders should not be affected.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.”  SFASNo. 161 requires entities to provide greater transparency about how andwhy the entity uses derivative instruments, how the instruments and relatedhedged items are accounted for under SFAS 133, and how the instruments andrelated hedged items affect the financial position, results of operations, andcash flows of the entity.  SFAS No. 161 is effective for fiscalyears and interim periods beginning after November 15,2008.  The principal impact to us will be to expand our disclosuresregarding derivative instruments.

 

InMay 2008, the FASB issued Staff Position APB 14-1, “Accounting forConvertible Debt Instruments That May Be Settled in Cash upon Conversion(Including Partial Cash Settlement)” (“FSP APB 14-1”).  FSP APB 14-1 applies to convertible debtinstruments that, by their stated terms, may be settled in cash (or otherassets) upon conversion, including partial cash settlement, unless the embeddedconversion option is required to be separately accounted for as a derivativeunder SFAS No. 133, “Accounting for Derivative Instruments and HedgingActivities.”  FSP APB 14-1 requires thatthe issuer of a convertible debt instrument within its scope separately accountfor the liability and equity components in a manner that will reflect theissuer’s nonconvertible debt borrowing rate when interest cost is recognized insubsequent periods.  The excess of theprincipal amount of the liability component over its initial fair value shallbe amortized to interest cost using the effective interest method.  FSP APB 14-1 is effective for financialstatements issued for fiscal years and interim periods beginning after December 15,2008.  Early adoption is notpermitted.  FSP APB 14-1 will be appliedretrospectively to all periods presented. We believe the adoption of FSP APB 14-1will have no material effect on our consolidated results of operations orfinancial position.

 

**4.****                                     ****Asset and Liabilities Measured atFair Value**

 

OnJanuary 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value, establishesa framework for measuring fair value, and expands disclosures about fair valuemeasurements.  SFAS No. 157 appliesto reported balances that are required or permitted to be measured at fairvalue under existing accounting pronouncements; accordingly, the standard doesnot require any new fair value measurements of reported balances.

 

SFASNo. 157 emphasizes that fair value is a market-based measurement, not anentity-specific measurement.  Therefore,a fair value measurement should be determined based on the assumptions thatmarket participants would use in pricing the asset or liability.  As a basis for considering market participantassumptions in fair value measurements, SFAS No. 157 establishes a fairvalue hierarchy that distinguishes between market participant assumptions basedon market data obtained from sources independent of the reporting entity(observable inputs that are classified within Levels 1 and 2 of the hierarchy)and the reporting entity’s own assumptions about market participant assumptions(unobservable inputs classified within Level 3 of the hierarchy).

 

Level1 inputs utilize quoted prices (unadjusted) in active markets for identicalassets or liabilities that we have the ability to access.  Level 2 inputs are inputs other than quotedprices included in Level 1 that are observable for the asset or liability,either directly or indirectly.  Level 2inputs may include quoted prices for similar assets and liabilities in activemarkets, as well as inputs that are observable for the asset or liability(other than quoted prices), such as interest rates, foreign exchange rates, andyield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs forthe asset or liability, which are typically based on an entity’s ownassumptions, as there is little, if any, related market activity. In instanceswhere the determination of the fair value measurement is based on inputs fromdifferent levels of the fair value hierarchy, the level in the fair value hierarchywithin which the entire fair value measurement falls is based on the lowestlevel input that is significant to the fair value measurement in itsentirety.  Our assessment of thesignificance of a particular input to the fair value measurement in its entiretyrequires judgment, and considers factors specific to the asset or liability.

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

Asof December 31, 2008 and 2007, management estimated the carrying value ofcash and cash equivalents, restricted cash, accounts receivable, accountspayable, accrued expenses, convertible debentures, other liabilities anddistributions payable were at amounts that reasonably approximated their fairvalue based on their highly-liquid nature and/or short-term maturities.  The carrying value of our notes receivable reasonablyapproximates fair value based on expected interest rates for notes to similarborrowers with similar terms and remaining maturities.

 

Thenotes payable totaling approximately $3.1 billion as of December 31, 2008have a fair value of approximately $2.8 billion based upon interest rates fornotes with similar terms and remaining maturities that management believes wecould have obtained on December 31, 2008. The notes payable totaling approximately $3.2 billion as of December 31,2007 had a fair value of approximately $3.1 billion based upon interest ratesfor notes with similar terms and remaining maturities that management believeswe could have obtained on December 31, 2007.

 

Thefair value estimate presented herein is based on information available to ourmanagement as of December 31, 2008 and 2007. We determined the abovedisclosure of estimated fair values using available market information andappropriate valuation methodologies. However, considerable judgment is necessary to interpret market data anddevelop the related estimates of fair value. Accordingly, the estimatespresented herein are not necessarily indicative of the amounts that could berealized upon disposition of the financial instruments.  The use of different market assumptions and/orestimation methodologies may have a material effect on the estimated fair valueamounts.  Although our management is notaware of any factors that would significantly affect the estimated fair valueamount, such amount has not been comprehensively revalued for purposes of theseconsolidated financial statements since that date, and current estimates offair value may differ significantly from the amounts presented herein.

 

***Derivativefinancial instruments***

 

Currently,we use interest rate swaps to manage our interest rate risk.  The valuation of these instruments isdetermined using widely accepted valuation techniques including discounted cashflow analysis of the expected cash flows of each derivative. This analysisreflects the contractual terms of the derivatives, including the period to maturity,and uses observable market-based inputs, including interest rate curves andimplied volatilities.  The fair values ofinterest rate swaps are determined using the market standard methodology ofnetting the discounted future fixed cash receipts (or payments) and thediscounted expected variable cash payments (or receipts).  The variablecash payments (or receipts) are based on an expectation of future interestrates (forward curves) derived from observable market interest rate curves.

 

Tocomply with the provisions of SFAS No. 157, we incorporate creditvaluation adjustments to appropriately reflect both our own nonperformance riskand the respective counterparty’s nonperformance risk in the fair valuemeasurements.  In adjusting the fairvalue of our derivative contracts for the effect of nonperformance risk, wehave considered the impact of netting and any applicable credit enhancements,such as collateral postings, thresholds, mutual puts, and guarantees.

 

Althoughwe have determined that the majority of the inputs used to value ourderivatives fall within Level 2 of the fair value hierarchy, the creditvaluation adjustments associated with our derivatives utilize Level 3 inputs,such as estimates of current credit spreads to evaluate the likelihood ofdefault by us and our counterparties. However, as of December 31, 2008, we have assessed the significanceof the impact of the credit valuation adjustments on the overall valuation ofour derivative positions and have determined that the credit valuationadjustments are not significant to the overall valuation of ourderivatives.  As a result, we havedetermined that our derivative valuations in their entirety are classified inLevel 2 of the fair value hierarchy. Unrealized gains or losses on derivatives are recorded in “Accumulatedother comprehensive loss” within stockholders’ equity at each measurement date.

 

Thefollowing table sets forth our financial assets and (liabilities) measured atfair value, which equals book value, by level within the fair value hierarchyas of December 31, 2008 (in thousands). Our derivative financial instruments are included in other liabilitieson our consolidated balance sheet.

 
| **Description**                  | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|----------------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Derivative financial instruments |       | $         | (10,747    | )                | $          | —           |       | $                | (10,747    | ) | $ | — |   |
|                                  |            |           |            |                  |            |                  |            |                  |            |  |  |  |  |

 

**5.****                                     ****Acquisitions and Dispositions**

 

***Acquisitions***

 

OnJanuary 15, 2008, we acquired a three-story office building containingapproximately 143,000 net rentable square feet (unaudited) located onapproximately nine acres of land in Houston, Texas (“Westway One”) from anunaffiliated third party for a contract purchase price of approximately $34.8million, paid from proceeds of our third public offering.

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

On June 19, 2008, we acquired a 31-story office buildingcontaining approximately 609,000 net rentable square feet (unaudited) locatedon approximately 2.2 acres of land in Houston, Texas (“One City Centre”) froman unaffiliated third party for a contract purchase price of approximately$130.5 million.  We assumed borrowings ofapproximately $76.5 million under a loan agreement with LaSalle Bank NationalAssociation to pay a portion of the purchase price and paid the remainingamount from proceeds of our third public offering.

 

OnSeptember 25, 2008, we acquired a 20-story office building, containingapproximately 502,000 net rentable square feet (unaudited), and a seven-levelparking garage located on approximately 9.3 acres of land in Houston, Texas (“OneBriarLake Plaza”) from an unaffiliated third party for a contract purchaseprice of approximately $133.6 million, paid from proceeds of our third publicoffering.

 

Inaddition to the acquisitions of wholly-owned properties described above, duringthe year ended December 31, 2008, we increased our ownership to 100% inthree of our TIC properties: Travis Tower, Minnesota Center and the ColoradoBuilding.

 

Weincreased our ownership interest in Travis Tower, a property containingapproximately 507,000 net rentable square feet (unaudited) located in Houston,Texas, to 100% from 60.43%.  The purchaseprice for the additional interests was approximately $25.9 million and wasfunded through the assumption of debt of approximately $14.1 million, with theremaining amount coming from proceeds of our third public offering.  The transaction resulted in the consolidationof this property at September 30, 2008.

 

Weincreased our ownership interest in Minnesota Center, a property containingapproximately 276,000 net rentable square feet (unaudited) located inBloomington, Minnesota to 100% from 93.07%. The purchase price for the additional interests in Minnesota Center wasapproximately $3.6 million and was funded through the assumption of debt ofapproximately $2.0 million, with the remaining amount coming from proceeds ofour third public offering.  The transactionresulted in the consolidation of this property at December 31, 2008.

 

Weincreased our ownership interest in the Colorado Building, a propertycontaining approximately 122,000 net rentable square feet (unaudited) locatedin Washington, D.C to 100% from 95.20%. The purchase price for the additional interests in the Colorado Buildingwas approximately $2.6 million and was funded through the assumption of debt ofapproximately $1.3 million, with the remaining amount coming from proceeds ofour third public offering.  Thetransaction resulted in the consolidation of this property at December 31,2008.

 

***Dispositions***

 

OnFebruary 15, 2008, we sold 9100 Mineral Circle, a property containingapproximately 153,000 net rentable square feet (unaudited) located inEnglewood, Colorado, to an unaffiliated third party for a contract sales priceof approximately $27.0 million.  The saleof the property resulted in a gain of approximately $6.9 million which wasrecorded as a gain on sale of discontinued operations during the year ended December 31,2008.  The sale was structured to qualifyas a 1031 like-kind exchange to defer the taxes on the capital gain resultingfrom the sale of the property.

