**UNITED STATES**

**SECURITIES AND 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, 2007** |
|                                                  |                                                                    |   |
| **or**                                                |
|                                                  |
| **o**                                                 | **Transition  Report Pursuant to Section 13 or 15(d) of the** |   |
| ** **                                            | **Securities Exchange Act of 1934**                                     |   |
|                                                       |                                                                         |        |  |  |  |

 

**For the transition period from                to                **

 

**CommissionFile Number: 000-51293**

 

**BehringerHarvard REIT I, Inc.**

(Exact name 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)        |
|                                                              |
| Securities  registered pursuant to section 12(b) of the Act: |
| **None**                                                          |
| ** **                                                        |
| Securities  registered pursuant to section 12(g) of the Act: |
| **Common  stock, $.0001 par value per share**                     |
| (Title of class)                                                  |

 

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

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.Yes o   No x

 

Indicateby check mark whether the registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x   No o

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K is not contained herein, and will not be contained, to the bestof registrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

Largeaccelerated filer o                                                                                                                    Acceleratedfiler o

 

Non-acceleratedfiler  x (Do not checkif a smaller reporting company)                                   Smallerreporting company o

 

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

 

Whilethere is no established market for the registrant’s shares of common stock, theregistrant currently is conducting a second follow-on offering of its shares ofcommon stock pursuant to a registration statement on Form S-11. In each ofits offerings, the registrant has sold shares of its common stock for $10.00per share, with discounts available for certain categories of purchasers. Thenumber of shares held by non-affiliates as of June 30, 2007 (the lastbusiness day of the registrant’s most recently completed second fiscal quarter)was approximately 180,090,291.

 

Asof March 14, 2008, the registrant had 215,020,619 shares of common stockoutstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Theregistrant incorporates by reference portions of its Definitive Proxy Statementfor the 2008 Annual Meeting of Stockholders, which is expected to be filed nolater than April 29, 2008, into Part III of this Form 10-K tothe extent stated herein.

 

 

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**BEHRINGERHARVARD REIT I, INC.**

**FORM 10-K**

**YearEnded December 31, 2007**

 
| ** **      | ** **                                                                                                              | ** ** | **Page**   |
|-----------------|-------------------------------------------------------------------------------------------------------------------------|------------|------------|
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| ** **      | **PART I**                                                                                                              | ** ** | ** ** |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 1.**     | **Business**                                                                                                            | ** ** | **3**      |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 1A.**    | **Risk Factors**                                                                                                        | ** ** | **7**      |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 1B.**    | **Unresolved Staff Comments**                                                                                           | ** ** | **32**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 2.**     | **Properties**                                                                                                          | ** ** | **32**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 3.**     | **Legal Proceedings**                                                                                                   | ** ** | **35**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 4.**     | **Submission  of Matters to a Vote of Security Holders**                                                                | ** ** | **35**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| ** **      | **PART II**                                                                                                             | ** ** | ** ** |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 5.**     | **Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities** | ** ** | **36**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 6.**     | **Selected  Financial Data**                                                                                            | ** ** | **38**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 7.**     | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                         | ** ** | **39**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 7A.**    | **Quantitative  and Qualitative Disclosures about Market Risk**                                                         | ** ** | **48**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 8.**     | **Financial  Statements and Supplementary Data**                                                                        | ** ** | **48**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 9.**     | **Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure**                               | ** ** | **48**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 9A(T).** | **Controls and  Procedures**                                                                                            | ** ** | **48**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 9B.**    | **Other Information**                                                                                                   | ** ** | **49**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| ** **      | **PART III**                                                                                                            | ** ** | ** ** |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 10.**    | **Directors,  Executive Officers and Corporate Governance**                                                             | ** ** | **50**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 11.**    | **Executive  Compensation**                                                                                             | ** ** | **50**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 12.**    | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                        | ** ** | **50**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 13.**    | **Certain  Relationships and Related Transactions, and Director Independence**                                          | ** ** | **50**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 14.**    | **Principal  Accounting Fees and Services**                                                                             | ** ** | **50**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| ** **      | **PART IV**                                                                                                             | ** ** | ** ** |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Item 15.**    | **Exhibits,  Financial Statement Schedules**                                                                            | ** ** | **51**     |
| ** **      | ** **                                                                                                              | ** ** | ** ** |
| **Signatures**  | ** **                                                                                                              | **52**     |

 

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### ** **

### **Forward-Looking Statements**

### ** **

Certain statements inthis Annual Report on Form 10-K constitute “forward-looking statements”within the meaning of Section 27A of the Securities Act of 1933, asamended (the “Securities Act”) and Section 21E of the Securities ExchangeAct of 1934, as amended (the “Exchange Act”). These forward-looking statements, include discussion and analysis of thefinancial condition of Behringer Harvard REIT I, Inc. and our subsidiaries(which may be referred to herein as the “Company,” “we,” “us” or “our”), ouranticipated capital expenditures required to complete projects, amounts ofanticipated cash distributions to our stockholders in the future and othermatters.  These forward-lookingstatements are not historical facts but are the intent, belief or currentexpectations of our management based on their knowledge and understanding ofthe business and industry.  Words such as“may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”“would,” “could,” “should” and variations of these words and similarexpressions are intended to identify forward-looking statements.  These statements are not guarantees of futureperformance and are subject to risks, uncertainties and other factors, some ofwhich are beyond our control, are difficult to predict and could cause actualresults to differ materially from those expressed or forecasted in theforward-looking statements.  We intendfor these forward-looking statements to be covered by the applicable safeharbor provisions created by Section 27A of the Securities Act and Section 21Eof the Exchange Act.

 

Forward-lookingstatements that were true at the time made may ultimately prove to be incorrector false.  We caution investors not toplace undue reliance on forward-looking statements, which reflect ourmanagement’s view only as of the date of this Annual Report on Form 10-K.  We undertake no obligation to update orrevise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events or changes to future operating results.  The forward-looking statements should be readin light of the risk factors identified in the “Risk Factors” section of thisAnnual 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, warrantiesor covenants should not be relied upon as accurately describing or reflectingthe 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.  As aREIT, we generally are not subject to corporate-level income taxes.  To maintain our REIT status, we are required,among other requirements, to distribute annually at least 90% of our “REITtaxable income,” as defined by the Internal Revenue Code of 1986, as amended(the “Code”), to our stockholders.  If wefail to qualify as a REIT in any taxable year, we would be subject to federalincome tax on our taxable income at regular corporate tax rates.  As of December 31, 2007, and the date ofthis filing, we believe we are in compliance with all applicable REITrequirements.

 

We acquire and operateinstitutional quality real estate.  Inparticular, we focus primarily on acquiring institutional quality officeproperties that we believe have premier business addresses, desirablelocations, personalized amenities and high quality construction with highlycreditworthy commercial tenants.  Todate, all of our investments have been institutional quality office properties,or development thereof, located in metropolitan cities and suburban markets inthe United States.  Our management andmembers of our board of directors have extensive experience in investing innumerous 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.  Further,we may invest in real estate related securities, including securities issued byother real estate companies, either for investment or in change of control transactionscompleted on a negotiated basis or otherwise. We also may invest in collateralized mortgage-backed securities,mortgage, bridge or mezzanine loans and Section 1031 tenant-in-common (“TIC”)interests, or in entities that make investments similar to the foregoing.  We completed our first property acquisitionin October 2003 and, as of December 31, 2007, we owned interests in75 office properties located in 23 states and the District of Columbia.

 

We are externally managedand advised by Behringer Advisors, LLC (“Behringer Advisors”), a Texas limitedliability company that was organized in June 2007.  Behringer Advisors is responsible formanaging our day-to-day affairs and for identifying and making acquisitions andinvestments on our behalf.  Prior to June 30,2007, we were advised by Behringer Advisors LP, a Texas limited partnership,which was merged into Behringer Advisors solely to change the type of entity.

 

3

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Substantially all of ourbusiness is conducted through Behringer Harvard Operating Partnership I LP, aTexas 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 wholly-owned subsidiaries, BHR BusinessTrust, a Maryland business trust, and BHR Partners, LLC, a Delaware limitedliability company, are limited partners of Behringer OP.

 

Our office is located at15601 Dallas Parkway, Suite 600, Addison, Texas 75001, and our toll-freetelephone number is (866) 655-1605.  Thename Behringer Harvard is the property of Behringer Harvard Holdings, LLC andis used by permission.

 

**Public Offerings**

 

On February 19,2003, we commenced a public offering (the “Initial Offering”) of up to80,000,000 shares of common stock offered at a price of $10.00 per sharepursuant to a Registration Statement on Form S-11 filed under theSecurities Act.  The Initial Offeringalso covered the registration of up to 8,000,000 shares offered pursuant to ourdistribution reinvestment plan (“DRIP”) and up to 3,520,000 shares issuable tobroker-dealers pursuant to warrants whereby participating broker-dealers wouldhave the right to purchase one share for every 25 shares they sold pursuant tothe Initial Offering.  We terminated theInitial Offering on February 19, 2005.

 

 On February 11, 2005, we commenced asecond public offering (the “Second Offering”) of up to 80,000,000 shares ofcommon stock offered at a price of $10.00 per share pursuant to a RegistrationStatement on Form S-3 filed under the Securities Act. The Second Offeringalso covered the registration of up to 16,000,000 shares offered pursuant toour DRIP.  We subsequently converted theSecond Offering to a Registration Statement on Form S-11 and reallocatedthe shares of common stock in the Second Offering to offer 90,000,000 shares ofcommon stock at a price of $10.00 per share and up to 5,473,684 shares pursuantto our DRIP.  In addition, we increased the aggregate amount of the SecondOffering by 2,945,017 shares in a related registration statement on Form S-11.  We terminated the Second Offering on October 20,2006 in all jurisdictions except the Commonwealth of Pennsylvania, and weterminated the Second Offering in the Commonwealth of Pennsylvania on February 9,2007.

 

 On October 20, 2006, we commenced a thirdpublic offering (the “Current Offering” and together with the Initial Offeringand Second Offering, the “Offerings”) of up to 200,000,000 shares of commonstock offered at a price of $10.00 per share pursuant to a Registration Statementon Form S-11 filed under the Securities Act. The Current Offering alsocovers the registration of up to 50,000,000 shares offered pursuant to ourDRIP.  The Current Offering willterminate on or before October 6, 2008 unless earlier terminated, fullysubscribed or extended.

 

As of December 31,2007, we had 205,562,785 shares of our common stock outstanding pursuant to theOfferings, including the effect of distribution reinvestments, redemptions,22,000 shares issued to Behringer Harvard Holdings, LLC (“Behringer HarvardHoldings”) and shares issued on October 1, 2005 pursuant to a 10% stockdividend, for aggregate gross proceeds of approximately $2.0 billion.  Net proceeds after selling commissions,dealer manager fees and organization and offering expenses totaledapproximately $1.8 billion.

** **

**2007 Highlights**

 

                During 2007, we completed the following keytransactions:

 

·                              we issued approximately 83.7 millionshares of our common stock (inclusive of distribution reinvestments andredemptions) resulting in net proceeds to us of approximately $748.6 million;and

 

·                              through asset acquisitions and businesscombinations we acquired interests in 39 office properties representingapproximately 12.9 million square feet for an aggregate purchase price ofapproximately $2.3 billion.

 

On December 12,2007, we completed the purchase of all of the outstanding shares of thesubsidiaries of IPC US Real Estate Investment Trust (“IPC”).   Theformer IPC subsidiaries owned a portfolio of interests in 34 office properties,comprising a total of approximately 9.6 million square feet of rentable space.

 

We acquired threeproperties located in Chicago, Illinois (the “Beacon Portfolio”) on November 1,2007.  The Beacon Portfolio representsapproximately 3.1 million square feet of rentable space.

 

We acquired 111Woodcrest, an office building comprised of approximately 53,000 rentable squarefeet located in Cherry Hill, New Jersey, on November 20, 2007 andCentreport Office Center, an office building comprised of approximately 133,000rentable square feet located in Ft. Worth, Texas, on June 14, 2007.

 

4

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**Investment Objectives**

 

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 anational securities exchange or, if we do not list our shares by 2017, to makean orderly disposition of our assets and distribute the cash to our investors,unless a majority of our directors, including a majority of our independentdirectors, extends this date.

 

**Acquisition and InvestmentPolicies**

 

We acquire and operateinstitutional quality real estate.  Inparticular, we focus primarily on acquiring institutional quality officeproperties that we believe have premier business addresses, desirablelocations, personalized amenities, high quality construction and highlycreditworthy commercial tenants.  Todate, all of our investments have been institutional quality office properties,or development thereof, located in metropolitan cities and suburban markets inthe United States.  Our management andmembers of our board of directors have extensive experience in investing innumerous 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 alsomay invest in real estate related securities, including securities issued byother real estate companies, either for investment or in change of controltransactions completed on a negotiated basis or otherwise.  We also may invest in collateralizedmortgage-backed securities, mortgage, bridge or mezzanine loans and Section 1031TIC interests, including those previously issued by programs sponsored byBehringer Harvard Holdings or its affiliates, or in entities that makeinvestments similar to the foregoing. Although our investments to date have been located in the United States,we also may invest in real estate assets located outside the UnitedStates.  Our investment strategy isintended to provide investors with a geographically diversified portfolio ofreal estate assets.

 

Wetypically make our real estate investments in fee title or a long-termleasehold estate through Behringer Harvard OP or indirectly through limitedliability companies or through investments in joint ventures, partnerships,co-tenancies or other co-ownership arrangements with the developers of theproperties, affiliates of Behringer Advisors or other persons.

 

As of December 31,2007, we owned interests in 75 properties located in 23 states and the Districtof Columbia.  As of December 31,2007, the properties in which we own an interest were approximately 92.5%leased on a weighted average basis.