 

OnJune 5, 2008, we transferred 11 Stanwix Street, a property containingapproximately 428,000 net rentable square feet (unaudited) located inPittsburg, Pennsylvania, to the lender associated with this property inexchange for our obligation of the non-recourse debt on the property totalingapproximately $28.4 million.   Due to thefact that the carrying amount of the property was equivalent to the debt on theproperty, the transfer of the property resulted in neither a gain norloss.  11 Stanwix Street was acquired in December 2007as part of our acquisition of the subsidiaries of IPC.

 

OnAugust 1, 2008, we sold 2383 Utah, a property containing approximately150,000 net rentable square feet (unaudited) located in El Segundo, California,to an unaffiliated third party for a contract sales price of approximately$35.0 million which included the purchaser’s assumption of approximately $20.0million of non-recourse debt on the property. The sale of the property resulted in a gain of approximately $9.2million which was recorded as a gain on sale of discontinued operations duringthe year ended December 31, 2008. The sale was structured to qualify as a 1031 like-kind exchange to deferthe taxes on the capital gain resulting from the sale of the property.

 

Inaddition to the dispositions of wholly-owned properties described above, on July 1,2008, we sold our 36.31% TIC investment in Enclave on the Lake, a propertycontaining approximately 171,000 net rentable square feet (unaudited) locatedin Houston, Texas, to an unaffiliated third party for a contract sales price ofapproximately $13.5 million, which included the purchaser’s assumption of ourapproximately $6.8 million of non-recourse debt on the property.  The sale of our interest, which was acquiredin April 2004 for a contract purchase price of approximately $10.4million, resulted in a gain of approximately $5.1 million which was recorded asa gain on sale of assets within continuing operations during the year ended December 31,2008.  In January 2008, we sold a0.93 acre (unaudited) land easement at our Ashford Perimeter property to anunaffiliated third party for a contract sales price of approximately $0.3million that resulted in a gain on sale of assets within continuing operationsduring the year ended December 31, 2008 of approximately $0.2 million.

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

***Business Combination***

 

OnDecember 12, 2007, we completed the purchase of the subsidiaries of IPC,which owned interests in a portfolio of 34 office properties, comprising atotal of approximately 9.6 million square feet of rentable space.  Theacquisition diversified our portfolio from a geographic prospective.  The acquired intangible assets andliabilities are amortized over the terms of the acquired leases or remaininglives of the assumed mortgages.

 

Thefollowing summary provides the finalized allocation of assets and liabilitiesof the subsidiaries of IPC as of the date of acquisition (in thousands);

 
| ** **                            | ** ** | **Allocation** | ** ** |
|---------------------------------------|------------|----------------|------------|
| Land                                  |       | $              | 168,860    |   |
| Buildings                             |       | 1,003,650      |       |
| Lease intangibles                     |       | 186,487        |       |
| Cash                                  |       | 14,706         |       |
| Restricted cash                       |       | 127,770        |       |
| Other assets                          |       | 45,810         |       |
| Goodwill                              |       | 11,655         |       |
| Notes receivable                      |       | 10,844         |       |
| Investment in unconsolidated entities |       | 55,338         |       |
| Acquired below market leases          |       | (41,595        | )          |
| Liabilities assumed                   |       | (863,844       | )          |
| Minority interest                     |       | (15,324        | )          |
| Net assets acquired                   |       | $              | 704,357    |   |

 

OurConsolidated Statements of Operations include the operations of thesubsidiaries of IPC for the year ended December 31, 2008 and for theperiod from December 12, 2007 (the date of acquisition) through December 31,2007.  The following summary presents theresults of operations (in thousands) for the years ended December 31, 2007and 2006, on an unaudited pro forma basis, as if the transaction had occurredas of January 1 of the respective years. The proforma results are for illustrative purposes only and do notpurport to be indicative of the actual results that would have occurred had thetransaction occurred on January 1 of the respective years, nor are theyindicative of results of operations that may occur in the future.

 
| ** **                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Total revenue                                          |       | $        | 560,576    |     | $          | 544,688 |   |
| Total expenses                                         |       | (724,411 | )          | (708,170 | )          |
| Interest income                                        |       | 25,524   |       | 4,954    |       |
| Gain on sale of assets                                 |       | 44       |       | 66,514   |       |
| Income tax provision/(benefit)                         |       | 686      |       | (4,166   | )          |
| Minority interest                                      |       | (2,851   | )          | (4,399   | )          |
| Equity in earnings (losses) of investments             |       | (1,139   | )          | 11,130   |       |
| Income (loss) from discontinued operations             |       | 1,927    |       | (108     | )          |
| Net loss                                               |       | $        | (139,644   | )        | $          | (89,557 | ) |
|                                                   |       |     |       |     |       |
| Basic and diluted weighted average shares  outstanding |       | 171,544  |       | 147,549  |       |
|                                                   |       |     |       |     |       |
| Basic and diluted loss per share                       |       | $        | (0.81      | )        | $          | (0.61 | ) |

 

**6.****                                     ****Investments in UnconsolidatedEntities**

 

Investmentsin unconsolidated entities consists of our undivided TIC interests in variousoffice buildings and our non-controlling 60% interest in the WanamakerBuilding.  During 2008, we acquired theremaining third-party interests in Travis Tower, Minnesota Center and theColorado Building and as a result, consolidated Travis Tower effective September 30,2008 and Minnesota Center and the Colorado Building effective December 31,2008.  On July 1, 2008, we sold our36.31% TIC investment in Enclave on the Lake, a property located in Houston,Texas, to an unaffiliated third party for a contract sales price ofapproximately $13.5 million.  During2007, we increased our TIC interest in two of our TIC properties and we acquireda 60% non-controlling interest in the Wanamaker Building, as part of ouracquisition of the subsidiaries of IPC completed in December 2007.

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

Thefollowing is a summary of our investments in unconsolidated entities as of December 31,2008 and 2007 (in thousands):

 
| ** **             | ** ** | **2008**      | ** ** | **2007**      | ** ** | **2008**                | ** ** | **2007**                | ** ** |
|------------------------|------------|---------------|------------|---------------|------------|-------------------------|------------|-------------------------|------------|
| ** **             | ** ** | **Ownership** | ** ** | **Ownership** | ** ** | **Carrying Value** | ** ** | **Carrying Value** | ** ** |
| **Property Name** | ** ** | **Interest**  | ** ** | **Interest**  | ** ** | **of Investment**  | ** ** | **of Investment**  | ** ** |
| Wanamaker Building     |       | 60.00%        |       | 60.00%        |       | $                       | 54,257     |                    | $          | 54,272 |   |
| Alamo Plaza            |       | 33.93%        |       | 33.93%        |       | 12,697                  |       | 13,527                  |       |
| St. Louis Place        |       | 35.71%        |       | 35.71%        |       | 10,302                  |       | 10,613                  |       |
| Minnesota Center       |       | 100.00%       |       | 93.07%        |       | —                  |       | 41,144                  |       |
| Colorado Building      |       | 100.00%       |       | 95.20%        |       | —                  |       | 43,763                  |       |
| Travis Tower           |       | 100.00%       |       | 60.43%        |       | —                  |       | 31,295                  |       |
| Enclave on the Lake    |       | —        |       | 36.31%        |       | —                  |       | 8,598                   |       |
| Total                  |       |          |       |          |       | $                       | 77,256     |                    | $          | 203,212 |   |

 

Ourinvestments in unconsolidated entities as of December 31, 2008 and 2007consisted of our proportionate share of the combined assets and liabilities ofour investment properties as follows (in thousands):

 
| ** **                                    | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Land                                          |       | $        | 54,572     |     | $          | 79,423 |   |
| Buildings, net                                |       | 147,443  |       | 259,382  |       |
| Lease intangibles, net                        |       | 33,104   |       | 52,039   |       |
| Cash and cash equivalents                     |       | 3,832    |       | 12,650   |       |
| Restricted cash                               |       | 9,247    |       | 18,850   |       |
| Accounts receivable and other assets          |       | 3,925    |       | 7,621    |       |
| Total assets                                  |       | $        | 252,123    |     | $          | 429,965 |   |
|                                          |       |     |       |     |       |
| Notes payable (1)                             |       | $        | 80,319     |     | $          | 81,772 |   |
| Acquired below market lease intangibles,  net |       | 10,890   |       | 13,854   |       |
| Other liabilities                             |       | 5,317    |       | 12,264   |       |
| Total liabilities                             |       | 96,526   |       | 107,890  |       |
|                                          |       |     |       |     |       |
| Equity                                        |       | 155,597  |       | 322,075  |       |
| Total liabilities and equity                  |       | $        | 252,123    |     | $          | 429,965 |   |

 

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(1)    This amount represents the notes payable forthe Wanamaker Building only.  Each of theTIC investors, including us, is a borrower under the TIC notes payable.  For those TIC properties that we do notconsolidate, our portion of the TIC notes payable was approximately $17.4million and approximately $99.4 million at December 31, 2008 and 2007,respectively and is reflected in the consolidated notes payable on our balancesheet.

 

In2008, we recorded approximately $1.3 million of equity in earnings andapproximately $9.6 million of distributions from our investments inunconsolidated entities.  Our equity inearnings for the years ended December 31, 2008, 2007 and 2006 from theseinvestments represents our proportionate share of the combined earnings for theperiod of our ownership and for the period prior to consolidation, ifapplicable and are presented below (in thousands):

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 
| ** **                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenue                                                |       | $        | 57,965     |     | $          | 41,223   |       | $ | 46,941 |   |
|                                                   |       |     |       |     |       |     |       |
| Expenses:                                              |       |     |       |     |       |     |       |
| Property operating expenses                            |       | 18,246   |       | 11,512   |       | 13,227   |       |
| Real estate taxes                                      |       | 8,348    |       | 5,493    |       | 5,870    |       |
| Depreciation and amortization                          |       | 24,287   |       | 14,986   |       | 18,486   |       |
| (Interest income)/interest expense and bank  fees, net |       | 4,342    |       | 373      |       | (368     | )          |
| Total expenses                                         |       | 55,223   |       | 32,364   |       | 37,215   |       |
|                                                   |       |     |       |     |       |     |       |
| Net income                                             |       | $        | 2,742      |     | $          | 8,859    |       | $ | 9,726 |   |
|                                                   |       |     |       |     |       |     |       |
| Company’s share of net income                     |       | $        | 1,331      |     | $          | 5,117    |       | $ | 4,804 |   |
|                                                   |       |     |       |     |       |     |       |
| Company’s share of total distributions            |       | $        | 9,637      |     | $          | 10,929   |       | $ | 11,030 |   |

 

**7.****                                      MinorityInterest**

 

Aspart of our acquisition of the subsidiaries of IPC, we acquired majorityinterest in certain real estate partnerships and thus, consolidate the accountswith and into our accounts.  Minorityinterest in partnerships represents the third-party partners’ proportionateshare of the equity in consolidated real estate partnerships.  Income and losses are allocated to minorityinterest holders based on their weighted average percentage ownership duringthe year.

 

 Minority interest also includes units oflimited partnership interests issued by Behringer OP to third parties.  In conjunction with the July 28, 2005acquisition of Buena Vista Plaza, 393,260 units of limited partnershipinterests in Behringer OP were issued at $8.90 per unit.  At December 31, 2007 and 2006, BehringerOP had 432,586 units of limited partnership interest outstanding with thirdparties, after giving effect to the 10% stock dividend issued October 1,2005.  These units of limited partnershipinterest are convertible into an equal number of shares of our common stock.

 

The following table is a summary of our minorityinterest investments (in thousands):

 
| ** **                | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| Non-controlling interests |       | $                     | 15,428     |                  | $          | 15,267 |   |
| Limited partnership units |       | 2,506                 |       | 2,782                 |       |
|                      |       | $                     | 17,934     |                  | $          | 18,049 |   |

 

**8.****                                   CapitalizedCosts**

 

Wecapitalize interest, property taxes, insurance and construction costs on ourreal estate properties under development, which include the development of anew building at Eldridge Place in Houston, Texas (“Three Eldridge”) and thefuture development of a parking facility at our Burnett Plaza property in Ft.Worth, Texas.  For the year ended December 31,2008 and 2007, we capitalized a total of approximately $21.9 million and $7.0million in costs associated with real estate under development, respectively,including approximately $0.5 million and $0.3 million in interest for realestate under development, respectively.

 

**9.****                                      LeasingActivity**

 

Futureminimum base rental payments due to us under non-cancelable leases in effect asof December 31, 2008, for properties we consolidate are as follows (inthousands):

 
| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2009       |       | $          | 407,919    |   |
| 2010       |       | 374,565    |       |
| 2011       |       | 321,923    |       |
| 2012       |       | 280,033    |       |
| 2013       |       | 230,943    |       |
| Thereafter |       | 682,210    |       |
| Total      |       | $          | 2,297,593  |   |

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

**10.          Derivative Instruments and HedgingActivities**

 

Weaccount for our derivatives and hedging activities under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” as amended andinterpreted.  In December 2007, we entered into two interestrate swap agreements associated with our credit facility.  For the year ended December 31, 2008 and2007, we recognized an other comprehensive loss of approximately $9.4 millionand $1.4 million, respectively to adjust the carrying amount of these interestrate swaps to fair value at December 31, 2008 and 2007.

 

Wemay be exposed to the risk associated with variability of interest rates thatmight impact our cash flows and our results of operations.  Thehedging strategy, therefore, is to eliminate or reduce, to the extent possible,the volatility of cash flows.  For the year ended December 31,2008, the swap agreements increased interest expense by approximately $2.3million.  The following table summarizesthe notional value (in thousands) of our derivative financial instruments as ofDecember 31, 2008.  The notionalvalue provides an indication of the extent of our involvement in theseinstruments at December 31, 2008, but does not represent exposure tocredit, interest rate, or market risks.

 
| ** **                      | ** ** | ** **              | ** ** | **Interest Swap** | ** ** | **Interest Swap** | ** **   | ** **   | ** **             |
|---------------------------------|------------|-------------------------|------------|------------------------|------------|------------------------|--------------|--------------|------------------------|
| **Hedge Type**             | ** ** | **Notional Value** | ** ** | **Pay Rate**      | ** ** | **Receive Rate**  | ** **   | **Maturity** | ** **             |
| Interest rate swaps - cash flow |       | $                       | 200,000    |                   | 3.9925     | %                      | 30-day LIBOR |         | December 13, 2010 |   |
|                                 |            |                         |            |                        |            |                        |              |              |                        |  |

 

Overtime the unrealized loss held in accumulated other comprehensive loss relatedto the cash flow hedge will be reclassified to earnings, of which approximately$6.0 million is expected to be reclassified in 2009.  No amounts were reclassified to earnings forthe year ended December 31, 2008. This reclassification will correlate with the recognition of the hedgedinterest payment in earnings.

 

**11.****                               NotesPayable**

 

Ournotes payable was approximately $3.1 billion at December 31, 2008 ascompared to $3.2 billion at December 31, 2007 consisting of approximately$2.9 billion of mortgage loans collateralized by our properties and the $200.0million term loan outstanding under our credit facility.  At December 31, 2008, the statedinterest rates on our notes payable ranged from 5.02% to 8.33%, with aneffective weighted average interest rate of approximately 5.75%.  As of December 31, 2008, all of our $3.1billion in debt is long-term fixed rate debt, including the $200.0 million termloan which bears interest at a variable rate, but which we have hedged throughuse of an interest rate swap.  At December 31,2008, our notes payable had maturity dates that range from October 2010 toMay 2017. We have no debt maturing in 2009 and in 2010 we haveapproximately $260.1 million, or 8%, of our loans maturing, $200 million ofwhich represents the term loan under our credit agreement which matures in December 2010and can be extended for one year.  In2011, we have approximately $542.8 million, or 18% of our loans secured byvarious properties maturing.  Our loanagreements generally stipulate that we comply with certain reporting andfinancial covenants.  At December 31,2008, we believe we were in compliance with each of the debt covenants underour loan agreements.  The following tablesummarizes our notes payable as of December 31, 2008 (in thousands):

 
| **Principal payments due in:** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|
| 2009                                          |       | $          | 13,319     |   |
| 2010                                          |       | 275,701    |       |
| 2011                                          |       | 564,511    |       |
| 2012                                          |       | 127,892    |       |
| 2013                                          |       | 96,312     |       |
| Thereafter                                    |       | 1,989,770  |       |
| unamortized  discount                         |       | (976       | )          |
| Total                                         |       | $          | 3,066,529  |   |

 

**12.****                              ****Convertible Debentures**

 

Asof December 31, 2008, we had a liability for convertible debentures ofapproximately $51.7 million.  The balancereflects the remaining liability assumed in the acquisition of the subsidiariesof IPC for debentures not yet converted. There are two series of debenturesreferred to herein as “Series A” and “Series B.”  Series A debentures represent approximately$15.0 million of the outstanding liability and pay semi-annual interestpayments at a rate of 6.0% per annum. The Series A debentures have a maturity date of November 2014,but are redeemable without penalty in November 2010.  Series B debentures representapproximately $36.7 million of the outstanding liability and pay semi-annualinterest payments at a rate of 5.75% per annum. The Series B debentures have a maturity date of September 2012,but are redeemable in September 2010. We have restricted cash on our balance sheet, totaling approximately$62.4 million,

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

heldby a trustee, which is used by the trustee for the purpose of paying interestand principal amounts due on the debentures as well as for the payment ofconversions as allowed for in the original indenture agreements. Theconvertible debentures are convertible to cash at the option of the holder at aconversion price of $9.75 per unit.

 

**13.****                              ****Stockholders’ Equity**

 

***Capitalization***

 

## ***As of December 31, 2008, wehad 288,807,752 shares of our common stock outstanding, which includes theeffect of a 10% stock dividend issued on October 1, 2005 and the effect ofdistribution reinvestments, redemptions, and 22,000 shares issued to BehringerHarvard Holdings.  As of December 31,2008, we had no shares of preferred stock issued and outstanding and options topurchase 68,500 shares of common stock outstanding at a weighted averageexercise price of $9.35.  At December 31,2008, Behringer OP had 432,586 units of limited partnership interest held bythird parties, after giving effect to the 10% stock dividend issued October 1,2005.  These units of limited partnershipinterest are convertible into an equal number of shares of our commonstock.  We sold 1,000 shares of ournon-participating, non-voting convertible stock to Behringer Advisors for$1,000 on March 22, 2006.  Pursuantto its terms, the convertible stock is convertible into shares of our commonstock with a value equal to 15% of the amount by which (1) our enterprisevalue, including the total amount of distributions paid to our stockholders,exceeds (2) the sum of the aggregate capital invested by stockholders plusa 9% cumulative, non-compounded, annual return on such capital.  At the date of issuance of the shares ofconvertible stock, management determined the fair value under GAAP was lessthan the nominal value paid for the shares; therefore, the difference is notmaterial.***

 

***Share Redemption Program***

 

Our board of directors has authorized a share redemption program forstockholders who have held their shares for more than one year.  On March 24, 2009, our board ofdirectors voted to accept all redemption requests submitted during the firstquarter of 2009 from stockholders whose requests were made on circumstances ofdeath, disability or need for long-term care. However, the board determined to not accept and to suspend until furthernotice redemptions other than those submitted in respect of a stockholder’sdeath, disability or need for long-term care. In addition, the board approved certain amendments to the program.  Under the amended and restated shareredemption program, the per share redemption price will equal:

 

·                  until 18 months have passed without usselling shares in a public primary offering (or sooner if our boarddetermines), the amount by which (a) the lesser of (i) 90% of theaverage price per share the original purchaser or purchasers of shares paid tous for all of his or her shares (as adjusted for any stock dividends,combinations, splits, recapitalizations and the like with respect to our commonstock) or (ii) 90% of the offering price of shares in our most recentpublic primary offering exceeds (b) the aggregate amount of net saleproceeds per share, if any, distributed to investors prior to the redemptiondate as a result of the sale of one or more of our properties, or

 

·                  after 18 months have passed without usselling shares in a public primary offering (or sooner if our boarddetermines), the lesser of (a) 100% of the average price per share theoriginal purchaser or purchasers of shares paid for all of his or her shares(as adjusted for any stock dividends, combinations, splits, recapitalizationsand the like with respect to our common stock) or (b) 90% of the estimatedvalue per share, as disseminated to our stockholders by way of a distributionnotice or account statement, quarterly or annual report or any otherstockholder communication.

 

For these purposes, nopurchase price is ascribed to the shares issued in respect of the 10% stockdividend, and we do not consider a “public offering” to include offerings onbehalf of selling stockholders or offerings related to a distributionreinvestment plan or employee benefit plan.