 

# **BorrowingPolicies**

# ** **

Ourboard of directors has adopted a policy to generally limit our aggregateborrowings to approximately 55% of the aggregate value of our assets unlesssubstantial justification exists that borrowing a greater amount is in our bestinterests.  For these purposes, theaggregate value of our assets is equal to our total assets plus acquired belowmarket lease intangibles, each as reflected on our balance sheet at the time ofthe calculation without giving effect to any accumulated depreciation oramortization attributable to our real estate assets.  Our policy limitation, however, does notapply to individual real estate assets and will apply only when we haveinvested substantially all of our capital raised in our Offerings, at whichpoint our board of directors also may consider the unrealized appreciation ofour real estate assets, as determined by Behringer Advisors in its solediscretion, when evaluating compliance with our policy limitation.  We typically borrow, and expect to continueborrowing, more than 55% of the contract purchase price of any real estateasset we acquire to the extent our board of directors determines that borrowingthese amounts is reasonable.  In makingthis determination, our board considers relevant financial factors,particularly whether borrowing additional amounts are expected to be accretiveto returns related to the particular portfolio investment.  As of December 31, 2007, we haveborrowed approximately 62% of the aggregate value of our assets and, onaverage, approximately 72% of the contract purchase price of each acquired realestate asset.  We expect these percentageamounts to increase if we use any unencumbered real estate assets to secureadditional borrowings or borrow additional amounts on currently encumberedassets.  Our board of directors mustreview our aggregate borrowings at least quarterly.

 

**Distribution Policy**

 

In order to qualify as aREIT for federal income tax purposes, we must distribute at least 90% of ourREIT taxable income to our stockholders on an annual basis.  We currently intend, although we are notlegally obligated, to make regular monthly distributions to holders of sharesof our common stock at least at the level required to maintain our REIT statusunless our results of operations, our general financial condition, generaleconomic conditions or other factors inhibit us from doing so.  Distributions are authorized at thediscretion of our board of directors, which is directed, in substantial part,by its obligation to cause us to comply with the REIT requirements of the Code.

 

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Distributions are paid toinvestors who are stockholders as of the record dates selected by our board ofdirectors.  Our board of directorscurrently declares distributions on a quarterly basis, portions of which arepaid on a monthly basis.  Monthlydistributions are paid based on daily record and distribution declaration datesso our investors will be entitled to be paid distributions beginning on the daythat they purchase shares.  There can beno assurance that we will be able to achieve expected cash flows necessary to continue topay currently established distributions or maintain distributions at anyparticular level, or that distributions 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        | % |
| 1st  Qtr. 2008    |       | $                                  | 0.1570660  per share |                                                                          | 6.3        | % |
| 2nd  Qtr. 2008    |       | $                                  | 0.1570660  per share |                                                                          | 6.3        | % |

 

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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.

 

**Tax Status**

 

We elected to be taxed asa REIT 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 a REIT, we generally will not besubject to federal income tax at the corporate level to the extent wedistribute at least 90% of our REIT taxable income to our stockholders on anannual basis.  If we fail to qualify as aREIT 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.

 

                Weintend to make an election for IPC (US), Inc. to be taxed as a REIT forfederal income tax purposes for the tax year ending December 31, 2008; forthe year ended December 31, 2007, IPC (US), Inc. will be treated as ataxable REIT subsidiary for federal income tax purposes.  IPC (US), Inc. is our indirectwholly-owned subsidiary that we acquired December 12, 2007 as part of ouracquisition of the subsidiaries of IPC.

 

**Competition**

 

We are subject tosignificant competition in seeking real estate investments and tenants. We compete with many third parties engaged in real estate investmentactivities including 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 fromother real estate investment programs, including other Behringer Harvardprograms, for investments that may be suitable for us.  Many of ourcompetitors have substantially greater financial and other resources than wehave and may have substantially more operating experience than either us orBehringer Advisors.  They also may enjoy significant competitiveadvantages that result from, among other things, a lower cost of capital.

 

**Regulations**

 

Our investments aresubject to various federal, state, local and foreign laws, ordinances andregulations, including, among other things, zoning regulations, land usecontrols, environmental controls relating to air and water quality, noisepollution and indirect environmental impacts such as increased motor vehicleactivity.  We believe that we have allpermits and approvals necessary under current law to operate our investments.

 

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**Environmental**

 

As an owner of real estate, we are subject to variousenvironmental laws of federal, state and local governments. Compliance withexisting laws has not had a material adverse effect on our financial conditionor results of operations, and management does not believe it will have such animpact 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 directemployees.  The employees of BehringerAdvisors and other affiliates of Behringer Harvard Holdings perform a fullrange of real estate services for us, including acquisitions, propertymanagement, accounting, legal, asset management, wholesale brokerage andinvestor relations services.

 

We are dependent onaffiliates of Behringer Harvard Holdings for services that are essential to us,including the sale of shares of our common stock, asset acquisition decisions,property management and other general administrative 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 business consists of owning, managing,operating, leasing, acquiring, developing, investing in and disposing of realestate assets.  All of our consolidatedrevenues are from our consolidated real estate properties.  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.

 

**Available Information**

 

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.  We also have filed with the SEC aregistration statement in connection with our Current Offering.  Copies of our filings with the SEC may beobtained from the 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.  Weare not incorporating our website or any information from the website into thisForm 10-K.

 

**Item 1A.         RiskFactors.**

 

****Thefactors described below represent our principal risks.  Other factors mayexist that we do not consider to be significant based on information that iscurrently available or that we are not currently able to anticipate.  Ourstockholders or potential investors may be referred to as “you” or “your” inthis Item 1A, “Risk Factors” section.****

 

**Risks Related to Our Business in General**

 

***A limit on the number of shares a personmay own may discourage a takeover.***

 

Our charter, withcertain exceptions, authorizes our directors to take such actions as arenecessary and desirable to preserve our qualification as a REIT.  Unless exempted by our board of directors, noperson or group may own more than 9.8% of our outstanding common or preferredstock, in value or number of shares, whichever is more restrictive.  This restriction may have the effect ofdelaying, deferring or preventing a change in control of us, including anextraordinary transaction (such as a merger, tender offer or sale of all orsubstantially all of our assets) that might otherwise provide stockholders withthe opportunity to receive a control premium for their shares.

 

***Our charter permits our board of directors to issueadditional shares of stock, which may dilute your voting power, subordinateyour rights or discourage a third-party from acquiring us.***

 

Our charterpermits our board of directors to issue up to 400,000,000 shares of capitalstock.  Our board of directors, withoutany action by our stockholders, may: (1) increase or decrease theaggregate number of shares; (2) increase or decrease the number of sharesof any class or series we have authority to issue; or (3) classify orreclassify any unissued common stock or preferred stock and establish thepreferences, conversion or other rights, voting powers, restrictions,limitations as to distributions, qualifications, or terms or conditions ofredemption of any such stock.  Shareswill be issued in the discretion of our board of directors.  In addition, because the limited partnershipinterests of our operating partnership may be exchanged for shares of ourcommon stock, any merger, exchange or conversion between our operatingpartnership and another entity ultimately could result in the issuance of asubstantial number of shares of our common stock.  In the event that we sell additional sharesof common stock in the future, or issue additional shares in connection withany merger, exchange or conversion between our operating partnership andanother entity, you will experience dilution of your voting power.  Further, our board of directors couldauthorize the issuance of stock with terms and conditions that couldsubordinate the rights of the holders of our current common stock or have theeffect of delaying,

 

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deferring or preventing achange in control of us, including an extraordinary transaction (such as amerger, tender offer or sale of all or substantially all of our assets) thatmight provide a premium price for our stockholders.

 

***Maryland law prohibits certain businesscombinations, which may make it more difficult for us to be acquired.***

 

Under Marylandlaw, “business combinations” between a Maryland corporation and an interestedstockholder or an affiliate of an interested stockholder are prohibited forfive years after the most recent date on which the interested stockholderbecomes an interested stockholder.  These business combinations include amerger, consolidation, share exchange or, in circumstances specified in thestatute, an asset transfer or issuance or reclassification of equitysecurities.  An interested stockholder is defined as:

 

·                  any person who beneficially owns 10% or more of thethen outstanding voting stock of the corporation; or

 

·                  an affiliate or associate of the corporation who, atany time within the two-year period prior to the date in question, was thebeneficial owner of 10% or more of the voting power of the then outstandingvoting stock of the corporation.

 

A person is not aninterested stockholder under the statute if the board of directors approved, inadvance, the transaction by which the person otherwise would have become aninterested stockholder.  However, inapproving a transaction, the board of directors may condition its approval tocompliance, at or after the time of approval, with any terms and conditionsdetermined by the board.

 

After theexpiration of the five-year period described above, any business combinationbetween the Maryland corporation and an interested stockholder generally mustbe recommended by the board of directors of the corporation and approved by theaffirmative vote of at least:

 

·                  80% of the votes entitled to be cast by holders of thethen outstanding shares of voting stock of the corporation; and

 

·                  two-thirds of the votes entitled to be cast by holdersof voting stock of the corporation other than shares held by the interestedstockholder with whom or with whose affiliate the business combination is to beeffected or held by an affiliate or associate of the interested stockholder.

 

Thesesuper-majority vote requirements do not apply if the corporation’s commonstockholders receive a minimum price, as defined under Maryland law, for theirshares in the form of cash or other consideration in the same form aspreviously paid by the interested stockholder for its shares.  Maryland law also permits various exemptionsfrom these provisions, including business combinations that are exempted by theboard of directors before the time that the interested stockholder becomes aninterested stockholder.  The businesscombination statute may discourage others from trying to acquire control of usand increase the difficulty of consummating any offer.

 

***Maryland law also limits the ability of a third-party to buya large stake in us and exercise voting power in electing directors.***

 

Maryland law alsocontains a second statute that 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 stock owned by the acquirer, byofficers or by employees who are directors of the corporation, are notconsidered disinterested for these purposes. “Control shares” are shares of stock that, taken together with all othershares of stock the acquirer previously acquired, would entitle the acquirer toexercise voting power in electing directors within one of the following rangesof voting power:

 

·                  one-tenth ormore 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 donot include shares of stock the acquiring person is entitled to vote as aresult of having previously obtained stockholder approval.  A “control share acquisition” means theacquisition of control shares, subject to certain exceptions.  The Control Share Acquisition Act does notapply to (1) shares acquired in a merger, consolidation or 

 

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share exchange if thecorporation is a party to the transaction or (2) acquisitions approved orexempted by our charter or bylaws.  Ourbylaws exempt from the Control Share Acquisition Act, any and all acquisitionsby any person of shares of our common stock. This statute could have the effect of discouraging offers from thirdparties to acquire us and increases the difficulty of successfully completingthis type of offer by anyone other than affiliates or any of their affiliates.

 

***Your investment return may be reduced if we are required toregister as an investment company under the Investment Company Act.***

 

We arenot registered as an investment company under the Investment Company Act of 1940,as amended, based on exclusions that we believe are available to us.  Ifwe were obligated to register as an investment company, we would have to complywith a variety of substantive requirements under the Investment Company Actimposing, among other things:

 

·                  limitations on capital structure;

 

·                  restrictions on specified investments;

 

·                  prohibitions on transactions with affiliates; and

 

·                  compliance with reporting, record keeping, voting,proxy disclosure and other rules and regulations that would significantlychange our operations.

 

In order tomaintain our exemption from regulation under the Investment Company Act, wemust engage primarily in the business of buying real estate assets or realestate-related assets.  Further, to maintain compliance with the InvestmentCompany Act exemption, we may be unable to sell assets we would otherwise wantto sell and may need to sell assets we would otherwise wish to retain.  Inaddition, we may have to acquire additional income or loss generating assetsthat we might not otherwise have acquired or may have to forgo opportunities toacquire interests in companies that we would otherwise want to acquire andwould be important to our investment strategy.  To avoid regulation as aninvestment company, we must be engaged primarily in a business other than thatof owning, holding, trading or investing in securities.  We may invest inassets that are determined to be securities rather than interests in, or liensupon, real estate.  If a sufficient amount of our assets were determinedto be securities instead of interests in, or liens upon, real estate, we wouldbe required to register as an investment company.  If we were required toregister as an investment company but failed to do so, we would be prohibitedfrom engaging in our business, and criminal and civil actions could be broughtagainst 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.  Registration as an investmentcompany could have a material adverse effect on our business, results ofoperations, financial condition and ability to pay distributions to you.

 

***You are bound by the majority vote onmatters on which you are entitled to vote.***

 

You may vote oncertain matters at any annual or special meeting of stockholders, including theelection of directors.  However, you will be bound by the majority vote onmatters requiring approval of a majority of the stockholders even if you do notvote with the majority on any such matter.

 

***Stockholders have limited control overchanges in our policies and operations.***

 

Our board ofdirectors determines our major policies, including our policies regardingfinancing, growth, debt capitalization, REIT qualification anddistributions.  Our board of directors may amend or revise these and otherpolicies without a vote of the stockholders.  Under the Maryland GeneralCorporation Law and our charter, our stockholders have a right to vote only onthe following:

 

·                  the election or removal of directors;

 

·                  any amendment of our charter, except that our board ofdirectors may amend or supplement our charter without stockholder approval to:change our name; increase or decrease the aggregate number of our shares; increaseor decrease the number of our shares of any class or series that we have theauthority to issue, to classify or reclassify any unissued shares by setting orchanging the preferences, conversion or other rights, restrictions, limitationsas to distributions, qualifications or terms and conditions of redemption ofthe shares; effect reverse stock splits; and after the listing of our shares ofcommon stock on a national securities exchange, opting into any of theprovisions of Subtitle 8 of Title 3 of the Maryland General Corporation Law;

 

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·                  our liquidation and dissolution; and

 

·                  any merger, consolidation, sale or other dispositionof substantially all of our assets, except in certain circumstances.

 

All other matters aresubject to the discretion of our board of directors.