 

Ourboard of directors reserves the right in its sole discretion at any time, andfrom time to time, to (1) waive the one-year holding period in the eventof the death, disability, need for long-term care, or other exigentcircumstances such as bankruptcy, a mandatory distribution requirement under astockholder’s IRA or with respect to shares purchased under or through our DRIPor automatic purchase plan, (2) reject any request for redemption, (3) changethe purchase price for redemptions, or (4) terminate, suspend or amend theshare redemption program.  Under theterms of the plan, during any calendar year, we will not redeem in excess of 5%of the weighted average number of shares outstanding during the twelve-monthperiod immediately prior to the date of redemption.  In addition, our board of directors willdetermine whether we have sufficient cash from operations to repurchase shares,and such purchases will generally be limited to proceeds of our DRIP plus 1% ofoperating cash flow for the previous fiscal year.  For the year ended December 31, 2008, weredeemed

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

approximately 3.7 million shares for approximately$33.0 million.  For the year ended December 31,2007, we redeemed approximately 2.3 million shares for approximately $20.0million.

 

***Stock Plans***

 

Ourstockholders have approved and adopted the 2005 Incentive Award Plan, whichallows for equity-based incentive awards to be granted to our directors andconsultants and to employees, directors and consultants of our affiliates.  The 2005 Incentive Award Plan replaced theNon-Employee Director Stock Option Plan, the Non-Employee Director Warrant Planand the 2002 Employee Stock Option Plan, each of which was terminated upon theapproval of the 2005 Incentive Award Plan. As of December 31, 2008, we had issued to the independent membersof the board of directors options to purchase 68,500 shares of our common stockat a weighted average exercise price of $9.35 per share, as adjusted for the10% stock dividend issued October 1, 2005 for options that were issuedprior to September 30, 2005.  Theseoptions vest one year from the date granted and have a maximum term of tenyears.  The options were anti-dilutive toearnings per share for the years ended December 31, 2008, 2007 and 2006.

 

***Distributions***

 

We initiated the payment of monthly distributions in November 2003in the amount of a 7% annualized rate of return, based on an investment in ourcommon stock of $10.00 per share and calculated on a daily record basis of$0.0019178 per share.  In August 2007, the declareddistributions rate was reduced to a daily amount of $0.0017260 per share ofcommon stock, which is equivalent to an annual distribution rate of 6.3%assuming the share was purchased for $10.00. In September 2008 and effective through March 2009, thedeclared distributions rate was increased to a daily amount of $0.0017808 pershare of common stock which is equivalent to an annual distribution rate of6.5% assuming the share was purchased for $10.00.

 

Pursuant to our DRIP, stockholders may electto reinvest any cash distribution in additional shares of common stock.  We record a liability for distributions whendeclared.  The stock issued through theDRIP is recorded to equity when the shares are actually issued.  For both the year ended December 31,2008 and 2007, distributions declared and recorded as a reduction to minorityinterest in connection with the Behringer OP limited partnership units wereapproximately $0.3 million. Distributions declared and payable as of December 31,2008 were approximately $15.9 million, which included approximately $7.2million of cash distributions payable and approximately $8.7 million of DRIPdistributions payable.  Distributionsdeclared and payable as of December 31, 2007 were approximately $11.0million, which included approximately $5.2 million of cash distributionspayable and approximately $5.8 million of DRIP distributions payable.

 

Thefollowing are the distributions declared for both our common stock and theBehringer OP limited partnership units during the year ended December 31,2008 and 2007 (in thousands):

 
| ** **  | ** ** | **Total** | ** ** | **Cash** | ** ** | **DRIP** | ** ** |
|-------------|------------|-----------|------------|----------|------------|----------|------------|
| 2008        |       |      |       |     |       |     |       |
| 1st Quarter |       | $         | 33,168     |     | $          | 15,628   |       | $ | 17,540 |   |
| 2nd Quarter |       | 35,280    |       | 16,623   |       | 18,657   |       |
| 3rd Quarter |       | 39,590    |       | 18,199   |       | 21,391   |       |
| 4th Quarter |       | 45,994    |       | 20,788   |       | 25,206   |       |
| Total       |       | $         | 154,032    |     | $          | 71,238   |       | $ | 82,794 |   |
|        |       |      |       |     |       |     |       |
| 2007        |       |      |       |     |       |     |       |
| 1st Quarter |       | $         | 22,918     |     | $          | 11,607   |       | $ | 11,311 |   |
| 2nd Quarter |       | 28,788    |       | 14,305   |       | 14,483   |       |
| 3rd Quarter |       | 31,122    |       | 15,123   |       | 15,999   |       |
| 4th Quarter |       | 31,982    |       | 15,259   |       | 16,723   |       |
| Total       |       | $         | 114,810    |     | $          | 56,294   |       | $ | 58,516 |   |

 

**14.****                              ****Related Party Transactions**

 

Ouradvisor and certain of its affiliates have earned fees and compensation inconnection with each of our public offerings and earn fees and compensation inconnection with the acquisition, management and sale of our assets.

 

BehringerSecurities LP (“Behringer Securities”), an affiliate of our advisor, served asthe dealer manager for  each of ourpublic offerings and received commissions of up to 7% of gross offeringproceeds (1% for sales under our DRIP) before reallowance of commissions earnedby participating broker-dealers.  Inconnection with our third public offering, up to 2.5% of gross proceeds beforereallowance to participating broker-dealers were paid to Behringer Securitiesas a dealer

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

managerfee; except that no dealer manager fee was paid on purchases made pursuant toour DRIP.  In our third public offering,Behringer Securities reallowed all of its commissions to participating broker-dealersand reallowed a portion of its dealer manager fee of up to 2.0% of the grossoffering proceeds to be paid to such participating broker-dealers; provided,however, that Behringer Securities did not reallow, in the aggregate, more than1.5% of gross offering proceeds for marketing fees and expenses, bona fidetraining and educational meetings and non-itemized, non-invoiced due diligenceefforts, and more than 0.5% of gross offering proceeds for bona fide,separately invoiced due diligence expenses incurred as fees, costs and otherexpenses from third parties.  During theyear ended December 31, 2008, Behringer Securities’ commissions and dealermanager fees totaled approximately $54.1 million and approximately $19.6million, respectively, and were recorded as a reduction of additional paid-incapital.  During the year ended December 31,2007, Behringer Securities’ commissions and dealer manager fees totaledapproximately $54.8 million and approximately $20.0 million, respectively, andwere recorded as a reduction of additional paid-in capital.

 

Ouradvisor, Behringer Advisors, or its affiliates, received up to 1.5% of grossoffering proceeds for reimbursement of offering expenses incurred in connectionwith our third pubic offering, except that no offering expenses were reimbursedwith respect to purchases made pursuant to our DRIP.  During the years ended December 31, 2008and 2007, offering expenses of approximately $11.8 million and approximately$12.0 million, respectively, were reimbursable by us and were recorded as areduction of additional paid-in capital.

 

BehringerAdvisors, or its affiliates, receives acquisition and advisory fees of up to2.5% of (1) the purchase price of real estate investments acquireddirectly by us, including any debt attributable to these investments, or (2) whenwe make an investment indirectly through another entity, our pro rata share ofthe gross asset value of real estate investments held by that entity.  Behringer Advisors or its affiliates alsoreceives up to 0.5% of the contract purchase price of each asset purchased orthe principal amount of each loan made by us for reimbursement of expensesrelated to making the investment. Behringer Advisors earned approximately $13.7 million and approximately$67.5 million in acquisition and advisory fees and reimbursement of expensesfor the investments we acquired in the years ended December 31, 2008 and2007, respectively.  We capitalize thesefees as part of our real estate, goodwill or investments in unconsolidatedentities.

 

HPTManagement Services LP (“HPT Management”), our property manager and anaffiliate of our advisor, receives fees for management, leasing andconstruction supervision of our properties, which may be subcontracted tounaffiliated third parties.  The managementfees are generally equal to approximately 3% of gross revenues of therespective property, plus leasing commissions based upon the customary leasingcommission applicable to the geographic location of the respectiveproperty.  In the event that we contractdirectly with a non-affiliated third party property manager in management of aproperty, we pay HPT Management an oversight fee equal to 0.5% of grossrevenues of the property managed.  In noevent will we pay both a property management fee and an oversight fee to HPTManagement with respect to any particular property.  We incurred and expensed fees ofapproximately $17.6 million, $8.5 million and approximately $4.3 million in theyears ended December 31, 2008, 2007 and 2006, respectively, for the servicesprovided by HPT Management in connection with our real estate and investmentproperties. Property management fees associated with our sold properties areclassified in discontinued operations.

 

Dependingon the nature of the asset at the time the fee is incurred, we pay BehringerAdvisors an annual asset management fee of either (1) 0.6% of aggregateasset value for operating assets or (2) 0.6% of total contract purchaseprice plus budgeted improvement costs for development or redevelopment assets (eachfee payable monthly in an amount equal to one-twelfth of 0.6% of such totalamount as of the date it is determinable). For the year ended December 31, 2008, we incurred and expensedapproximately $28.0 million of asset management fees as compared to approximately$13.6 million for the year ended December 31, 2007 and approximately $5.1million of the year ended December 31, 2006.  Asset management fees of approximately $1.0million and $2.7 million were waived for the years ended December 31, 2007and 2006, respectively.  Asset managementfees associated with our sold properties are classified in discontinuedoperations.

 

BehringerAdvisors may require us to reimburse it for costs and expenses paid or incurredto provide services to us including the costs of goods, services or materialsused by us and the salaries and benefits of persons employed by these entitiesand performing services for us; provided, however, no reimbursement is made forcosts of personnel to the extent the advisor receives a separate fee for theirservices.  For the year ended December 31,2008, we incurred and expensed approximately $1.7 million for these costs and expenses.  For the year ended December 31, 2007, we didnot incur and expense any of these costs and expenses.

 

Wepay Behringer Advisors or its affiliates a debt financing fee equal to 1% ofthe amount of any debt made available to us. We incurred approximately $0.9 million and $17.8 million in debtfinancing fees for the years ended December 31, 2008 and 2007, respectively.

 

AtDecember 31, 2008, we had payables to related parties of approximately$8.3 million consisting primarily of acquisition and advisory fees, assetmanagement fees, offering costs and operating expense reimbursements payable toBehringer Advisors and property management fees payable to HPT Management.  At December 31, 2007 we had payables

 

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BehringerHarvard REIT I, Inc.