 

***Our board of directors may change our investment policieswithout stockholder approval, which could alter the nature of your investment.***

 

Our charterrequires that our independent directors review our investment policies at leastannually to determine that the policies we are following are in the bestinterest of the stockholders.  These policies may change over time. The methods of implementing our investment policies also may vary, as newinvestment techniques are developed.  Our investment policies, the methodsfor their implementation, and our other objectives, policies and procedures maybe altered by our board of directors without the approval of ourstockholders.  As a result, the nature of your investment could changewithout your consent.

 

***Your interest in Behringer Harvard REIT Iwill be diluted if we issue additional shares.***

 

Existingstockholders and potential investors in our offering do not have preemptiverights to any shares issued by us in the future.  Our charter currentlyhas authorized 400,000,000 shares of capital stock, of which 382,499,000 sharesare designated as common stock, 1,000 shares are designated as convertiblestock and 17,500,000 are designated as preferred stock.  Subject to anylimitations set forth under Maryland law, our board of directors may increasethe number of authorized shares of capital stock, increase or decrease thenumber of shares of any class or series of stock designated, or reclassify anyunissued shares without the necessity of obtaining stockholder approval. Shares may be issued in the discretion of our board of directors. Stockholders will likely experience dilution of their equity investment in usin the event that we (1) sell shares in our offering or sell additionalshares in the future, including those issued pursuant to the distributionreinvestment plan, (2) sell securities that are convertible into shares ofour common stock, (3) issue shares of our common stock in a private offeringof securities to institutional investors, (4) issue shares of common stockupon the conversion of the convertible stock, (5) issue shares of ourcommon stock upon the exercise of the options granted to our independentdirectors or employees of Behringer Advisors and HPT Management, our affiliatedproperty management company, or their affiliates, or the warrants issued in ourprior offering to participating broker-dealers or our independent directors, (6) issueshares to our advisor, its successors or assigns, in payment of an outstandingfee obligation as set forth under our advisory management agreement, or (7) issueshares of our common stock to sellers of properties acquired by us inconnection with an exchange of limited partnership interests of BehringerOP.  In addition, the partnership agreement for Behringer OP containsprovisions that would allow, under certain circumstances, other entities,including other Behringer Harvard sponsored programs, to merge into or causethe exchange or conversion of their interest for interests of BehringerOP.  Because the limited partnership interests of Behringer Harvard OP maybe exchanged for shares of our common stock, any merger, exchange or conversionbetween Behringer Harvard OP and another entity ultimately could result in theissuance of a substantial number of shares of our common stock, therebydiluting the percentage ownership interest of other stockholders.  Becauseof these and other reasons described in this “Risk Factors” section, you shouldnot expect to be able to own a significant percentage of our shares.

 

***Payment of fees to Behringer Advisors and its affiliateswill reduce cash available for investment and payment of distributions.***

 

Behringer Advisorsand its affiliates are paid fees for performing various services for us.  These fees were not negotiated at arm’slength and reduce the amount of cash available for investment in properties orto pay distributions to stockholders.

 

***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 management agreement,we may terminate the agreement upon 30 days’ notice in the event of, and onlyin the event of, a showing of willful misconduct, gross negligence ordeliberate malfeasance by the property manager in performing its duties. Our board of directors may find the performance of our property manager to beunsatisfactory.  However, unsatisfactory performance by the propertymanager may not constitute “willful misconduct,

 

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grossnegligence or deliberate malfeasance.”  As a result, we may be unable toterminate the property management agreement at the desired time, which may havean adverse effect on the management and profitability of our properties.

 

***Distributions may be paid from capital, and there can be noassurance that we will be able to achieve expected cash flows necessary tocontinue to pay currently established distributions or maintain distributionsat any particular level, or that distributions will increase over time.***

 

There are manyfactors that can affect the availability and timing of cash distributions paidto stockholders.  Distributions generallyare based upon such factors as the amount of cash available or anticipated tobe available from real estate securities, mortgage, bridge or mezzanine loansand other investments, current and projected cash requirements and taxconsiderations.  Because we may receiveincome from interest or rents at various times during our fiscal year, there isno assurance we will be able to continue paying distributions at historical levels.  The amount of cash available fordistributions is affected by many factors, such as our ability to buyproperties as offering proceeds become available, income from those propertiesand mortgages, yields on securities of other real estate programs that weinvest in, and our operating expense levels, as well as many othervariables.  Actual cash available fordistributions may vary substantially from estimates.  We currently make distributions to ourstockholders at an annualized rate of 6.3%, assuming the shares were purchasedfor $10.00 per share.  Approximately82.5%, 77% and 72% of our aggregate distributions made in 2007, 2006, and 2005,respectively, constituted a return of capital for tax purposes.  Distributions constitute a return of capitalwhen and to the extent the amount of the distributions exceed earnings andprofits as determined on a tax basis.  Infiscal year 2007, 2006 and 2005, we made cash distributions aggregatingapproximately $111.0 million, $60.1 million and $22.4 million, respectively, toour stockholders.  Of these amounts,approximately 17.5%, or $19.4 million, in fiscal 2007, approximately 23%, or$13.9 million, in fiscal 2006, and approximately 28%, or $6.3 million, infiscal 2005 was paid using cash generated from our operations.  The remaining amounts were paid from sourcesother than operating cash flow, such as offering proceeds, cash advanced to usby, or reimbursements for expenses or waiver of fees from, our advisor andproceeds from loans including those secured by our assets.

 

***Until we generate sufficient cash flow from operations tomake distributions to our stockholders, we may make distributions from othersources in anticipation of future operating cash flow, which may reduce theamount of capital we ultimately invest and may negatively impact the value ofyour investment.***

 

Until we generatesufficient cash flow from operations to make distributions to our stockholders,some or all of our distributions will be paid from other sources, such asoffering proceeds, cash advanced to us by, or reimbursements for expenses orwaiver of fees from, our advisor and proceeds from loans including thosesecured by our assets.  In addition, tothe extent we invest in development or redevelopment projects, or in propertiesthat have significant capital requirements, our ability to make distributionsmay be negatively impacted.  Accordingly,the amount of distributions paid at any time may not reflect current cash flowfrom operations.  To the extentdistributions are paid from offering proceeds, we will have less moneyavailable to invest in properties or other real estate-related investments,which may negatively impact our ability to achieve our investment objectives.

 

***Adverse economic conditions may negativelyaffect our returns and profitability, which could negatively impact our abilityto pay cash distributions to our stockholders.***

 

Our operating results may be affected by many factors,including a continued or exacerbated general economic slowdown experienced bythe nation as a whole or by the local economies where our properties or otherinvestments are located.  These factors include:

 

·                  poor economic conditions that result in defaults bytenants of our properties and borrowers under our investments in mortgage,bridge or mezzanine loans;

 

·                  job transfers and layoffs that cause tenant vacanciesto increase;

 

·                  the fact that increasing concessions or reduced rentalrates or capital improvements may be required to maintain occupancy levels; and

 

·                  increased insurance premiums that reduce fundsavailable for distribution or, to the extent the increases are passed throughto tenants, may lead to tenant defaults.  Also, increased insurancepremiums may make it difficult to increase rents to tenants on turnover, whichmay adversely affect our ability to increase our returns.

 

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The length and severityof any economic downturn cannot be predicted.  Our operations could benegatively affected to the extent that an economic downturn is prolonged orbecomes more severe.

 

***We and the other public programs sponsored by affiliates ofBehringer Advisors have experienced losses in the past, and we may experiencesimilar losses in the future.***

 

Historically, thepublic programs sponsored by affiliates of Behringer Advisors have experiencedlosses during the early periods of their operation.  Many of these losses can be attributed to theinitial start-up costs and operating expenses incurred prior to purchasingproperties or making other investments that generate revenue.  In addition, depreciation and amortizationexpense substantially reduce net income. We have experienced similar losses and we may continue to do so in thefuture.  We cannot assure you that wewill be profitable or that we will realize growth in the value of our realestate investments.

 

***We are uncertain of our sources for funding of future capitalneeds, which could adversely affect the value of our investments.***

 

Substantially allof the gross proceeds of our offerings have been, or will be, used to makeinvestments in real estate assets and to pay various fees and expenses relatedto the offering and potentially a portion of distributions.  We establish capital reserves on aproperty-by-property basis, as we deem appropriate.  In addition to any reserves we establish, alender may require escrow of reserves in excess of our established capitalreserves.  If these reserves are insufficient to meet our cash needs, wemay have to obtain financing from either affiliated or unaffiliated sources tofund our cash requirements.  We cannot assure you that additional fundingwill be available to us for potential capital needs in the future.

 

***Instabilityin the credit market and real estate market could have a material adverseeffect on our results of operations, financial condition and ability to paydistributions to you.***

 

If debt financingis not available on terms and conditions we find acceptable, we may not be ableto 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 terms and conditions that we find acceptable, welikely will have to reduce the number of properties we can purchase, and thereturn on the properties we do purchase likely will be lower.  In addition, we may find it difficult, costlyor impossible to refinance indebtedness which is maturing.  If interest rates are higher when theproperties are refinanced, we may not be able to finance the properties and ourincome could be reduced. In addition, if we pay fees to lock-in a favorableinterest rate, falling interest rates or other factors could require us toforfeit these fees.  All of these eventswould have a material adverse effect on our results of operations, financialcondition and ability to pay distributions.

 

In addition tovolatility in the credit markets, the real estate market is subject tofluctuation and can be impacted by factors such as general economic conditions,supply and demand, availability of financing and interest rates. To the extentwe purchase real estate in an unstable market, we are subject to the risk thatif the real estate market ceases to attract the same level of capitalinvestment in the future that it attracts at the time of our purchases, or thenumber of companies seeking to acquire properties decreases, the value of ourinvestments may not appreciate or may decrease significantly below the amount wepay for these investments.

 

***To hedge against exchange rate and interest ratefluctuations, we may use derivative financial instruments that may be costlyand ineffective and may reduce the overall returns on your investment.***

 

We may usederivative financial instruments to hedge exposures to changes in exchangerates and interest rates on loans secured by our assets and investments incollateralized mortgage-backed securities.  Derivative instruments mayinclude interest rate swap contracts, interest rate cap or floor contracts,futures or forward contracts, options or repurchaseagreements.  Our actual hedging decisions will bedetermined in light of the facts and circumstances existing at the time of thehedge and may differ from time to time.

 

To the extent thatwe use derivative financial instruments to hedge against exchange rate andinterest rate fluctuations, we will be exposed to credit risk, basis risk andlegal enforceability risks.  In thiscontext, credit risk is the failure of the counterparty to perform under theterms of the derivative contract.  If thefair value of a derivative contract is positive, the counterparty owes us,which creates credit risk for us.  Basisrisk occurs when the index upon which the contract is based is more or less variablethan the index upon which the hedged asset or liability is based, therebymaking the hedge less effective. Finally, legal enforceability risks encompass general contractual risksincluding the risk that the 

 

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counterparty will breachthe terms of, or fail to perform its obligations under, the derivativecontract.  Further, the REIT provisionsof the Internal Revenue Code may limit our ability to hedge the risks inherentto our operations.  Failure to managethese risks effectively, or an inability to hedge due to the various REITprovisions in the Code may have a material adverse effect on our business,results of operations, financial condition and ability to pay distributions toour stockholders.

 

***Complying with REIT requirements may limitour ability to hedge risk effectively.***

 

The REITprovisions of the Code may limit our ability to hedge the risks inherent to ouroperations.  Under current law, income that we generate from derivativesor other transactions intended to hedge our interest rate risk may constituteincome that does not qualify for purposes of the 75% income requirementapplicable to REITs, and also may be treated as nonqualifying income forpurposes of the 95% income test also applicable to REITs unless specifiedrequirements are met.  In addition, any income from foreign currency orother hedging transactions may constitute nonqualifying income for purposes ofboth the 75% and 95% income tests.  As a result of these rules, we may haveto limit the use of hedging techniques that might otherwise be advantageous,which could result in greater risks associated with interest rate or otherchanges than we would otherwise incur.

 

***The State of Texas recently enacted legislation that createsa new “margin tax” and decreases state property taxes.  This tax reformcould result in decreased reimbursable expenses from tenants, and increasedtaxes on our operations, which could reduce the cash available for distributionto you.***

 

In May 2006, the State of Texas enactedlegislation which replaced the franchise tax with a new “margin tax,” which iseffective for calendar years beginning after December 31, 2006.  Thenew legislation expands the number of entities covered by the current Texasfranchise tax, and specifically includes limited partnerships as subject to thenew margin tax.  The tax generally will be 1% of an entity’s taxablemargin, which is the part of an entity’s total revenue less applicabledeductions apportioned to Texas.  In May 2006, the State of Texasalso enacted legislation that reduces the state property tax.  As a resultof this new property tax legislation, our reimbursable expenses from tenants atthe property level may decrease, due to decreased property taxes.  We holdseveral assets in Texas.  As a consequence, the new margin tax, combinedwith the decrease of reimbursable expenses due to the decreased property tax,could reduce the amount of cash we have available for distribution to you.

 

**General Risks Related to Investments in Real Estate**

 

***Our operating results are affected by economic andregulatory changes that may have an adverse impact on the real estate market ingeneral.  We cannot assure you that we will be profitable or that we willrealize growth in the value of our real estate assets.***

 

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

 

·                  changes in general economic or local conditions;

 

·                  changes in supply of or demand for similar orcompeting properties in an area;

 

·                  ability to collect rent from tenants;

 

·                  changes in interest rates and availability ofpermanent mortgage funds, which may render the sale of a property difficult orunattractive;

 

·                  the illiquidity of real estate investments generally;

 

·                  changes in tax, real estate, environmental and zoninglaws; and

 

·                  periods of high interest rates and tight money supply.

 

For these and otherreasons, we cannot assure you that we will be profitable or that we willrealize growth in the value of our investments.

 

***Properties that have significant vacancies could bedifficult to sell, which could diminish the return on your real estateproperties.***

 

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A property may suffer vacancies either by the continued default oftenants under their leases or the expiration of tenant leases.  Ifvacancies continue for a long period of time, we may suffer reducedrevenues.  In addition, the resale value of the property could bediminished because the market value of a particular property will dependprincipally upon the cash flow generated from leasing activity.

 

***The inability of a significanttenant or number of tenants to pay rent when due may negatively impact therevenues generated by our real property investments.***

 

The revenues generated by our real property investments, particularlyproperties occupied by a single tenant, will depend on the financial stabilityof the particular tenant.  A significanttenant or number of tenants may not pay rent when due.  Further, if a tenant or tenants default, wemay experience delays in enforcing our rights as landlord and may incursubstantial costs in protecting our investment and re-letting ourproperty.  If significant leases areterminated, we cannot assure you that we will be able to lease the property forthe rent previously received or sell the property without incurring aloss.  Any one, or a combination, ofthese items may have a material adverse effect on our business, results ofoperations, financial condition and ability to pay distributions to ourstockholders.

 

***We may be unable to secure funds forfuture tenant improvements, which could adversely impact our ability to paycash distributions to our stockholders.***

 

We may be required to expend substantial funds to improve or refurbishleaseable space either to maintain existing tenants or to attract newtenants.  Although we intend to establishreserves 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, and could have a material adverse effect onour results of operations, financial condition and ability to pay distributionsto our stockholders.

 

***We may be unable to sell a propertyif or when we decide to do so, which could adversely impact our ability to paycash distributions to our stockholders.***

 

We intend to hold our real properties and other investments untilBehringer Advisors determines that a sale or other disposition is consistentwith our investment objectives or until it appears that these objectives willnot be met.  Otherwise, Behringer Advisors, subject to approval of ourboard, may exercise its discretion as to whether and when to sell a property,and we will have no obligation to sell properties at any particular time,except upon our liquidation if we do not cause the shares to be listed fortrading on a national securities exchange by 2017, unless a majority of theboard of directors and a majority of the independent directors approveotherwise.  We may not be able to sell a property or properties even ifBehringer Advisors believes doing so would be in our best interest.  The ability to sell real estate is affectedby many factors, such as general economic conditions, availability offinancing, interest rates and other factors, including supply and demandconditions.  We cannot predict whether wewill be able to sell any asset on terms acceptable to us, if at all.  Failure to sell properties when we need orwant to do so, on terms acceptable to us, could have a material adverse effecton our business, results of operations, financial condition and ability to paydistributions to our stockholders.

 

***Our co-venture partners,co-tenants or other partners in co-ownership arrangements could take actionscontrary to our interests.***

 

We may enter into joint ventures, TICinvestments or other co-ownership arrangements with other Behringer Harvardprograms or third parties.  We may alsopurchase and develop properties in joint ventures or in partnerships,co-tenancies or other co-ownership arrangements with the sellers of theproperties, affiliates of the sellers, developers or other persons.  These investments may involve risks nototherwise present with other forms of real estate investment, including, forexample:

 

·                  the possibility that our co-venturer,co-tenant or partner in an investment might become bankrupt;

 

·                  the possibility that a co-venturer,co-tenant or partner in an investment might breach a loan agreement or otheragreement or otherwise, by action or inaction, act in a way detrimental to usor the investment;

 

·                  that such co-venturer, co-tenant orpartner may at any time have economic or business interests or goals that are,or that become inconsistent with, our business interests or goals;

 

·                  the possibility that we may incurliabilities as the result of the action taken by our partner or co-investor; or

 

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·                  that such co-venturer, co-tenant orpartner may be in a position to take action contrary to our instructions orrequests or contrary to our policies or objectives, including our policy withrespect to qualifying and maintaining our qualification as a REIT.

 

***We may suffer uninsured losses relating toreal property or pay excessively expensive premiums for insurance coverage.***

*** ***

AlthoughBehringer Advisors attempts to ensure that all of our properties are adequatelyinsured to cover casualty losses, there are certain types of losses, generallycatastrophic in nature, such as losses due to wars, acts of terrorism,earthquakes, floods, hurricanes, pollution or environmental matters, which areuninsurable or not economically insurable, or may be insured subject tolimitations, such as large deductibles or co-payments.  Insurance risks associated with potentialterrorism acts could sharply increase the premiums we pay for coverage againstproperty and casualty claims.  Mortgagelenders generally insist that specific coverage against terrorism be purchasedby commercial property owners as a condition for providing mortgage, bridge ormezzanine loans.  We cannot be certainthat this coverage will continue to be available, or available at reasonablecost, if at all, which could inhibit our ability to finance or refinance ourproperties.  We may be required to provideother financial support, either through financial assurances or self-insurance,to cover potential losses.  We cannotassure you that 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 no source of funding to repair or reconstructany uninsured damaged property, and we cannot assure you that those reserveswill be sufficient.

 

***Development and constructionprojects are subject to delays that may materially increase the cost tocomplete the project.***

 

We may invest some or all of the proceeds available for investment inthe acquisition and development of properties upon which we will develop andconstruct improvements.  We may, from time to time, develop and constructnew properties or redevelop existing properties.  In doing so, we will be subject to the risksand uncertainties associated with construction and development including theenvironmental concerns of governmental entities or community groups and ourbuilder’s ability to control construction costs or to build in conformity withplans, specifications and timetables. The builder’s failure to perform may necessitate legal action by us torescind the purchase or the construction contract or to compelperformance.  Performance also may beaffected or delayed by conditions beyond the builder’s control.  Delays in completion of construction alsocould give tenants the right to terminate preconstruction leases for space at anewly developed project.  We may incuradditional risks when we make periodic progress payments or other advances tosuch 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 normal lease-uprisks relating to newly constructed or re-developed projects.  Furthermore, we must rely upon projections ofrental income and expenses and estimates of the fair market value of propertyupon completion of construction when agreeing upon a price to be paid for theproperty 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 thoseassociated with re-zoning.

 

***Our earnest moneydeposit may not be refunded.***

 

We may enter intoone or more contracts, either directly or indirectly through joint ventures,TIC investments or other co-ownership arrangements, to acquire real propertyfrom Behringer Development Company LP, an affiliate of Behringer Advisors.  We anticipate that we will be obligated topay a substantial earnest money deposit at the time of contracting to acquireany property.  In the case of propertiesto be developed by Behringer Development or its affiliates, we anticipate thatwe will be required to close the purchase of the property upon completion ofthe development of the property by Behringer Development or its affiliates.  At the time of contracting and the payment ofthe earnest money deposit by us, Behringer Development or its affiliatestypically will not have acquired title to any real property.  Typically, Behringer Development or itsaffiliates will only have a contract to acquire land, a development agreementto develop a building on the land and an agreement with one or more tenants tolease all or part of the property upon its completion.  There is no assurance that BehringerDevelopment or its affiliates will refund our earnest money which will not besecured by any assets.  Further,Behringer Development does not have substantial assets or operations.

 

***We compete withthird 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

 

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insurance companyinvestment accounts, other REITs, real estate limited partnerships and otherentities engaged in real estate investment activities, many of which havegreater resources than we do.  Largerreal estate programs may enjoy significant competitive advantages that resultfrom, among other things, a lower cost of capital and enhanced operatingefficiencies.  In addition, the number ofentities and the amount of funds competing for suitable investment propertiesmay increase.  Any increase would resultin increased demand and prices for these assets.  If we pay higher prices for properties andother investments, our returns on investment will be less which may have anadverse effect on our ability to pay distributions to our stockholders.

 

***A concentration of our investmentsin any one property class may leave our profitability vulnerable to a downturnin that sector.***

 

At any one time, a significant portion of our investments could be inone property class, such as institutional quality office properties.  As aresult, we will be subject to risks inherent in investing in a single type ofproperty.  If our investments are substantially in one property class,then the potential effects on our revenues, and as a result, on cash availablefor distribution to our stockholders, resulting from a downturn in thebusinesses conducted in those types of properties could be more pronounced thanif we had more fully diversified our investments.

 

***Acquiring or attempting to acquiremultiple properties in a single transaction may adversely affect ouroperations.***

 

From time to time, we have acquired multiple properties in a singletransaction.  Portfolio acquisitions are more complex and expensive thansingle property acquisitions, and the risk that a multiple-property acquisitiondoes not close may be greater than in a single-property acquisition. Portfolio acquisitions also may result in us owning investments ingeographically dispersed markets, placing additional demands on our ability tomanage the properties in the portfolio.  In addition, a seller may requirethat a group of properties be purchased as a package even though we may notwant to purchase one or more properties in the portfolio.  In thesesituations, if we are unable to identify another person or entity to acquirethe unwanted properties, we may be required to operate or attempt to dispose ofthese properties.  Acquiring multiple properties in a single transactionlikely requires us accumulate a large amount of cash.  The returns that we earn on this excess cashare typically less than the ultimate returns generated by the real property andtherefore, accumulating such cash could reduce the funds available to paydistributions to our stockholders.

 

***Our operating results will be negativelyaffected if our investments, including investments in TIC interests sponsoredby our sponsor, do not meet projected distribution levels.***

*** ***

Affiliatesof Behringer Advisors have formed and organized a number of TIC real estateprojects.  Some of these projects havenot met the distribution levels or the leasing and operational thresholdsprojected by Behringer Harvard Holdings and its affiliates.  Specifically, several TIC investment programshave not benefited from expected leasing improvements.  Behringer Harvard Holdings has providedsupport for some of these programs in the form of master leases and otherpayments.  In addition, the Beau TerreOffice Park TIC program, a program not sponsored by Behringer Advisors or us,  is currently underperforming relative toprojections that were based on seller representations that Behringer HarvardHoldings believes to be false.  Withrespect to this program, Behringer Harvard Holdings has completed a settlementwith the investors to support their returns and is pursuing a claim against theseller on behalf of the investors and itself. If projections related to our investments, including any TIC interestsin which we invest, are inaccurate, we may pay too much for an investment andour return on our investment could suffer.

 

***If we set aside insufficient capital reserves, wemay be required to defer necessary property improvements, which could adverselyaffect our operating results.***

*** ***

Ifwe do not have sufficient reserves or generate sufficient cash from operationsto fund capital improvements throughout the life of the investment in aproperty, we may be required to defer necessary improvements to the propertywhich may cause the property to suffer from a greater risk of obsolescence or adecline in value, or a greater risk of decreased cash flow as a result of fewerpotential tenants being attracted to the property.  If this happens, we may not be able tomaintain projected rental rates for effected properties, and our results ofoperations and ability to pay distributions may be negatively impacted.

 

***The cost of complying with environmental and othergovernmental laws and regulations may adversely affect our income and the cashavailable for any distributions.***

*** ***

Allreal property and the operations conducted on real property are subject tofederal, state and local laws and regulations (including those of foreignjurisdictions) relating to environmental protection and human health andsafety.  These laws and regulationsgenerally govern wastewater discharges, air emissions, the operation andremoval of underground and above-ground storage tanks, the use, storage,treatment, transportation and disposal of solid and hazardous

 

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materials,and the remediation of contamination associated with disposals.  Some of these laws and regulations may imposejoint and several liability on tenants, owners or operators for the costs ofinvestigation or remediation of contaminated properties, regardless of fault orthe legality of the original disposal. In addition, the presence of these substances, or the failure toproperly remediate these substances, may adversely affect our ability to sellor rent such property or to use the property as collateral for futureborrowing.

 

Compliancewith new or more stringent laws or regulations or stricter interpretation ofexisting laws may require material expenditures by us.  We cannot assure you that future laws,ordinances or regulations will not impose any material environmental liability,or that the current environmental condition of our properties will not beaffected by the operations of the tenants, by the existing condition of theland, by operations in the vicinity of the properties, such as the presence ofunderground storage tanks, or by the activities of unrelated third parties.  In addition, there are various local, stateand federal fire, health, life-safety and similar regulations (including thoseof foreign jurisdictions) that we may be required to comply with, and that maysubject us to liability in the form of fines or damages for noncompliance.  Any foreign investments we make will besubject to the laws in the relevant jurisdiction.  These laws may impose additional restrictionsor impose additional compliance requirements.

 

***Discovery of previously undetected environmentallyhazardous conditions may adversely affect our operating results.***

*** ***

Undervarious federal, state and local environmental laws, ordinances and regulations(including those of foreign jurisdictions), a current or previous owner oroperator of real property may be liable for the cost of removal or remediationof hazardous or toxic substances on, under or in such property.  The costs of removing or remediating thesesubstances could be substantial.  Theselaws often impose liability whether or not the owner or operator knew of, orwas responsible for, the presence of the hazardous or toxic substances.  Environmental laws also may imposerestrictions on the manner in which property may be used or businesses may beoperated, and these restrictions may require substantial expenditures.  Environmental laws provide for sanctions inthe event of noncompliance and may be enforced by governmental agencies or, incertain circumstances, by private parties. Certain environmental laws and common law principles could be used toimpose liability for release of and exposure to hazardous substances, includingasbestos containing materials into the air, and third parties may seek recoveryfrom owners or operators of real properties for personal injury or propertydamage associated with exposure to released hazardous substances.  The cost of defending against claims ofliability, of compliance with environmental regulatory requirements, ofremediating any contaminated property, or of paying personal injury claimscould materially adversely affect our business, assets or results of operationsand, consequently, amounts available for distribution to you.

 

***Our costs associated with complying with theAmericans with Disabilities Act may affect cash available for distributions.***

*** ***

Ourinvestments in real properties are generally expected to be subject to theAmericans with Disabilities Act of 1990, as amended, or similar laws of foreignjurisdiction.  Under this Act, all placesof public accommodation are required to comply with federal requirementsrelated to access and use by disabled persons. The Act has separate compliance requirements for “public accommodations”and “commercial facilities” that generally require that buildings and servicesbe made accessible and available to people with disabilities.  The Act’s requirements could require removalof access barriers and could result in the imposition of injunctive relief,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 cannot, monies used to comply with theAct or other relevant laws and regulations could reduce the amount of moniesavailable to pay distributions.