Notesto Consolidated Financial Statements

 

torelated parties of approximately $8.2 million consisting primarily of offeringcosts payable to Behringer Advisors and property management fees payable to HPTManagement.  At December 31, 2008,we had no receivables from related parties and at December 31, 2007 we hadreceivables from related parties of approximately $1.0 consisting primarily ofreimbursements due from HPT Management.

 

BehringerAdvisors or its affiliates will be paid disposition fees if the advisor or itsaffiliates provide a substantial amount of services, as determined by ourindependent directors, in connection with the sale of one or moreproperties.  In such event, we will paythe advisor, or its affiliates, an amount equal to the lesser of (subject tothe limitation set forth below): (a) one-half of the brokerage commissionpaid, or (b) 3% of the sales price of each property sold.  This fee will not be earned or paid unlessand until our stockholders have received total distributions (excluding the 10%stock dividend) in an amount equal to or greater than the sum of the aggregatecapital contributed by stockholders plus a 9% annual, cumulative,non-compounded return thereon.  Subordinateddisposition fees that are not earned and payable at the date of sale arereflected as a contingent liability which will be earned and paid when theabove condition has been satisfied, if ever. As of December 31, 2008, assuming all the conditions above are met,Behringer Advisors would be paid approximately $0.8 million in dispositionfees.

 

Weare dependent on Behringer Advisors and HPT Management for certain servicesthat are essential to us, including asset acquisition and dispositiondecisions, property management and leasing services and other generaladministrative responsibilities.  In theevent that these companies were unable to provide us with the respectiveservices, we would be required to obtain such services from other sources.

 

**15.****                              ****Commitments and Contingencies**

 

Asof December 31, 2008, we had commitments of approximately $36.3 millionfor future tenant improvements and leasing commissions and commitments ofapproximately $27.0 million for the development of Eldridge Three.

 

BehringerAdvisors or its affiliates will be paid disposition fees if the advisor or itsaffiliates provides a substantial amount of services, as determined by ourindependent directors, in connection with the sale of one or moreproperties.  As of December 31,2008, assuming all conditions are met, Behringer Advisors would be paidapproximately $0.8 million in disposition fees.

 

**16.****                              ****Supplemental Cash FlowInformation**

 

Supplementalcash flow information is summarized below for the years ended December 31,2008, 2007 and 2006 (in thousands):

 
| ** **                                               | ** ** | **2008** | ** ** | **2007**  | ** ** | **2006** | ** ** |
|----------------------------------------------------------|------------|----------|------------|-----------|------------|----------|------------|
| **Interest paid, net of amounts capitalized**            |       | $        | 181,064    |      | $          | 94,158   |       | $ | 44,163 |   |
| **Income taxes paid**                                    |       | $        | 2,669      |      | $          | —   |       | $ | — |   |
|                                                     |       |     |       |      |       |     |       |
| **Non-cash investing activities:**                       |       |     |       |      |       |     |       |
| Property and equipment additions in accrued  liabilities |       | $        | 18,079     |      | $          | 3,742    |       | $ | 3,075 |   |
| Escrow deposit applied to purchase of real  estate       |       | 1,000    |       | —    |       | —   |       |
|                                                     |       |     |       |      |       |     |       |
| **Non-cash financing activities:**                       | * *   | * * | * *   | * *  | * *   | * * | * *   |
| Common stock issued in distribution  reinvestment plan   |       | $        | 79,796     |      | $          | 56,283   |       | $ | 29,786 |   |
| Mortgage notes assumed                                   |       | 90,503   |       | 1,251,086 |       | 144,400  |       |
| Mortgage notes assumed by purchaser                      |       | (26,827  | )          | —    |       | —   |       |
| Financing costs in accrued liabilities                   |       | 17       |       | —    |       | —   |       |
| Cancellation of debt through transfer of  real estate    |       | 25,698   |       | —    |       | —   |       |
| Recapture of minority interest in lieu of  note          |       | 844      |       | —    |       | —   |       |

 

**17.****                              ****Discontinued Operations**

 

OnFebruary 15, 2008, we sold 9100 Mineral Circle, located in Englewood,Colorado, to an unaffiliated third party for a contract sale price ofapproximately $27.0 million.  On June 5,2008, we transferred 11 Stanwix Street to the lender holding a mortgage on theproperty.  On August 1, 2008, wesold 2383 Utah, located in El Segundo, California, to an unaffiliated thirdparty for a contract sale price of approximately $35.0 million.  In accordance with SFAS No. 144, “Accountingfor the Impairment or Disposal of Long-Lived Assets,” the results of operationsfor these properties are classified as discontinued operations in theaccompanying consolidated statements of operations.  The following table summarizes the results ofdiscontinued operations for years ended December 31, 2008, 2007 and 2006(in thousands):

 

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Notesto Consolidated Financial Statements

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Rental revenue**                             |       | $                                          | 4,972      |   | $ | 9,512 |   | $ | 5,795 |   |
|                                           |       |                                       |       |   |   |   |   |
| **Expenses**                                   |       |                                       |       |   |   |   |   |
| Property operating expenses                    |       | 1,887                                      |       | 870 |   | 541 |   |
| Interest expense                               |       | 2,151                                      |       | 1,353 |   | 1,152 |   |
| Real estate taxes                              |       | 695                                        |       | 879 |   | 678 |   |
| Property and asset management fees             |       | 343                                        |       | 454 |   | 445 |   |
| Depreciation and amortization                  |       | 2,408                                      |       | 4,045 |   | 3,096 |   |
| **Total expenses**                             |       | 7,484                                      |       | 7,601 |   | 5,912 |   |
|                                           |       |                                       |       |   |   |   |   |
| Interest income                                |       | 9                                          |       | 16 |   | 9 |   |
|                                           |       |                                       |       |   |   |   |   |
| **Income (loss) from discontinued operations** |       | $                                          | (2,503     | ) | $ | 1,927 |   | $ | (108 | ) |

 

**18.****                              ****Quarterly Results (Unaudited)**

 

Presentedbelow is a summary of the unaudited quarterly financial information for theyears ended December 31, 2008 and 2007 (in thousands except per sharedata):

 
| **2008 Quarters Ended**          | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
|                                       |       |              |       |             |       |                  |       |                 |       |
| Rental revenue                             |       | $                 | 139,282    |             | $          | 156,413               |       | $                    | 156,031    |   | $ | 153,707 |   |
|                                       |       |              |       |             |       |                  |       |                 |       |
| Loss from continuing operations            |       | (41,896           | )          | (30,071          | )          | (27,883               | )          | (74,204              | )          |
| Income (loss) from discontinued operations |       | 5,455             |       | (971             | )          | 9,051                 |       | 98                   |       |
| Net loss                                   |       | $                 | (36,441    | )                | $          | (31,042               | )          | $                    | (18,832    | ) | $ | (74,106 | ) |
|                                       |       |              |       |             |       |                  |       |                 |       |
| Weighted average shares outstanding        |       | 210,475           |       | 223,973          |       | 245,832               |       | 279,974              |       |
| Basic and diluted loss per share           |       | $                 | (0.17      | )                | $          | (0.14                 | )          | $                    | (0.07      | ) | $ | (0.26 | ) |

 
| **2007  Quarters Ended**                   | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** |   |
|--------------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|--------|
|                                       |       |              |       |             |       |                  |       |                 |   |
| Rental revenue                             |       | $                 | 68,327     |             | $          | 67,800                |       | $                    | 69,266 |   | $ | 99,316 |   |
|                                       |       |              |       |             |       |                  |       |                 |   |
| Loss from continuing operations            |       | (12,519           | )          | (9,036           | )          | (6,324                | )          | (15,679              | )      |
| Income (loss) from discontinued operations |       | 1,862             |       | (195             | )          | 191                   |       | 69                   |   |
| Net loss                                   |       | $                 | (10,657    | )                | $          | (9,231                | )          | $                    | (6,133 | ) | $ | (15,610 | ) |
|                                       |       |              |       |             |       |                  |       |                 |   |
| Weighted average shares outstanding        |       | 132,000           |       | 164,112          |       | 188,347               |       | 200,778              |   |
| Basic and diluted loss per share           |       | $                 | (0.08      | )                | $          | (0.06                 | )          | $                    | (0.03  | ) | $ | (0.08 | ) |

 

*****

 

F-26

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Table of Contents

 

Report of Independent****RegisteredPublic Accounting Firm

 

Tothe Board of Directors and Stockholders of

BehringerHarvard REIT I, Inc.

Addison,Texas

 

Wehave audited the consolidated financial statements of Behringer Harvard REIT I, Inc.and subsidiaries (the “Company”) as of December 31, 2008 and 2007 and foreach of the three years in the period ended December 31, 2008, and haveissued our report thereon dated March 31, 2009; such report is includedelsewhere in this Form 10-K.  Ouraudits also included the financial statement schedules of the Company listed inItem 15.  These financial statementschedules are the responsibility of the Company’s management.  Our responsibility is to express an opinionbased on our audits.  In our opinion,such financial statement schedules, when considered in relation to the basicfinancial statements taken as a whole, present fairly, in all materialrespects, the information set forth therein.

 

 
| /s/  Deloitte & Touche LLP |
|-------------------------------------|
|                                |
| Dallas, Texas                       |
| March 31, 2009                 |

 

F-27

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Table of Contents

 

**Valuation and Qualifying Accounts**

**Schedule II**

**December 31, 2008**

**(in thousands)**

 
| **Allowance for doubtful accounts** | ** ** | **Balance at  Beginning  of Year** | ** ** | **Charged to  Costs and  Expenses** | ** ** | **Charged to  Other Accounts** | ** ** | **Deductions** | ** ** | **Balance at End  of Year** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|-----------------------------------------------|------------|------------------------------------------|------------|----------------|------------|--------------------------------------------|------------|
|                                               |       |                                         |       |                                          |       |                                     |       |           |       |                                       |       |
| Year ended December 31, 2008                  |       | $                                            | 540        |                                          | $          | 1,440                                    |       | $              | —     |                                       | $          | 234 |   | $ | 1,746 |   |
| Year ended December 31, 2007                  |       | 96                                           |       | 351                                           |       | 93                                       |       | —         |       | 540                                        |       |
| Year ended December 31, 2006                  |       | 42                                           |       | 103                                           |       | —                                   |       | 49             |       | 96                                         |       |
|                                                    |            |                                              |            |                                               |            |                                          |            |                |            |                                            |            |  |  |  |  |  |

 

F-28

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Table of Contents

 