 

***If we sell properties byproviding financing to purchasers, we will bear the risk of default by thepurchaser.***

*** ***

We may, from time to time, sell a property or otherasset by providing financing to the purchaser. There are no limits or restrictions on our ability to accept purchasemoney obligations secured by a mortgage as payment for the purchase price.  The terms of payment to us will be affectedby custom in the area where the property being sold is located andthen-prevailing economic conditions.  Ifwe receive promissory notes or other property in lieu of cash from propertysales, the distribution of the proceeds of sales to our stockholders, orreinvestment in other properties, will be delayed until the promissory notes orother property are actually 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.  Defaultsby any purchaser under any financing arrangement with us could have a materialadverse effect on our business, results of operations, financial condition andability to pay distributions to our stockholders.

 

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**Risks Associated with DebtFinancing**

 

***We incur mortgageindebtedness 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.

 

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 to our charter limitation, our board of directors hasadopted a policy to generally limit our aggregate borrowings to approximately55% of the aggregate value of our assets unless substantial justificationexists that borrowing a greater amount is in our best interests.  Our policy limitation, however, does notapply to individual real estate assets and will apply only when we haveinvested most of our capital.  As aresult, we typically borrow, and expect to continue borrowing, more than 55% ofthe contract purchase price of each real estate asset we acquire to the extentour board of directors determines that borrowing these amounts is reasonable.

 

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.  Inaddition, incurring mortgage debt increases the risk of loss since defaults onindebtedness secured by a property may result in foreclosure actions initiatedby lenders and our loss of the property securing the loan that is indefault.  For tax purposes, a foreclosureis treated as a sale of the property for a purchase price equal to theoutstanding balance of the debt secured by the mortgage.  If the outstanding balance of the debtsecured by the mortgage exceeds our tax basis in the property, we wouldrecognize taxable income on foreclosure, but would not receive any cash proceeds.  We also may provide full or partialguarantees to lenders of mortgage debt to the entities that own ourproperties.  When we give a guaranty onbehalf of an entity that owns one of our properties, we will be responsible tothe lender for satisfaction of the debt if it is not paid by the entity.  If any mortgages containcross-collateralization or cross-default provisions, there is a risk that morethan one real property may be affected by a default.  If any of our properties are foreclosed upondue to a default, our ability to make distributions to our stockholders will beadversely affected.

 

***If mortgage debt is unavailable atreasonable rates, we may not be able to refinance our properties, which couldreduce the number of properties we can acquire and the amount of cashdistributions we can make.***

 

When we place mortgage debt on properties, we run the risk of beingunable to refinance the properties when the loans come due, or of being unableto refinance on favorable terms.  If interest rates are higher when theproperties are refinanced, we may not be able to finance the properties and ourincome could be reduced.  If this occurs, it would reduce cash availablefor distribution to our stockholders, and it may prevent us from raisingcapital by issuing more stock or prevent us from borrowing more money.

 

***Lenders may require us to enter intorestrictive covenants relating to our operations, which could limit our abilityto make distributions to our stockholders.***

 

In connection with obtaining financing, a lender could imposerestrictions on us that affect our ability to incur additional debt and ourdistribution and operating policies.  In general, our loan agreementsrestrict our ability to encumber or otherwise transfer our interest in therespective property without the prior consent of the lender.  Loandocuments we enter into may contain other customary negative covenants that maylimit our ability to further mortgage the property, discontinue insurancecoverage, replace Behringer Advisors as our advisor or impose other limitations. Any such restriction or limitation may limit our ability to pay distributionsto our stockholders.

 

***Interest-only indebtedness mayincrease our risk of default and ultimately may reduce our funds available fordistribution to our stockholders.***

 

We may finance our property acquisitions using interest-only mortgageindebtedness.  During the interest only period, the amount of eachscheduled payment will be less than that of a traditional amortizing mortgageloan. The 

 

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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 requiredprincipal or balloon payments will increase the amount of our scheduledpayments and may increase our risk of default under the related mortgageloan.  If the mortgage loan has an adjustable interest rate, the amount ofour scheduled payments also may increase at a time of rising interestrates.  Increased payments and substantial principal or balloon maturitypayments will reduce the funds available for distribution to our stockholdersbecause cash otherwise available for distribution will be required to payprincipal and interest associated 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 thatbears interest at a variable rate. Variable rate loans will expose us to increases in costs in a risinginterest rate environment.  In addition, ifrising interest rates cause us to need additional capital to repayindebtedness, we may be forced to sell one or more of our investments inproperties at times which may not permit us to realize the return on theinvestments we would have otherwise realized. Increases in interest rates could have a material adverse effect on ourbusiness, results of operations, financial condition and ability to paydistributions to our stockholders.

 

***Financing arrangements involvingballoon payment obligations may adversely affect our ability to makedistributions.***

 

Our fixed-term financing arrangements generally require us to make “balloon”payments at maturity.  Our ability to make a balloon payment at maturityis uncertain and may depend upon our ability to obtain additional financing orour ability to sell the property.  At the time the balloon payment is due,we may or may not be able to refinance the balloon payment on terms asfavorable as the original loan or sell the property at a price sufficient tomake the balloon payment.  The effect of a refinancing or sale couldaffect the rate of return to stockholders and the projected time of dispositionof our assets.  In addition, payments of principal and interest made toservice our debts may leave us with insufficient cash to pay the distributionsthat we are required to pay to maintain our qualification as a REIT.  Anyof these results would have a significant, negative impact on your investment.

 

***We have broad authority to incurdebt, and high debt levels could hinder our ability to make distributions andcould decrease the value of your investment.***

 

Our board of directors has adopted a policy that wewill generally limit our aggregate borrowings to approximately 55% of theaggregate value of our assets, but we may exceed this limit under somecircumstances.  Such debt may be at a level that is higher than other realestate investment trusts with similar investment objectives or criteria. High debt levels would cause us to incur higher interest charges, would resultin higher debt service payments, and could be accompanied by restrictivecovenants.  These factors could limit the amount of cash we have availableto distribute and could result in a decline in the value of your investment.

 

**Risks Related to an Investment inBehringer Harvard REIT I**

 

***We may suffer from delays inlocating suitable investments, which could adversely affect the return on yourinvestment.***

 

Even if we are able to access sufficient capital, we may suffer fromdelays in deploying the capital into properties or other real estateassets.  Delays may occur, for example,as a result of our relying on our advisor, Behringer Advisors, and itsaffiliates to identify these opportunities given that the employees of theseentities are simultaneously seeking to locate suitable investments for otherprograms sponsored by our sponsor. Delays in selecting, acquiring and developing real estate assets couldadversely affect investor returns.  Inaddition, properties acquired prior to the start of construction or during theearly stages of construction typically take several months to completeconstruction and rent available space. Failure to deploy capital not otherwise invested in income-producingreal estate assets in a timely manner could have a material adverse effect onour ability to pay distributions. 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.

 

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

 

To effectively compete for the acquisition ofproperties and other investments, our advisor and board of directors may be required to make decisions or postsubstantial non-refundable deposits prior to completing our analysis and duediligence on property acquisitions.  Inthese cases, the information available to our advisor and board ofdirectors at the

 

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timeof making any 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 to detailed informationregarding any particular investment property, such as physical characteristics,environmental matters, zoning regulations or other local conditions affectingthe investment property.  Therefore,there is no assurance that our advisor and board of directors will have knowledge ofall circumstances that may adversely affect an investment.  In addition, our advisor and board ofdirectors expect to rely upon independent consultants in connection withevaluating proposed investment properties, and no assurance can be given as tothe accuracy or completeness of the information provided by such independentconsultants.

 

***If we lose or are unable to obtainkey personnel, our ability to implement our investment strategies could bedelayed or hindered.***

 

Our ability to achieve our investment objectives depends, to asignificant degree, upon the continued contributions of certain executiveofficers and other key personnel of Behringer Advisors and its affiliates,including Robert M. Behringer and Robert S. Aisner, each of whom would bedifficult to replace. We do not have employment agreements with our executiveofficers.  Although several of ourexecutive officers, including Mr. Behringer and Mr. Aisner, haveentered into employment agreements with affiliates of Behringer Advisors,including Harvard Property Trust, LLC, these agreements are terminable at will,and we cannot guarantee that they will remain affiliated with our advisor.  If any of our executive officers and otherkey personnel of Behringer Advisors and its affiliates were to cease theiraffiliation with us, Behringer Advisors or its affiliates, our operatingresults could suffer. Further, although Behringer Harvard Holdings has keyperson insurance on the lives of Messrs. Behringer, Mattox and Reihsen,and is in the process of obtaining key person insurance on the lives of Messrs. Aisner,Bresky and Schwaber, we do not currently intend to separately maintain keyperson life insurance on these individuals or any other person. We believe thatour future success depends, in large part, on the ability of Behringer Advisorsand its affiliates 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 its affiliates will besuccessful in attracting and retaining skilled personnel. Further, we haveestablished, and intend in the future to establish, strategic relationshipswith firms that have special expertise in certain services or as to assets bothnationally and in certain geographic regions. Maintaining these relationshipswill be important for us to effectively compete for assets. We cannot assureyou that we will be successful in attracting and retaining these strategicrelationships. If we lose or are unable to obtain the services of our executiveofficers and other key personnel of Behringer Advisors and its affiliates, ordo not establish or maintain the necessary strategic relationships, our abilityto implement our investment strategy could be delayed or hindered.

 

***If we internalize our management functions, yourvoting power in us could be diluted, and we could incur other significant costsassociated with being self-managed.***

 

At some point in the future, we may consider acquiring our advisor andproperty managers in a transaction or series of transactions known as an “internalization.”  The method by which we could internalizethese functions could take many forms such as a merger with Behringer Advisors,in which we would acquire Behringer Advisors, or an asset acquisition.  Further, the amount and form of anyconsideration that we would pay in this type of transaction could take manyforms.  Issuing shares of our commonstock or entering into promissory notes could reduce our net income, funds fromoperations and ability to make distributions to you.  In addition, issuing shares of our commonstock could dilute your voting power as a stockholder.  Further, as part of internalizing ourmanagement functions, we would likely begin paying compensation and benefits toour officers and other employees and consultants in addition to the potentialliabilities commonly faced by employers from items such as workers disabilityand compensation claims, potential labor disputes and other employee-relatedliabilities and grievances.  In addition,we may issue equity awards to officers, employees and consultants, which wouldhave the effect of reducing your voting percentage and possibly decrease ournet income and funds from operations. Finally, internalizing our management functions may negatively impactour net income and funds from operations because: (1) actual costs exceedbudgeted costs and we fail to realize the projected synergies from thetransaction; (2) we are unable to successfully integrate the acquiredentities and people; (3) we fail to identify the appropriate mix ofpersonnel and capital needs to operate as a stand-alone entity.  All of these factors could have a materialadverse effect on our results of operations, financial condition and ability topay distributions.

 

A proposed internalization transaction also may expose us to litigationrisks.  We and our directors may berequired to defend against claims related to the consideration to be paid to theadvisor as part of the transaction or claims related to any disclosure requiredby applicable federal and state securities laws.   Any amounts we are required to expenddefending claims brought against us will reduce the amount of funds availablefor us to invest in properties or other investments and may reduce the amountof funds available for distribution to our stockholders.

 

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***Our rights, and the rights of ourstockholders, to recover claims against our officers, directors and advisor arelimited.***

 

Our charter, and agreements entered into with our officers anddirectors, states that we may indemnify our directors, our officers, ouremployees, our agents, our advisor and its affiliates for losses or liabilitythey may suffer so long as the person seeking indemnity has determined that thecourse of conduct that caused the loss or liability was in our best interests,they were acting on our behalf or performing services for us, the liability wasnot the result of negligence or misconduct by our non-independent directors,our advisor and its affiliates or gross negligence or willful misconduct by ourindependent directors, and the indemnification is recoverable only out ofour net assets or the proceeds of insurance and not from the stockholders.  As a result, we and our stockholders may havemore limited rights against our directors, officers, employees and agents, andBehringer Advisors and its affiliates, even if their conduct causes a loss tous.  In addition, we may be obligated tofund the defense costs incurred by our directors, officers, employees andagents or Behringer Advisors in some cases.

 

***Your investmentmay be subject to additional risks if we make international investments.***

 

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.  These investments may be affected by factors peculiar tothe laws of the jurisdiction in which the borrower or the property islocated.  These laws may expose us to risks that are different from and inaddition to those commonly found in the United States.  Foreigninvestments could be subject to the following additional risks:

 

·                  governmental laws, rules and policiesincluding laws relating to the foreign ownership of real property or mortgagesand laws relating to the ability of foreign persons or corporations to removeprofits earned from activities within the country to the person’s orcorporation’s country of origin;

 

·                   variationsin currency exchange rates;

 

·                  adverse market conditions caused by inflationor other changes in national or local economic conditions;

 

·                  changes in relative interest rates;

 

·                  changes in the availability, cost and termsof mortgage funds resulting from varying national economic policies;

 

·                  changes in real estate and other tax rates, thetax treatment of transaction structures and other changes in operating expensesin a particular country where we have an investment;

 

·                  lack of uniform accounting standards(including availability of information with U.S. generally accepted accountingprinciples);

 

·                  changes in land use and zoning laws;

 

·                  more stringent environmental laws or changesin these laws;

 

·                  changes in social stability or otherpolitical, economic or diplomatic developments in or affecting a country wherewe have an investment;

 

·                  the fact that our sponsor and its affiliateshave only limited experience investing in real property or other investmentsoutside of the United States; and

 

·                  legal and logistical barriers to enforcingour contractual rights.

 

Anyof these risks could have an adverse effect on our business, results ofoperations and ability to make distributions to our stockholders.

 

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***We do not havesubstantial experience with international investments.***

 

Neither we nor our sponsor, Behringer Harvard Holdings, or any of itsaffiliates has any substantial experience investing in real property or otherinvestments outside the United States.  If we invest in real estate assetsoutside of the United States, we intend to invest primarily in institutionalquality office properties, but we are not limited as to the specific geographicregions where we may conduct our operations.  We may not have theexpertise necessary to maximize the return on our international investments.

 

**Risks Related to Conflicts of Interest**

 

We are subject to conflicts of interest arising out of ourrelationships with our advisor and its affiliates, including the materialconflicts discussed below.

 

***Because a number of BehringerHarvard real estate programs use investment strategies that are similar toours, Behringer Advisors and its and our executive officers will face conflictsof interest relating to the purchase and leasing of properties and otherinvestments, and these conflicts may not be resolved in our favor.***

 

Affiliates ofRobert M. Behringer are sponsoring or have recently sponsored six public realestate programs with substantially the same investment objectives as ours.  There may be periods during which all ofthese programs are seeking to invest in similar properties and other realestate-related investments.  As a result,we may be seeking to buy properties and other real estate-related investmentsat the same time as these other Behringer Harvard-sponsored programs managed byofficers and employees of ouradvisor andits affiliates.  These other BehringerHarvard-sponsored programs may use investment strategies that are similar toours.  Our executive officers and theexecutive officers of our advisor also are the executive officers of other BehringerHarvard-sponsored REITs and their advisors, the general partners of BehringerHarvard-sponsored partnerships or the advisors or fiduciaries of otherBehringer 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. You will not have the opportunity to evaluate the manner in which theseconflicts of interest are resolved before or after making your investment.

 

***Behringer Advisors will face conflicts of interestrelating to joint ventures, TIC investments or other co-ownership arrangementsthat we enter with other Behringer Harvard-sponsored programs, which couldresult in a disproportionate benefit to another Behringer Harvard-sponsoredprogram.***

 

We are likely to enter into joint ventures, TIC investments or otherco-ownership arrangements with other Behringer Harvard-sponsored programs toacquire, develop or improve properties as well as to acquire other realestate-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 will face conflictsof interest in determining which Behringer Harvard-sponsored program shouldenter into 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 joint venture, TIC investment orother co-ownership arrangements with another Behringer Harvard-sponsoredprogram or joint venture, Behringer Advisors and its affiliates may have aconflict of interest in determining when, and whether, to buy or sell aparticular real estate property.  Ourgoals and objectives also may diverge from those of our joint venture partnerwhich could lead to deadlocks and delays in decisions to sell a property orresult in the premature sale of a property. In the event that a co-venturer has a right of first refusal to buy outthe other co-venturer, it may be unable to finance the buy-out at thattime.  If our interest is subject to abuy/sell right, we may not have sufficient cash, available borrowing capacityor other capital resources to allow us to purchase an interest of a co-venturersubject to the buy/sell right, in which case we may be forced to sell ourinterest as the result of the exercise of the right when we would otherwiseprefer to keep our interest. Furthermore, we may not be able to sell our interest in a joint venture

 

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ifwe desire to exit the venture for any reason or if our interest is likewisesubject to a right of first refusal of our co-venturer or partner, our abilityto sell such interest may be adversely impacted by this right.

 

***Our advisor’s executive officers and key personneland the executive officers and key personnel of Behringer Harvard-affiliatedentities that conduct our day-to-day operations and our offering will facecompeting demands on their time, and this may cause our investment returns tosuffer******.***

 

We rely upon the executive officers of Behringer Advisors and theexecutive officers and employees of Behringer Harvard-affiliated entities toconduct our day-to-day operations and our offering.   These persons also conduct the day-to-dayoperations of other Behringer Harvard-sponsored programs and may have otherbusiness interests as well.  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.  These conflictscould have a material adverse effect on our business, results of operations,financial condition and ability to pay distributions to our stockholders.

 

***Our officers faceconflicts of interest related to the positions they hold with other entitiesaffiliated with Behringer Advisors, which could diminish the value of theservices they provide to us.***

 

Each of our executiveofficers, including Mr. Behringer, who serves as our Chief ExecutiveOfficer, Chief Investment Officer and chairman of our board of directors, isalso an officer of Behringer Advisors, our property manager, our dealer managerand other entities affiliated with Behringer Advisors, including the advisorsand fiduciaries to other Behringer Harvard-sponsored programs.  As a result, these individuals owe fiduciaryduties to these other entities and their investors, which may conflict with thefiduciary duties that they owe to us and our stockholders.  Their loyalties to these other entities andinvestors could result in action or inaction that is detrimental to ourbusiness, which could harm the implementation of our business strategy and ourinvestment and leasing opportunities. Conflicts with our business and interests are most likely to arise frominvolvement in activities related to: (1) allocating new investments andmanagement time and services between us and the other entities; (2) thetiming and terms of the investment in, or sale of, an asset; (3) developmentof our properties by affiliates of our advisor; (4) investments withaffiliates of our advisor; (5) compensation to our advisor; and (6) ourrelationship with our dealer manager and property manager.  Failure to resolve these conflicts could havea material adverse effect on our business, results of operations, financialcondition and ability to pay distributions to our stockholders.

 

***Your investmentwill be diluted upon conversion of the convertible stock.***

 

Behringer Advisors purchased 1,000 shares of our non-participating,non-voting, convertible stock for an aggregate purchase price of $1,000. Under limited circumstances, these shares may be converted into shares of ourcommon stock, resulting in dilution of our stockholders’ interest in us. The terms of the convertible stock provide that, generally, holders ofconvertible stock will receive shares of common stock with an aggregate valueequal to 15% of the amount by which (1) our enterprise value, includingthe 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 have receiveddistributions 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 listed fortrading on a national securities exchange; or

 

·                  the advisory management agreement expireswithout renewal or is terminated, other than due to a termination because of amaterial breach by our advisor, and at the time of or subsequent totermination, 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 can influence whether we terminate the advisorymanagement agreement or allow it to expire without renewal, or whether ourcommon stock is listed for trading on a national securities exchange. Accordingly, Behringer Advisors can influence both the conversion of theconvertible stock issued to it and the resulting dilution of other stockholders’interests.

 

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***Behringer Advisors faces conflictsof interest relating to the incentive fee structure under******our advisory******management agreement, which could result in actions that arenot necessarily in the long-term best interests of our stockholders.***

 

Under our advisory management agreement, Behringer Advisors is entitledto fees that are structured in a manner intended to provide incentives to ouradvisor to 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’sentitlement 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 also requires us to pay aperformance-based termination fee to our advisor (reduced by the value ofshares of common stock issued or issuable upon conversion of our convertiblestock) in the event that the advisory management agreement expires withoutrenewal or is terminated, other than because of a material breach by theadvisor; the holders of the common stock have received distributions equal tothe sum of the capital invested by such stockholders and a 9% cumulative,non-compounded, annual return; or the shares of common stock are listed fortrading on a national securities exchange.  To avoid paying this fee, ourindependent directors may decide against terminating the advisory managementagreement prior to our listing even if, but for the termination fee,termination of the advisory management agreement would be in our bestinterest.  In addition, the requirement to pay a fee to our advisor attermination could cause us to make different investment or dispositiondecisions than we would otherwise make, in order to satisfy our obligation topay the fee to the terminated advisor.  Moreover, our advisor has theright to terminate the advisory management agreement upon a change of controlof our company and thereby trigger the payment of the performance fee, whichcould have the effect of delaying, deferring or preventing the change ofcontrol.

 

***Because we rely on affiliates ofBehringer Harvard Holdings to provide advisory, property management and dealermanager services, if Behringer Harvard Holdings is unable to meet itsobligations we may be required to find alternative providers of these services,which could disrupt our business.***

 

Behringer Harvard Holdings, through one or more of its subsidiaries,owns our advisor, our property manager, and the dealer manager of ouroffering.  These entities represent asubstantial majority 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, property manager and dealer manager.  Although we believe that Behringer HarvardHoldings currently has adequate working capital, from both funds on hand andborrowing capacity, to meet its obligations, its continued viability may beaffected by its ability to continue to successfully sponsor and operate realestate programs.  In the event thatBehringer Harvard Holdings would be unable to meet its obligations as theybecome due, we might be required to find alternative service providers, whichcould materially disrupt our business.

 

**Risks Related to Investments inReal Estate-Related Securities**

 

***Recent market conditions and therisk of continued market deterioration may reduce the value of any real estaterelated securities in which we may invest.***

 

Recently the U.S.credit markets and the sub-prime residential mortgage market have experiencedsevere dislocations and liquidity disruptions. Sub-prime mortgage loans haveexperienced increasing rates of delinquency, foreclosure and loss. These andother related events have had a significant impact on the capital marketsassociated not only with sub-prime mortgage-backed securities, asset-backedsecurities and collateralized debt obligations, but also with the U.S. creditand financial markets as a whole.

 

If we were to investin real estate related securities, including collateralized mortgage-backedsecurities, as part of our investment strategy, we would be exposed to thevolatility of the credit markets. Turmoil in the credit market may have a material adverse effect on boththe value of our securities portfolio and the availability or cost of any usedin connection with our securities portfolio.

 

Because there maybe significant uncertainty in the valuation of, or in the stability of thevalue of, securities holdings, the fair values of these investments might notreflect the prices that we would obtain if such investments were actuallysold.   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.

 

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***Investments in real estate-related-securities will besubject to specific risks relating to the particular issuer of the securitiesand may be subject to the general risks of investing in subordinated realestate securities.***

 

We may invest inreal estate-related securities of both publicly traded and private real estatecompanies.  Our investments in realestate-related securities will involve special risks relating to the particularissuer of the securities, including the financial condition and business outlookof 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 risks relating to rising interest rates.

 

Realestate-related equity securities are always unsecured and subordinated to otherobligations of the issuer.  Investmentsin real estate-related equity securities are subject to risks of: (1) limitedliquidity in the secondary trading market in the case of unlisted or thinlytraded securities; (2) substantial market price volatility resulting fromchanges in prevailing interest rates in the case of traded equity securities; (3) subordinationto the liabilities of the entity; (4) the operation of mandatory sinkingfund or call/redemption provisions during periods of declining interest ratesthat could cause the issuer to redeem the securities; (5) the possibilitythat earnings of the issuer may be insufficient to meet its debt service anddistribution obligations; and (6) the declining creditworthiness andpotential for insolvency of the issuer during periods of rising interest ratesand economic downturn.  These risks mayadversely affect the value of outstanding real estate-related equity securitiesand the ability of the issuers thereof to repay principal and interest or makedistribution payments.

 

***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 acquisitionfees to third parties, including investment bankers and brokers, in connectionwith identifying, reviewing, evaluating and investing in real estate-relatedsecurities.  In addition, we mayreimburse these third parties for expenses related to selecting and acquiringsecurities for us, including, but not limited to, legal fees 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 preferred equitysecurities involve a greater risk of loss than traditional debt financing.***

 

We may invest inreal estate-related preferred equity securities, which may involve a higherdegree of risk than traditional debt financing due to a variety of factors,including that such investments are subordinate to the liabilities of the entityand are not secured by property underlying the investment.  Furthermore,should the issuer default on our investment, we would be able to proceed onlyagainst the entity in which we have an interest, and not the property owned bysuch entity and underlying our investment.  As a result, we may notrecover some or all of our investment.

 

***The mezzanine loans in which we may invest would involvegreater risks of loss than senior loans secured by income producing realproperties.***

 

We may invest inmezzanine loans that take the form of subordinated loans secured by secondmortgages on the underlying real property or loans secured by a pledge of theownership interests of either the entity owning the real property or the entitythat owns the interest in the entity owning the real property.  Thesetypes of investments involve a higher degree of risk than long-term seniormortgage lending secured by income producing real property because theinvestment may become unsecured as a result of foreclosure by the seniorlender.  In the event of a bankruptcy of the entity providing the pledgeof its ownership interests as security, we may not have full recourse to theassets of the entity, or the assets of the entity may not be sufficient tosatisfy our mezzanine loan.  If a borrower defaults on our mezzanine loanor debt senior to our loan, or in the event of a borrower bankruptcy, ourmezzanine loan will be satisfied only after the senior debt.  As a result,we may not recover some or all of our investment.

 

***We may make investments in non-U.S. dollar denominatedsecurities, which will be subject to currency rates exposure and theuncertainty of foreign laws and markets.***

 

We may purchasereal property or real estate-related securities denominated in foreigncurrencies.  A change in foreign currency exchange rates may have anadverse impact on returns on our non-U.S. dollar denominated investments. Although we may hedge our foreign currency risk subject to the REIT incomequalification tests, we may not be able to do so successfully and may incurlosses on these investments as a result of exchange rate fluctuations.

 

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***We expect that a portion of any real estate-relatedsecurities investments we make will be illiquid and we may not be able toadjust our portfolio in response to changes in economic and other conditions.***

 

Certain of thereal estate-related securities that we may purchase in connection withprivately negotiated transactions will not be registered under the applicablesecurities laws, resulting in a prohibition against their transfer, sale,pledge or other disposition except in a transaction that is exempt from theregistration requirements of, or is otherwise in accordance with, thoselaws.  As a result, our ability to vary our portfolio in response tochanges in economic and other conditions may be relatively limited.  Themezzanine and bridge loans we may purchase will be particularly illiquidinvestments due to their short life, their unsuitability for securitization andthe greater difficulty of recoupment in the event of a borrower’s default.

 

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

 

Interest rate riskis the risk that prevailing market interest rates change relative to thecurrent yield on fixed income securities such as preferred and debt securities,and to a lesser extent dividend paying common stock.  Generally, whenmarket interest rates rise, the market value of these securities declines, andvice versa.  In addition, when interest rates fall, issuers are morelikely to repurchase their existing preferred and debt securities to takeadvantage of the lower cost of financing.  As repurchases occur, principalis returned to the holders of the securities sooner than expected, therebylowering the effective yield on the investment.  On the other hand, wheninterest rates rise, issuers are more likely to maintain their existingpreferred and debt securities.  As a result, repurchases decrease, therebyextending the average maturity of the securities.  We intend to manageinterest rate risk by purchasing preferred and debt securities with maturitiesand repurchase provisions that are designed to match our investment objectives. If we are unable to manage these risks effectively, our results of operations,financial condition and ability to pay distributions to you will be adverselyaffected.