**Behringer Harvard REIT I, Inc.**

**Real Estate and Accumulated Depreciation**

**Schedule III**

**December 31, 2008**

**(in thousands)**

 
| ** **                             | ** ** | ** **       | ** ** | ** **                | ** ** | ** **            | ** ** | ** **      | ** ** | ** **          | ** ** | **Gross amount**                  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** |
|----------------------------------------|------------|------------------|------------|---------------------------|------------|-----------------------|------------|-----------------|------------|---------------------|------------|----------------------------------------|------------|------------------|------------|------------------|------------|--------------|------------|
| ** **                             | ** ** | ** **       | ** ** | ** **                | ** ** | **Initial cost** | ** ** | **Adjustments** | ** ** | **carried at** | ** ** | **Accumulated**                        | ** ** | **Year of** | ** ** | **Date**         | ** ** |
| **Property Name**                 | ** ** | **Location**     | ** ** | **Encumbrances (1)** | ** ** | **Land**              | ** ** | **Building**    | ** ** | **to basis**   | ** ** | **close of period (2)** | ** ** | **depreciation** | ** ** | **construction** | ** ** | **acquired** | ** ** |
| Ashford Perimter                       |       | Atlanta, GA      |       | 34,480                    |       | 8,479                 |       | 31,662          |       | (8,505              | )          | 31,636                                 |       | 6,187            |       | 1982             |       | 01/06/05     |       |
| Lawson Commons                         |       | St. Paul, MN     |       | 58,300                    |       | 2,021                 |       | 75,881          |       | 175                 |       | 78,077                                 |       | 10,660           |       | 1999             |       | 06/10/05     |       |
| Downtown Plaza                         |       | Long Beach, CA   |       | 12,650                    |       | 4,127                 |       | 11,874          |       | 1,520               |       | 17,521                                 |       | 1,773            |       | 1982             |       | 06/14/05     |       |
| Gateway 12                             |       | Diamond Bar, CA  |       | 70,750                    | (3)        | 1,600                 |       | 6,319           |       | 10                  |       | 7,929                                  |       | 864              |       | 1999             |       | 07/20/05     |       |
| Gateway 22                             |       | Diamond Bar, CA  |       | —                    | (3)        | 3,862                 |       | 7,691           |       | 47                  |       | 11,600                                 |       | 1,056            |       | 1999             |       | 07/20/05     |       |
| Gateway 23                             |       | Diamond Bar, CA  |       | —                    | (3)        | 5,295                 |       | 10,864          |       | 23                  |       | 16,182                                 |       | 1,489            |       | 1999             |       | 07/20/05     |       |
| Southwest Center                       |       | Tigard, OR       |       | —                    | (3)        | 2,106                 |       | 16,317          |       | 400                 |       | 18,823                                 |       | 2,284            |       | 2001             |       | 07/20/05     |       |
| 17655 Waterview                        |       | Richardson, TX   |       | —                    | (3)        | 2,932                 |       | 28,876          |       | 26                  |       | 31,834                                 |       | 3,950            |       | 1998             |       | 07/20/05     |       |
| Buena Vista Plaza                      |       | Burbank, CA      |       | 22,000                    |       | 3,806                 |       | 28,368          |       | 112                 |       | 32,286                                 |       | 3,882            |       | 1991             |       | 07/28/05     |       |
| One Financial Plaza                    |       | Minneapolis, MN  |       | 43,000                    |       | 10,689                |       | 39,482          |       | 906                 |       | 51,077                                 |       | 5,698            |       | 1960             |       | 08/02/05     |       |
| Riverview Tower                        |       | Knoxville, TN    |       | 30,250                    |       | 2,740                 |       | 35,181          |       | 477                 |       | 38,398                                 |       | 4,668            |       | 1985             |       | 10/05/05     |       |
| 1325 G Street                          |       | Washington, D.C. |       | 100,000                   |       | 71,313                |       | 60,681          |       | 2,875               |       | 134,869                                |       | 7,832            |       | 1969             |       | 11/15/05     |       |
| Woodcrest Corporate  Center            |       | Cherry Hill, NJ  |       | 50,400                    |       | 5,927                 |       | 49,977          |       | 1,767               |       | 57,671                                 |       | 6,233            |       | 1960             |       | 01/11/06     |       |
| Burnett Plaza (8)                      |       | Ft Worth, TX     |       | 113,154                   |       | 6,239                 |       | 157,171         |       | 4,676               |       | 168,086                                |       | 17,996           |       | 1983             |       | 02/10/06     |       |
| AMEC Paragon  I & II          |       | Houston, TX      |       | 16,300                    |       | 2,550                 |       | 23,338          |       | 33                  |       | 25,921                                 |       | 2,571            |       | 1999/2003        |       | 03/14/06     |       |
| Paces West                             |       | Atlanta, GA      |       | 84,000                    |       | 8,838                 |       | 88,172          |       | 2,885               |       | 99,895                                 |       | 9,760            |       | 1987/89          |       | 04/19/06     |       |
| 222 South Riverside  Plaza             |       | Chicago, IL      |       | 202,000                   |       | 29,787                |       | 190,111         |       | 13,601              |       | 233,499                                |       | 21,051           |       | 1971             |       | 06/02/06     |       |
| The Terrace Office Park                |       | Austin, TX       |       | 131,000                   |       | 17,330                |       | 124,551         |       | 3,037               |       | 144,918                                |       | 12,769           |       | 1997-2002        |       | 06/21/06     |       |
| 600 & 619  Alexander Road     |       | Princeton, NJ    |       | 16,500                    |       | 3,000                 |       | 16,700          |       | 2,158               |       | 21,858                                 |       | 1,763            |       | 1983/85          |       | 06/28/06     |       |
| Grandview II                           |       | Birmingham, AL   |       | 17,000                    |       | 1,625                 |       | 19,274          |       | 283                 |       | 21,182                                 |       | 1,702            |       | 1998             |       | 10/20/06     |       |
| Bank of America  Plaza-Charlotte       |       | Charlotte, NC    |       | 150,000                   |       | 26,656                |       | 185,215         |       | 3,953               |       | 215,824                                |       | 16,266           |       | 1974             |       | 10/26/06     |       |
| Three Parkway                          |       | Philadelphia, PA |       | 67,125                    |       | 7,905                 |       | 69,033          |       | 2,780               |       | 79,718                                 |       | 6,313            |       | 1970             |       | 10/30/06     |       |
| 4440 El Camino Real                    |       | Los Altos, CA    |       | 26,975                    |       | 4,412                 |       | 30,794          |       | 86                  |       | 35,292                                 |       | 2,671            |       | 2000             |       | 11/02/06     |       |
| Fifth Third  Center-Cleveland          |       | Cleveland, OH    |       | 49,250                    |       | 1,424                 |       | 52,075          |       | 1,746               |       | 55,245                                 |       | 4,424            |       | 1991             |       | 11/16/06     |       |
| Resurgens Plaza                        |       | Atlanta, GA      |       | 82,000                    |       | —                |       | 92,980          |       | 3,883               |       | 96,863                                 |       | 8,160            |       | 1988             |       | 11/30/06     |       |
| 5 & 15 Wayside                |       | Burlington, MA   |       | —                    |       | 8,917                 |       | 61,709          |       | 50                  |       | 70,676                                 |       | 4,941            |       | 1999/2001        |       | 12/08/06     |       |
| One & Two  Eldridge Place (8) |       | Houston, TX      |       | 75,000                    |       | 9,695                 |       | 89,506          |       | 25,024              |       | 124,225                                |       | 7,511            |       | 1984/86          |       | 12/13/06     |       |
| 250 W. Pratt                           |       | Baltimore, MD    |       | 36,038                    |       | 6,700                 |       | 39,861          |       | 6,576               |       | 53,137                                 |       | 5,256            |       | 1986             |       | 12/04-12/06  |       |
| Centreport Office Center               |       | Ft Worth, TX     |       | —                    |       | 3,175                 |       | 12,917          |       | 69                  |       | 16,161                                 |       | 776              |       | 1999             |       | 06/14/07     |       |
| 200 South Wacker                       |       | Chicago, IL      |       | 95,500                    |       | 7,842                 |       | 141,981         |       | 5,663               |       | 155,486                                |       | 6,893            |       | 1981             |       | 11/01/07     |       |
| One Financial Place                    |       | Chicago, IL      |       | 188,600                   |       | 23,285                |       | 265,099         |       | 1,994               |       | 290,378                                |       | 12,521           |       | 1984             |       | 11/01/07     |       |
| 10 & 120 South  Riverside     |       | Chicago, IL      |       | 225,000                   |       | 40,476                |       | 311,716         |       | 7,715               |       | 359,907                                |       | 14,835           |       | 1965             |       | 11/01/07     |       |
| 111 Woodcrest                          |       | Cherry Hill, NJ  |       | —                    |       | 1,000                 |       | 5,417           |       | 473                 |       | 6,890                                  |       | 235              |       | 1964             |       | 11/20/07     |       |
| 1650 Arch Street                       |       | Philadelphia, PA |       | 43,312                    |       | 24,000                |       | 60,825          |       | 340                 |       | 85,165                                 |       | 2,434            |       | 1974             |       | 12/12/07     |       |
| United Plaza                           |       | Philadelphia, PA |       | 66,195                    |       | 23,736                |       | 90,001          |       | 1,555               |       | 115,292                                |       | 3,645            |       | 1975             |       | 12/12/07     |       |
| One Oxmoor Place                       |       | Louisville, KY   |       | 100,496                   | (4)        | 2,851                 |       | 17,614          |       | (110                | )          | 20,355                                 |       | 698              |       | 1989             |       | 12/12/07     |       |
| Hurstbourne Place                      |       | Louisville, KY   |       | —                    | (4)        | 4,587                 |       | 30,203          |       | 196                 |       | 34,986                                 |       | 1,256            |       | 1982             |       | 12/12/07     |       |
| Hurstbourne Park                       |       | Louisville, KY   |       | —                    | (4)        | 2,297                 |       | 12,728          |       | 215                 |       | 15,240                                 |       | 544              |       | 1971             |       | 12/12/07     |       |
| Hurstbourne Plaza                      |       | Louisville, KY   |       | —                    | (4)        | 4,000                 |       | 10,054          |       | —              |       | 14,054                                 |       | 416              |       | 1971             |       | 12/12/07     |       |
| Forum Office Park                      |       | Louisville, KY   |       | —                    | (4)        | 6,811                 |       | 32,548          |       | 1,099               |       | 40,458                                 |       | 1,379            |       | 1984             |       | 12/12/07     |       |
| Lakeview                               |       | Louisville, KY   |       | —                    | (4)        | 1,468                 |       | 8,574           |       | 92                  |       | 10,134                                 |       | 387              |       | 1989             |       | 12/12/07     |       |
| Steeplechase Place                     |       | Louisville, KY   |       | —                    | (4)        | 1,766                 |       | 7,424           |       | 44                  |       | 9,234                                  |       | 307              |       | 1989             |       | 12/12/07     |       |
| Hunnington                             |       | Louisville, KY   |       | —                    | (4)        | 978                   |       | 5,507           |       | 19                  |       | 6,504                                  |       | 230              |       | 1986             |       | 12/12/07     |       |
| City Hall Plaza                        |       | Manchester, NH   |       | —                    | (4)        | 2,516                 |       | 27,509          |       | 70                  |       | 30,095                                 |       | 1,104            |       | 1982             |       | 12/12/07     |       |
| One & Two  Chestnut Place     |       | Worcester, MA    |       | —                    | (4)        | 2,903                 |       | 15,715          |       | (1,121              | )          | 17,497                                 |       | 609              |       | 1990             |       | 12/12/07     |       |
| Executive Park                         |       | Louisville, KY   |       | 5,649                     |       | —                |       | 6,311           |       | (1,304              | )          | 5,007                                  |       | 279              |       | 1973             |       | 12/12/07     |       |
| Energy Centre                          |       | New Orleans, LA  |       | 50,310                    |       | 6,134                 |       | 59,852          |       | 841                 |       | 66,827                                 |       | 4,037            |       | 1984             |       | 12/12/07     |       |
| Bank of America  Plaza-Las Vegas       |       | Las Vegas, NV    |       | 49,269                    |       | 10,914                |       | 86,101          |       | 141                 |       | 97,156                                 |       | 3,800            |       | 1975             |       | 12/12/07     |       |