 

***We have not made any investments in realestate-related securities.***

 

Aside frominvestments in institutional quality commercial properties, we are permitted toinvest in real estate-related securities, including securities issued by otherreal estate companies, collateralized mortgage-backed securities, mortgage,bridge or mezzanine loans and Section 1031 TIC interests.  To date,however, we have focused on acquiring interests in office buildings and othercommercial properties.  We may not have the expertise necessary tomaximize the return on real estate-related securities.

 

***We may acquire real estate-related securities through tenderoffers, which may require us to spend significant amounts of time and moneythat otherwise could be allocated to our operations.***

 

We may acquirereal estate-related securities through 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.  These consequences could adverselyaffect our operations and reduce the cash available for distribution to ourstockholders.

 

**Risks Associated with Mortgage Lending**

 

***We may not have the expertise necessary to maximizethe return on our investments in mortgage, bridge or mezzanine loans.***

*** ***

Although we expectthat our directors will have the relevant knowledge and experience required toinvest in the types of assets that we propose to acquire, including mortgage,bridge and mezzanine loans, neither Behringer Advisors nor any of itsaffiliates has substantial experience in investing in mortgage, bridge andmezzanine loans.   We may neverthelessmake these investments to the extent our advisor determines that it isadvantageous to us due to the state of the real estate market or in order todiversify our investment portfolio.  Ifwe decide to make mortgage, bridge or mezzanine loans or acquire them, weultimately may not have the expertise necessary to maximize the return oninvestments in these types of loans.

 

***Our mortgage, bridge or mezzanine loans may be impacted byunfavorable real estate market conditions, which could decrease the value ofthose loans.***

 

If we make orinvest in mortgage, bridge or mezzanine loans, we will be at risk of defaultson those mortgage, bridge or mezzanine loans caused by many conditions beyondour control, including local and other economic conditions affecting realestate values and interest rate levels.  We do not know whether the valuesof the property securing the mortgage, bridge or mezzanine loans will remain atthe levels existing on the dates of origination of the mortgage, bridge ormezzanine loans.  If the values of the underlying properties drop, ourrisk will increase because of the lower value of the securities associated withthe loan.

 

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***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 infixed-rate, long-term mortgage, bridge or mezzanine loans and interest ratesrise, the mortgage, bridge or mezzanine loans could yield a return lower thanthen-current market rates.  If interestrates decrease, we will be adversely affected to the extent that mortgage,bridge or mezzanine loans are prepaid, because we may not be able to make newloans at the previously higher interest rate. If we invest in variable-rate loans and interest rates decrease, ourrevenues will also decrease.  Finally, ifwe invest in variable-rate loans and interest rates increase, the value of theloans we own at such time would decrease, which would lower the proceeds wewould receive in the event we sell such assets. For these reasons, if we invest in mortgage, bridge or mezzanine loans,our returns on those loans and the value of your investment will be subject tofluctuation 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 defaultsunder our mortgage, bridge or mezzanine loans, we may not be able to repossessand sell quickly any properties serving such loans.  The resulting time delay could reduce thevalue of our investment in the defaulted mortgage, bridge or mezzanineloans.  An action to foreclose on aproperty securing a mortgage loan is regulated by state statutes andregulations and is subject to many of the delays and expenses of any lawsuitsbrought in connection with the foreclosure if the defendant raises defenses orcounterclaims.  In the event of defaultby a mortgagor, these restrictions, among other things, may impede our abilityto foreclose on or sell the mortgaged property or to obtain proceeds sufficientto repay all amounts due to us on the mortgage loan.

 

***Returns on ourmortgage, bridge or mezzanine loans may be limited by regulations.***

 

The mortgage, bridge or mezzanine loans in which weinvest or that we may make, may be subject to regulation by federal, state andlocal authorities (or regulations by foreign jurisdictions) and subject tovarious laws and judicial and administrative decisions.  We may determinenot to make mortgage, bridge or mezzanine loans in any jurisdiction in which webelieve we have not complied in all material respects with applicablerequirements.  If we decide not to make mortgage, bridge or mezzanineloans in several jurisdictions, it could reduce the amount of income we wouldotherwise receive.

 

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

 

If we acquireproperty by foreclosure following defaults under our mortgage, bridge ormezzanine loans, we will have the economic and liability risks as the owner.

 

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

 

The mezzanine andbridge loans we may purchase will be particularly illiquid investments due totheir short lives, their unsuitability for securitization and the greater difficultyof recoupment in the event of a borrower’s default.   If our advisor determines that it is in ourbest interest to make or invest in mortgage, bridge or mezzanine loans, anyintended liquidation of us may be delayed beyond the time of the sale of all ofour properties until all mortgage, bridge or mezzanine loans expire or aresold, because we may enter into mortgage, bridge or mezzanine loans with termsthat expire after the date we intend to have sold all of our properties.

 

**Risks Associated with Section 1031 TIC Transactions**

 

***We may have increased exposure to liabilities fromlitigation as a result of our participation in Section 1031 TICtransactions.***

 

Many of ouracquisitions of TIC interests were or will be structured to qualify forlike-kind exchange treatment under Section 1031 of the Code and we,through our affiliates, intend to continue to enter into Section 1031 TICtransactions in the future.  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 single member limited liability companies or similar entities (“BehringerHarvard Exchange Entities”).  We may provide accommodation in support ofor otherwise be involved in such Section 1031 TIC Transactions.  Specifically, at the closing of certainproperties acquired by a Behringer Harvard Exchange Entity, we may enter into acontractual arrangement with such entity providing:  (1) in the event that the BehringerHarvard Exchange Entity is unable to sell all of the co-tenancy interests in

 

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that property to 1031Participants, we will purchase, at the Behringer Harvard Exchange Entity’scost, any co-tenancy interests remaining unsold; (2) we will guaranteecertain bridge loans associated with the purchase of the property in which TICinterests are to be sold; or (3) we will provide security for theguarantee of such bridge loans.  Althoughour participation in Section 1031 TIC Transactions has certain benefits toour business, including enabling us to invest capital more readily and over amore diversified portfolio and allowing us to acquire interests in propertiesthat we would be unable to acquire using our own capital resources, 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 value.  In certain Section 1031TIC Transactions 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.  Furthermore, in the event that the InternalRevenue Service conducts an audit of the purchasers of co-tenancy interests andsuccessfully challenges the qualification of the transaction as a like-kindexchange, purchasers of co-tenancy interests may file a lawsuit against theentity offering the co-tenancy interests, its sponsors, or us.  We may be involved in one or more suchofferings and could therefore be named in or otherwise required to defendagainst lawsuits brought by 1031 Participants. Any amounts we are required to expend defending claims will reduce theamount of funds available for investment by us in properties or otherinvestments and may reduce the amount of funds available for distribution toour stockholders.  In addition,disclosure of any litigation may adversely affect our ability to raiseadditional capital in the future through the sale of stock.

 

***We may have increased business and litigation risks as aresult of any direct sales by us of TIC interests in Section 1031 TICtransactions.***

 

We may directlysell TIC interests in our properties to 1031 Participants, which may expose usto significant tax and securities disclosure risks.  Changes in tax lawsmay negatively impact the tax benefits of like-kind exchanges or result inthese transactions not achieving their intended value.  Furthermore, theInternal Revenue Service may determine that the sale of TIC interests is a “prohibitedtransaction” under the Code, which would cause all of the gain we realize fromthe sale to be taxed with none of the gain available for distribution to ourstockholders.  The Internal Revenue Service also may audit the purchasersof TIC interests and successfully challenge the qualification of thetransaction as a like-kind exchange.  We also may be named in or otherwiserequired to defend against any lawsuits brought by stockholders or 1031Participants in connection with Section 1031 TIC Transactions in which wedirectly sell TIC interests.  In addition, as a seller of TIC interests,we would be required to comply with applicable federal and state securitieslaws and to provide fair and adequate disclosure to 1031 Participants relatingto the respective Section 1031 TIC Transaction.  Any alleged failureby us to comply with these requirements could expose us to risks oflitigation.  Any amounts we are required to expend defending claimsbrought against us will reduce the amount of funds available for investment byus in properties or other investments and may reduce the amount of fundsavailable for distribution to our stockholders.  In addition, disclosureof any such litigation may adversely affect our ability to raise additionalcapital in the future through the sale of stock.

 

***We are subject to certain risks inconnection with our arrangements with Behringer Harvard Exchange Entities.***

 

We anticipatethat, in connection with most of our property acquisitions, we currently orsubsequently may become TIC owners of properties in which Behringer HarvardExchange Entities subsequently sell TIC interests to 1031 Participants. At the closing of certain properties acquired by a Behringer Harvard ExchangeEntity, we may enter into a contractual arrangement with such entity providingthat (1) in the event that the Behringer Harvard Exchange Entity is unableto sell all of the co-tenancy interests in that property to 1031 Participants,we will purchase, at the Behringer Harvard Exchange Entity’s cost, anyco-tenancy interests remaining unsold; (2) we will guarantee certainbridge loans associated with the purchase of the property in which TICinterests are to be sold; or (3) we will provide security for theguarantee of such bridge loans.  Accordingly, in the event that aBehringer Harvard Exchange Entity is unable to sell all co-tenancy interests inone or more of its properties, we may be required to purchase the unsoldco-tenancy interests in such property or properties.  In any event, as anowner of TIC interests in properties, we will be subject to the risks thatownership of co-tenancy interests with unrelated third parties entails. Furthermore, to the extent we guarantee certain bridge loans associated withTIC transactions, we, as well as the co-tenants, will become liable for thelender’s customary carve-outs under the applicable mortgage loan financingdocuments, including but not limited to fraud or intentional misrepresentation bya co-tenant or a guarantor of the loan, physical waste of the property,misapplication or misappropriation of insurance proceeds, and failure to paytaxes.

 

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***We have acquired certain properties in the form of TIC orother co-tenancy arrangements and we may enter into more such arrangements inthe future.  Therefore, we are subject to risks associated with co-tenancyarrangements that otherwise may not be present in non-co-tenancy real estateinvestments.***

 

We have enteredinto TIC or other co-tenancy arrangements to acquire certain properties. Whether acquired as a planned co-tenancy or as the result of an accommodationor other arrangement disclosed above,ownership of co-tenancy interests involves risksgenerally not otherwise present with an investment in real estate including:

 

·                  the risk that a co-tenant may at any time haveeconomic or business interests or goals that are or that become inconsistentwith our business interests or goals;

 

·                  the risk that a co-tenant may be in a position to takeaction contrary to our instructions or requests or contrary to our policies orobjectives;

 

·                  the possibility that an individual co-tenant mightbecome insolvent or bankrupt, or otherwise default under the applicablemortgage loan financing documents, which may constitute an event of defaultunder all of the applicable mortgage loan financing documents or allow thebankruptcy court to reject the tenants-in-common agreement or managementagreement entered into by the co-tenants owning interests in the property;

 

·                  the possibility that a co-tenant might not haveadequate liquid assets to make cash advances that may be required in order tofund operations, maintenance and other expenses related to the property, whichcould result in the loss of a current or prospective tenants and may otherwiseadversely affect the operation and maintenance of the property, and could causea default under the mortgage loan financing documents applicable to theproperty and may result in late charges, penalties and interest, and may leadto the exercise of foreclosure and other remedies by the lender;

 

·                  the risk that a co-tenant could breach agreementsrelated to the property, which may cause a default under, or result in personalliability for, the applicable mortgage loan financing documents, violateapplicable securities law and otherwise adversely affect the property and theco-tenancy arrangement; or

 

·                  the risk that a default by any co-tenant wouldconstitute a default under the applicable mortgage loan financing documentsthat could result in a foreclosure and the loss of all or a substantial portionof the investment made by the co-tenants.

 

***Our interestsmay become adverse to those of a co-tenant.***

*** ***

Our interests may becomeadverse to those of the other co-tenants in a Section 1031 TICTransaction.  In certain cases we may nothave the contractual right to purchase the co-tenancy interests from the otherco-tenants or we may not have sufficient funds available to purchase theco-tenancy interests from the 1031 Participants even if we have the right.

 

In addition, wemay desire to sell our co-tenancy interests in a given property at a time whenthe other co-tenants do not desire to sell their interests.  Therefore, we may not be able to sell ourinterest in a property at the time we would like to sell.  Finally, we believe that it will be much moredifficult to find a willing buyer for our co-tenancy interests in a propertythan it would be to find a buyer for a property we owned outright.

 

***Our participation in Section 1031 TIC Transactions maylimit our ability to borrow funds in the future, which could adversely affectthe value of our investments.***

 

We may enter into Section 1031TIC Transaction agreements that contain obligations to acquire unsoldco-tenancy interests in properties.  These agreements may be viewed byinstitutional lenders as a contingent liability against our cash or otherassets, which may limit our ability to borrow funds in the future. Furthermore, these obligations may be viewed by our lenders in a fashion thatlimits our ability to borrow funds based on regulatory restrictions on lenderslimiting the amount of loans they can make to any one borrower.