 

F-29

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Table of Contents

 

**Behringer Harvard REIT I, Inc.**

**Real Estate and Accumulated Depreciation**

**Schedule III**

**December 31, 2008**

**(in thousands)**

 
| ** **                   | ** ** | ** **         | ** ** | ** **                | ** ** | ** **            | ** ** | ** **      | ** ** | ** **          | ** ** | **Gross amount**                  | ** ** | ** **       | ** ** | ** **       | ** ** | ** **    | ** ** |
|------------------------------|------------|--------------------|------------|---------------------------|------------|-----------------------|------------|-----------------|------------|---------------------|------------|----------------------------------------|------------|------------------|------------|------------------|------------|---------------|------------|
| ** **                   | ** ** | ** **         | ** ** | ** **                | ** ** | **Initial cost** | ** ** | **Adjustments** | ** ** | **carried at** | ** ** | **Accumulated**                        | ** ** | **Year of** | ** ** | **Date**         | ** ** |
| **Property Name**       | ** ** | **Location**       | ** ** | **Encumbrances (1)** | ** ** | **Land**              | ** ** | **Building**    | ** ** | **to basis**   | ** ** | **close of period (2)** | ** ** | **depreciation** | ** ** | **construction** | ** ** | **acquired**  | ** ** |
| KeyBank Center               |       | Cleveland, OH      |       | 27,623                    |       | 2,031                 |       | 21,495          |       | 256                 |       | 23,782                                 |       | 892              |       | 1969             |       | 12/12/07      |       |
| One Edgewater Plaza          |       | Staten Island, NY  |       | 35,863                    | (5)        | 12,789                |       | 26,292          |       | 1,255               |       | 40,336                                 |       | 1,231            |       | 1919             |       | 12/12/07      |       |
| Tice Building                |       | Woodcliff Lake, NJ |       | —                    | (5)        | 2,500                 |       | 18,118          |       | —              |       | 20,618                                 |       | 949              |       | 1988             |       | 12/12/07      |       |
| 222 Bloomingdale Road        |       | White Plains, NY   |       | 10,345                    |       | —                |       | 13,990          |       | (4,143              | )          | 9,847                                  |       | 674              |       | 1980             |       | 12/12/07      |       |
| Fifth Third  Center-Columbus |       | Columbus, OH       |       | 52,500                    |       | 3,500                 |       | 54,242          |       | 58                  |       | 57,800                                 |       | 2,306            |       | 1928             |       | 12/12/07      |       |
| City Center                  |       | St. Petersburg, FL |       | 16,035                    |       | 5,200                 |       | 30,955          |       | 948                 |       | 37,103                                 |       | 1,436            |       | 1984             |       | 12/12/07      |       |
| 5104 Eisenhower  Boulevard   |       | Tampa, FL          |       | —                    |       | 2,602                 |       | 25,054          |       | —              |       | 27,656                                 |       | 1,219            |       | 1998             |       | 12/12/07      |       |
| Royal Caribbean Center       |       | Miramar, FL        |       | 27,979                    | (6)        | 7,250                 |       | 25,876          |       | —              |       | 33,126                                 |       | 1,069            |       | 2001             |       | 12/12/07      |       |
| DeVry University             |       | Miramar, FL        |       | —                    | (6)        | 5,370                 |       | 15,633          |       | —              |       | 21,003                                 |       | 673              |       | 2002             |       | 12/12/07      |       |
| Crescent Center              |       | Memphis, TN        |       | 43,000                    |       | 6,377                 |       | 59,286          |       | 1,499               |       | 67,162                                 |       | 2,721            |       | 1986             |       | 12/12/07      |       |
| Plaza at MetroCenter         |       | Nashville, TN      |       | 25,000                    |       | 3,341                 |       | 35,333          |       | 598                 |       | 39,272                                 |       | 1,489            |       | 1985             |       | 12/12/07      |       |
| Loop Central                 |       | Houston, TX        |       | 46,000                    |       | 11,653                |       | 86,587          |       | 1,769               |       | 100,009                                |       | 3,900            |       | 1980-1982        |       | 12/12/07      |       |
| Epic Center                  |       | Wichita, KS        |       | 15,628                    | (7)        | 951                   |       | 19,609          |       | 711                 |       | 21,271                                 |       | 968              |       | 1987             |       | 12/12/07      |       |
| One Brittany Place           |       | Wichita, KS        |       | —                    | (7)        | 926                   |       | 3,478           |       | 136                 |       | 4,540                                  |       | 149              |       | 1984             |       | 12/12/07      |       |
| Two Brittany Place           |       | Wichita, KS        |       | —                    | (7)        | 926                   |       | 1,666           |       | 242                 |       | 2,834                                  |       | 87               |       | 1984             |       | 12/12/07      |       |
| 801 Thompson                 |       | Rockville, MD      |       | 10,651                    |       | 3,200                 |       | 10,578          |       | 205                 |       | 13,983                                 |       | 427              |       | 1963             |       | 12/12/07      |       |
| 500 E. Pratt                 |       | Baltimore, MD      |       | 58,800                    |       | —                |       | 66,390          |       | 230                 |       | 66,620                                 |       | 2,654            |       | 2004             |       | 12/12/07      |       |
| Westway One                  |       | Houston, TX        |       | —                    |       | 3,655                 |       | 26,771          |       | 2,643               |       | 33,069                                 |       | 1,198            |       | 2007             |       | 1/15/08       |       |
| One City Centre              |       | Houston, TX        |       | 76,500                    |       | 19,747                |       | 97,487          |       | 1,417               |       | 118,651                                |       | 1,955            |       | 1962             |       | 6/19/08       |       |
| One BriarLake Plaza          |       | Houston, TX        |       | —                    |       | 9,602                 |       | 119,660         |       | 486                 |       | 129,748                                |       | 1,197            |       | 2000             |       | 9/25/08       |       |
| Travis Tower                 |       | Houston, TX        |       | 35,544                    |       | 6,230                 |       | 42,253          |       | —              |       | 48,483                                 |       | 485              |       | 1955             |       | 10/04 - 09/08 |       |
| Minnesota Center             |       | Bloomington, MN    |       | 28,096                    |       | 3,500                 |       | 35,809          |       | —              |       | 39,309                                 |       | —           |       | 1987             |       | 10/03-12/08   |       |
| Colorado Building            |       | Washington, D.C.   |       | 28,000                    |       | 13,328                |       | 28,109          |       | —              |       | 41,437                                 |       | —           |       | 1903             |       | 08/04-12/08   |       |
| Totals                       |       |               |       | $                         | 2,850,067  |                  | $          | 555,392         |       | $                   | 3,716,430  |                                   | $          | 96,905           |       | $                | 4,368,727  |          | $          | 263,794 |   |   |   |   |   |
|                              |            |                    |            |                           |            |                       |            |                 |            |                     |            |                                        |            |                  |            |                  |            |               |            |  |  |  |  |  |  |

 

Each of our properties has a depreciable life of 25 years

 

----

(1) Excludes unamortized premiums and discounts.

(2) The aggregate cost for federal income tax purposes isapproximately $4.3 billion.

(3) Gateway 12, Gateway 22, Gateway 23, Southwest Center and 17655Waterview are each held as collateral for this note payable.

(4) OneOxmoor Place, Hurstborne Place, Hurstborne Park, Hurstborne Plaza, Forum OfficePark, Lakeview, Steeplechase Place, Hunnington, City Hall Plaza and One &Two Chestnut Place are each held as collateral for this note payable.

(5) One Edgewater Plaza and the Tice Building are each held as collateral for this note payable.

(6) Royal Caribbean Center and DeVry University are each held ascollateral for this note payable.

(7) Epic Center, One Brittany Place and Two Brittany Place are eachheld as collateral for this note payable.

(8) Includes development projects of a parking garage at ourBurnett Plaza property and the development of a third office building at One &Two Eldrige Place which we refer to as Three Eldridge.

 

F-30

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Table of Contents

 

Asummary of activity for real estate and accumulated depreciation for the yearsended December 31, 2008, 2007 and 2006 is as follows (in thousands):

 
| ** **                   | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|------------------------------|------------|---------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| ** **                   | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** |
| Real Estate:                 |       |                            |       |                            |       |                            |       |
| Balance at beginning of year |       | $                               | 3,997,455  |                            | $          | 1,950,045                       |       | $ | 516,239 |   |
| Additions                    |       | 458,961                         |       | 2,047,410                       |       | 1,433,806                       |       |
| Deductions                   |       | (87,689                         | )          | —                          |       | —                          |       |
| Balance at end of the year   |       | $                               | 4,368,727  |                            | $          | 3,997,455                       |       | $ | 1,950,045 |   |
|                         |       |                            |       |                            |       |                            |       |
| Accumulated depreciation:    |       |                            |       |                            |       |                            |       |
| Balance at beginning of year |       | $                               | 116,745    |                            | $          | 42,339                          |       | $ | 6,808 |   |
| Depreciation expense         |       | 149,987                         |       | 74,406                          |       | 35,531                          |       |
| Deductions                   |       | (2,938                          | )          | —                          |       | —                          |       |
| Balance at end of the year   |       | $                               | 263,794    |                            | $          | 116,745                         |       | $ | 42,339 |   |

 

****

 

F-31

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Table of Contents

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.1                 |       | Eighth Articles of Amendment and Restatement (previously filed and  incorporated by reference to Form 8-K filed on August 1, 2008)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.2                 |       | Amended and Restated Bylaws (previously filed and incorporated by  reference to Amendment No. 4 to Registrant’s Registration Statement on  Form S-11, Commission File No. 333-91532, filed on  February 11, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 3.2.1               |       | Amendment  to the Amended and Restated Bylaws (previously filed and incorporated by  reference to Form 8-K filed on February 23, 2009)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.1                 |       | Distribution  Reinvestment Plan of the Registrant, effective as of January 5, 2009  (previously filed and incorporated by reference in the Registrant’s  Registration Statement on Form S-3D filed on January 5, 2009)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 4.2                 |       | Statement  regarding restrictions on transferability of shares of common stock (to  appear on stock certificate or to be sent upon request and without charge to  stockholders issued shares without certificates) (previously filed and  incorporated by reference to Exhibit 4.4 to Registrant’s Post-Effective  Amendment No. 8 to Registration Statement on Form S-11 filed on  April 24, 2008)                                                                                                                                                                                                                                                                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.1                |       | Second  Amended and Restated Agreement of Limited Partnership of Behringer Harvard  Operating Partnership I LP (previously filed and incorporated by  reference to Form 8-K filed on January 5, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.2                |       | Fifth  Amended and Restated Advisory Agreement between the Registrant and Behringer  Advisors LP (previously filed and incorporated by reference to Form 8-K  filed on January 5, 2007), as amended by the First Amendment to the  Fifth Amended and Restated Advisory Management Agreement, dated June 25,  2008 (previously filed and incorporated by reference to Form 8-K filed  on June 25, 2008)                                                                                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.3                |       | Fifth  Amended and Restated Property Management and Leasing Agreement, dated  May 15, 2008, by and among Behringer Harvard REIT I, Inc.,  Behringer Harvard Operating Partnership I LP and HPT Management Services LP  (previously filed and incorporated by reference to Form 8-K filed on  May 15, 2008), as amended by the First Amendment to the Fifth Amended  and Restated Property Management and Leasing Agreement, dated June 25,  2008 (previously filed and incorporated by reference to Form 8-K filed  on June 25, 2008), and the Second Amendment to the Fifth Amended and  Restated Property Management Agreement, dated August 13, 2008  (previously filed and incorporated by reference to Form 8-K filed on  August 13, 2008) |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.4                |       | Behringer  Harvard REIT I, Inc. 2005 Incentive Award Plan (previously filed and  incorporated by reference to Annex A of the Registrant’s Definitive Proxy  Statement on Schedule 14A, filed on April 15, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.5                |       | Form of  Stock Option Agreement under Behringer Harvard REIT I, Inc. 2005  Incentive Award Plan (previously filed and incorporated by reference to  Registrant’s Post-Effective Amendment No. 1 to Form S-3  Registration Statement on Form S-11, Commission File No. 333-119945,  filed on March 29, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.6                |       | Stock  Purchase and Sale Agreement between BCSP IV U.S. Investments, L.P. and  Behringer Harvard Operating Partnership I, LP, dated August 15, 2007  (previously filed and incorporated by reference to Form 8-K filed on  November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.7                |       | Amendment  to Stock Purchase and Sale Agreement, dated October 30, 2007 (previously  filed and incorporated by reference to Form 8-K filed on  November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.8                |       | Loan  Agreement between 200 South Wacker Property LLC and Lehman Brothers Bank FSB,  dated January 30, 2006 (previously filed and incorporated by reference  to Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.9                |       | Loan  Agreement between 10/120 South Riverside Fee LLC and 10/120 South Riverside  Property LLC and Merrill Lynch Mortgage Lending, Inc., dated  October 3, 2006 (previously filed and incorporated by reference to  Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

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Table of Contents

 
| 10.10  |   | Mortgage,  Security Agreement, Assignment of Rents and Fixture Filing by One Financial  Place Property LLC, as borrower in favor of Wachovia Bank, National  Association, dated July 13, 2006 (previously filed and incorporated by  reference to Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.11  |   | Promissory  Note made between 200 South Wacker Property LLC and Lehman Brothers Bank FSB,  dated January 30, 2006 (previously filed and incorporated by reference  to Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.12  |   | Promissory  Note A between 10/120 South Riverside Fee LLC and 10/120 South Riverside  Property LLC and Merrill Lynch Mortgage Lending, Inc., dated  October 3, 2006 (previously filed and incorporated by reference to  Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.13  |   | Promissory  Note B between 10/120 South Riverside Fee LLC and 10/120 South Riverside  Property LLC and Merrill Lynch Mortgage Lending, Inc., dated  October 3, 2006 (previously filed and incorporated by reference to  Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.14  |   | Promissory  Note A between by One Financial Place Property LLC and Wachovia Bank,  National Association, dated July 13, 2006 (previously filed and  incorporated by reference to Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.15  |   | Promissory  Note B between by One Financial Place Property LLC and Wachovia Bank, National  Association, dated July 13, 2006 (previously filed and incorporated by  reference to Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.16  |   | Guaranty  of Recourse Obligations by Beacon Capital Strategic Partners IV, L.P., for  the benefit of Lehman Brothers Bank FSB, dated January 30, 2006  (previously filed and incorporated by reference to Form 8-K filed on  November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.17  |   | Guaranty  of Recourse Obligations by Beacon Capital Strategic Partners IV, L.P., for  the benefit of Merrill Lynch Mortgage Lending, Inc., dated  October 3, 2006 (previously filed and incorporated by reference to  Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.18  |   | Guaranty  by Beacon Capital Strategic Partners IV, L.P., for the benefit of Wachovia  Bank, National Association, dated July 13, 2006 (previously filed and  incorporated by reference to Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.19  |   | Reaffirmation,  Consent to Transfer, Substitution of Indemnitor and Modification of Loan  Documents by and among 200 South Wacker Property, LLC, Beacon Capital  Strategic Partners IV, L.P., BCSP IV U.S. Investments, L.P., Behringer  Harvard 200 South Wacker Drive, LLC and Behringer Harvard REIT I, Inc.,  and LaSalle Bank National Association as Trustee under that certain  Pooling and Servicing Agreement dated as of March 13, 2006, for the  Registered Holders of LB-UBS Commercial Mortgage Trust 2006-C3, Commercial  Mortgage Pass-Through Certificates, Series 2006-C3, dated  November 1, 2007 (previously  filed and incorporated by reference to Form 8-K filed on November 7,  2007) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.20  |   | Consent  Agreement by and between LaSalle Bank National Association, as Trustee for  the Registered Holders of ML-CFC Commercial Mortgage Trust 2006-4, Commercial  Mortgage Pass-Through Certificates, Series 2006-4, 10/120 South  Riverside Fee LLC and 10/120 South Riverside Property LLC, dated  November 1, 2007 (previously filed and incorporated by reference to  Form 8-K filed on November 7, 2007)                                                                                                                                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.21  |   | Reaffirmation,  Consent to Transfer, Substitution of Indemnitor and Modification of Loan  Documents by and among One Financial Place Property, LLC, Beacon Capital  Strategic Partners IV, L.P., BCSP IV U.S. Investments, L.P., Behringer  Harvard One Financial Plaza Chicago, LLC and Behringer Harvard REIT  I, Inc., and Wells Fargo Bank N.A. as Trustee  under that certain Pooling and Servicing Agreement dated as of  August 1,2006, for the Registered Holders of Wachovia Bank National  Association, Wachovia Securities, Commercial Real Estate Services, dated  November 1, 2007 (previously  filed and incorporated by reference to Form 8-K filed on  November 7, 2007)                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.22  |   | Purchase  Agreement between Behringer Harvard REIT I, Inc. and Everclear  Acquisition Corporation and IPC US Real Estate Investment Trust and PRF  Holdings Inc. and Barry Reichmann (previously filed and incorporated by  reference to Form 10-Q filed on November 14, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 10.23  |   | Letter  Agreement, dated November 8, 2007, between Behringer Advisors LLC and  Behringer Harvard REIT I, Inc. regarding waiver of asset management fees  (previously filed and incorporated by reference to Form 10-Q filed on  November 14, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

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Table of Contents

 
| 10.24  |   | Credit  Agreement dated as of December 11, 2007, by and among Behringer Harvard  Operating Partnership I LP, as borrower, Keybank National Association, the  other lenders which are parties to the agreement and other lenders that may  become parties to the agreement, Keybank National Association, as agent,  Keybanc Capital Markets, as Sole Book Manager, Keybank Capital Markets and  Wachovia Bank National Association, as co-lead arrangers, and Aareal Bank AG  and Westdeutsche Immobilienbank AG as co-documentation agents (previously  filed and incorporated by reference to Form 10-K filed on March 31,  2008) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.25  |   | Termination  Agreement, dated as of December 20, 2007, among Behringer Harvard  Multifamily OP I LP, Behringer Harvard Multifamily REIT I, Inc.,  Behringer Harvard Holdings, LLC and Behringer Harvard Operating Partnership I  LP (previously filed and incorporated by reference to Form 8-K filed on  December 21, 2007)                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.26  |   | Development  Agreement by and between Behringer Harvard REIT I, Inc. and Behringer  Development Company LP, dated February 29, 2008 (previously filed and  incorporated by reference to Form 8-K filed on March 4, 2008)                                                                                                                                                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 10.27  |   | Agreement,  dated November 13, 2008, by and among Behringer Harvard REIT  I, Inc., Behringer Harvard Operating Partnership I LP, Behringer  Advisors, LLC, HPT Management Services LP and HPT TIC Management Services LP  (previously filed and incorporated by reference to Form 8-K filed on  November 18, 2008)                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 21.1   |   | List of Subsidiaries *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 23.1   |   | Consent of Deloitte & Touche LLP *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.1   |   | Rule 13a-14(a) or  Rule 15d-14(a) Certification *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 31.2   |   | Rule 13a-14(a) or  Rule 15d-14(a) Certification *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 32.1   |   | Section 1350  Certifications *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| 99.1   |   | Amended  and Restated Share Redemption Program *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |

 

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* filed herewith

 

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