 

**Federal Income Tax Risks**

 

***Failure to qualifyas a REIT would adversely affect our operations and our ability to makedistributions.***

 

We elected to be taxed as a REIT commencing with our2004 tax year.  As a result, for the 2003 tax year, we were taxed as acorporation.  However, we were not required to pay any income taxesbecause we did not have any taxable income for the period.  In order forus to remain qualified as a REIT, we must satisfy certain requirements setforth in the Code and Treasury Regulations and various factual matters andcircumstances that are not entirely within our control.  We intend tostructure our activities in a manner designed to satisfy all of theserequirements.  However, if certain of our operations were to berecharacterized by the Internal Revenue Service, such recharacterization couldjeopardize our ability

 

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tosatisfy all of the requirements for qualification as a REIT and may affect ourability to qualify, or continue to qualify as a REIT.  In addition, newlegislation, new regulations, administrative interpretations or court decisionscould significantly change the tax laws with respect to qualifying as a REIT orthe federal income tax consequences of qualifying.

 

Our qualificationas a REIT depends upon our ability to meet, through investments, actualoperating results, distributions and satisfaction of specific stockholderrules, the various tests imposed by the Code.  We cannot assure you thatwe will satisfy the REIT requirements in the future.

 

If we fail toqualify as a REIT for any taxable year, we will be subject to federal incometax for that year on our taxable income at corporate rates.  In addition,we would generally be disqualified from treatment as a REIT for the fourtaxable years following the year of losing our REIT status.  Losing ourREIT status would reduce our net earnings available for investment ordistribution to stockholders because of the additional tax liability.  Inaddition, distributions to stockholders would no longer qualify for thedistributions paid deduction, and we would no longer be required to makedistributions.  If this occurs, we might be required to borrow funds orliquidate some investments in order to pay the applicable tax.  Our failure to qualify as a REIT would have a materialadverse effect on our ability to pay distributions to our stockholders.

 

***Failure to maintain an acquired entity’sREIT status may cause us to lose our REIT status.***

 

We may, from timeto time, acquire entities that own real estate including other entities thathave elected to be taxed as a REIT.  In this latter case, if we decide tomaintain the entity’s status as a REIT at the time we acquire it, but laterfail to maintain or operate the entity in accordance with the various rules governingREIT status, the entity would likely lose its status as a REIT.  Failureto maintain the acquired entity’s status as a REIT would also likely cause usto lose our status as a REIT, all of which could have a material adverse effecton our business, results of operations, financial condition and the ability topay distributions to our stockholders.

 

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

 

Income received inthe nature of rental subsidies or rent guarantees, in some cases, may notqualify as rental income and could be characterized by the Internal RevenueService as non-qualifying income for purposes of satisfying the “income tests”required for REIT qualification.  In addition, in connection with any Section 1031TIC Transactions, we or one of the affiliates of Behringer Advisors typicallyenters into a number of contractual arrangements with Behringer HarvardExchange Entities that guarantee or effectively guarantee the sale of theco-tenancy interests being offered by any Behringer Harvard ExchangeEntity.  In consideration for entering into these agreements, we are paidfees that could be characterized by the Internal Revenue Service asnon-qualifying income.  If any of our income were, in fact, treated asnon-qualifying, and if the aggregate of such non-qualifying income in anytaxable year ever exceeded 5% of our gross revenues for such year, we couldlose our REIT status for that taxable year and the four taxable years followingthe year of losing our tax status.  We use reasonable efforts to structureour activities in a manner intended to satisfy the requirements for ourcontinued qualification as a REIT.  Our failure to qualify as a REIT wouldadversely affect the return on your investment.

 

***Recharacterization of the Section 1031 TIC Transactionsmay result in taxation of income from a prohibited transaction, which woulddiminish distributions to our stockholders.***

 

In the event thatthe Internal Revenue Service 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, which would have amaterial adverse effect on our business, results of operations, financialcondition and the ability to pay distributions to our stockholders.

 

***You may have current tax liability ondistributions you elect to reinvest in our common stock.***

 

If you participatein our distribution reinvestment plan, you will be deemed to have received, andfor income tax purposes will be taxed on, the amount reinvested in shares ofour common stock to the extent the amount reinvested was not a tax-free returnof capital.   In addition, you will betreated for tax purposes as having received an additional distribution to theextent the shares are purchased at a discount to fair market value.  As a result, unless you are a tax-exemptentity, you may have to use funds from other sources to pay your tax liabilityon the value of the shares of common stock received.

 

30

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***If our operating partnership fails to maintain its status asa partnership, its income may be subject to tax at corporate rates.***

 

We intend tomaintain the status of the operating partnership as a partnership for federalincome tax purposes.  However, if the Internal Revenue Service were tosuccessfully challenge the status of the operating partnership as apartnership, it would be taxable as a corporation, reducing the amount ofdistributions that the operating partnership 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 our cash available to makedistributions to our stockholders.  In addition, if any of thepartnerships or limited liability companies through which the operatingpartnership owns its properties, in whole or in part, loses itscharacterization as a partnership for federal income tax purposes, the entitywould besubject totax as a corporation, thereby reducing distributions to the operatingpartnership.  Recharacterization of an underlying property owner alsocould threaten our ability to maintain REIT status.

 

***In certain circumstances, we may be subject to federal andstate taxes on income as a REIT, which would reduce our cash available fordistribution to our stockholders.***

 

Even if wemaintain our status as a REIT, we may become subject to federal income taxesand related state taxes.  For example, if we have net income from a “prohibitedtransaction,” the income will be subject to the 100% penalty tax.  We maynot be able to make sufficient distributions to avoid excise taxes applicableto REITs.  We also may decide to retain income we earn from the sale orother disposition of our property and pay income tax directly on theincome.  In that event, our stockholders would be treated as if theyearned that income and paid the tax on it directly.  We also may besubject to state and local taxes on our income or property, either directly orat the level of the operating partnership or at the level of the othercompanies through which we indirectly own our assets.  Any federal orstate taxes paid by us will reduce our cash available for distribution to ourstockholders.

 

***Non-U.S. income or other taxes, and a requirement to withholdany non-U.S. taxes, may apply, and, if so, the amount of net cash fromoperations payable to you will be reduced.***

 

From time to time,we may acquire real property located outside the U.S. and may invest in stockor other securities of entities owning real property located outside theU.S.  As a result, we may be subject to foreign (i.e., non-U.S.) incometaxes, stamp taxes, real property conveyance taxes, withholding taxes, andother foreign taxes or similar impositions in connection with our ownership offoreign real property or foreign securities. The country in which the real property is located may impose these taxesregardless of whether we are profitable and in addition to any U.S. income taxor other U.S. taxes imposed on profits from our investments in any such realproperty or securities.  If a foreigncountry imposes income taxes on profits from our investment in foreign realproperty or foreign securities, you will not be eligible to claim a tax crediton your U.S. federal income tax returns to offset the income taxes paid to theforeign country, and the imposition of any foreign taxes in connection with ourownership and operation of foreign real property or our investment insecurities of foreign entities will reduce the amounts distributable toyou.  Similarly, the imposition ofwithholding taxes by a foreign country will reduce the amounts distributable toyou.  We expect the organizational costsassociated with non-U.S. investments, including costs to structure theinvestments so as to minimize the impact of foreign taxes, will be higher thanthose associated with U.S. investments. Moreover, we may be required to file income tax or other informationreturns in foreign jurisdictions as a result of our investments made outside ofthe U.S.  Any organizational costs andreporting requirements will increase our administrative expenses and reduce theamount of cash available for distribution to you.  You are urged to consult with your own taxadvisors with respect to the impact of applicable non-U.S. taxes and taxwithholding requirements on an investment in our common stock.

 

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

 

In recent years,numerous legislative, judicial and administrative changes have been made in thefederal income tax laws applicable to investments similar to an investment inshares of our common stock.  Additional changes to the tax laws are likelyto continue to occur, and we cannot assure you that any of these changes willnot adversely affect the taxation of a stockholder.  Any such changescould have an adverse effect on an investment in shares or on the market valueor the resale potential of our assets.  You are urged to consult with yourown tax advisor with respect to the impact of recent legislation on yourinvestment in our shares and the status of legislative, regulatory oradministrative developments and proposals and their potential effect on aninvestment in our shares.

 

Congress passedmajor federal tax legislation in 2003, with modifications to that legislationin 2005.  One of the changes effected by that legislation generallyreduced the tax rate on dividends paid by corporations to individuals to amaximum of 15% prior to 2011.  REIT distributions generally do not qualifyfor this reduced rate.  The tax changes did not, however, reduce thecorporate tax rates.  Therefore, the maximum corporate tax rate of 35% hasnot been affected.

 

31

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However, as a REIT, wegenerally would not be subject to federal or state corporate income taxes onthat portion of our ordinary income or capital gain that we distributecurrently to our stockholders, and we thus expect to avoid the “double taxation”that other corporations typically are subject to.

 

Although REITscontinue to receive substantially better tax treatment than entities taxed ascorporations, it is possible that future legislation would result in 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 charter provides our board of directorswith the power, under certain circumstances, to revoke or otherwise terminateour REIT election and cause us to be taxed as a corporation, without the voteof our stockholders.  Our board ofdirectors has fiduciary duties to us and our stockholders and could only causesuch changes in our tax treatment if it determines in good faith that such changesare in the best interest of our stockholders.

 

We have acquiredseveral of our properties by means of 1031 TIC Transactions.  Changes intax laws may result in Section 1031 TIC Transactions being no longeravailable, which may adversely affect Section 1031 TIC Transactions orcause such transactions not to achieve their intended value.  Any changesin tax laws that result in Section 1031 Transactions being no longeravailable may have a negative impact on our investment strategy.

 

***Equity participation in mortgage, bridge, mezzanine or otherloans may result in taxable income and gains from these properties that couldadversely impact our REIT status.***

 

If we participateunder a mortgage loan in any appreciation of the properties securing themortgage loan or its cash flow and the Internal Revenue Service characterizesthis participation as “equity,” we might have to recognize income, gains andother items from the property for federal income tax purposes.  This couldaffect our ability to continue to qualify as a REIT.

 

**Item 1B.                 UnresolvedStaff Comments.**

 

None.

 

**Item 2.                    Properties.**

 

****General****

 

As of December 31, 2007, we owned interests in 75office properties located in 23 states and the District of Columbia.  All of these properties consist of developedinstitutional quality office buildings with office space that is currentlyleased to tenants.  In the aggregate,these properties represent approximately 25.2 million rentable squarefeet.  As of December 31, 2007, theproperties in which we own an interest were approximately 92.5% leased on a weightedaverage basis.

 

32

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The following tablepresents certain additional information about the 68 properties we consolidatedat December 31, 2007:

 
| ** **                             | ** ** | ** **       | ** ** | ** **        | ** ** | **Approximate**         | ** ** | ** **                      | ** ** | ** **        | ** ** |
|----------------------------------------|------------|------------------|------------|-------------------|------------|-------------------------|------------|---------------------------------|------------|-------------------|------------|
| ** **                             | ** ** | ** **       | ** ** | **Date**          | ** ** | **Rentable**            | ** ** | **Encumbrances**                | ** ** | **Approximate**   | ** ** |
| **Property Name**                 | ** ** | **Location**     | ** ** | **acquired**      | ** ** | **Square Footage** | ** ** | **(in millions) (1)** | ** ** | **% leased** | ** ** |
| 9100 Mineral  Circle (Cyprus Building) |       | Englewood, CO    |       | 12/17/04          |       | 153,000                 |       | $                               | —     |              | 100        | % |
| Ashford Perimeter                      |       | Atlanta, GA      |       | 01/06/05          |       | 288,000                 |       | 35.0                            |       | 82                | %          |
| 2383 Utah                              |       | El Segundo, CA   |       | 04/21/05          |       | 150,000                 |       | 20.0                            |       | 78                | %          |
| 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                            |       | 100               | %          |
| Gateway 12                             |       | Diamond Bar, CA  |       | 07/20/05          |       | 41,000                  |       | 70.7                            | (2)        | 100               | %          |
| Gateway 22                             |       | Diamond Bar, CA  |       | 07/20/05          |       | 55,000                  |       | —                          |       | 100               | %          |
| Gateway 23                             |       | Diamond Bar, CA  |       | 07/20/05          |       | 72,000                  |       | —                          |       | 100               | %          |
| Southwest Center                       |       | Tigard, OR       |       | 07/20/05          |       | 88,000                  |       | —                          |       | 98                | %          |
| 17655 Waterview                        |       | Richardson, TX   |       | 07/20/05          |       | 230,000                 |       | —                          |       | 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                            |       | 80                | %          |
| Riverview Tower                        |       | Knoxville, TN    |       | 10/05/05          |       | 334,000                 |       | 30.3                            |       | 96                | %          |
| 1325 G Street                          |       | Washington, D.C. |       | 11/15/05          |       | 307,000                 |       | 100.0                           |       | 97                | %          |
| 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               |       | 114.2                           |       | 97                | %          |
| 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                            |       | 82                | %          |
| 222 South  Riverside Plaza             |       | Chicago, IL      |       | 06/02/06          |       | 1,184,000               |       | 202.0                           |       | 95                | %          |
| The Terrace  Office Park               |       | Austin, TX       |       | 06/21/06          |       | 619,000                 |       | 131.0                           |       | 91                | %          |
| 600 &  619 Alexander          |       | Princeton, NJ    |       | 06/28/06          |       | 97,000                  |       | 16.5                            |       | 91                | %          |
| Grandview II                           |       | Birmingham, AL   |       | 10/20/06          |       | 149,000                 |       | 17.0                            |       | 92                | %          |
| Bank of America  Plaza-Charlotte       |       | Charlotte, NC    |       | 10/26/06          |       | 887,000                 |       | 150.0                           |       | 99                | %          |
| Three Parkway                          |       | Philadelphia, PA |       | 10/30/06          |       | 561,000                 |       | 67.1                            |       | 92                | %          |
| 4440 El Camino  Real                   |       | Los Altos, CA    |       | 11/02/06          |       | 97,000                  |       | 27.4                            |       | 100               | %          |
| Fifth Third  Center-Cleveland          |       | Cleveland, OH    |       | 11/16/06          |       | 508,000                 |       | 49.3                            |       | 87                | %          |
| Resurgens Plaza                        |       | Atlanta, GA      |       | 11/30/06          |       | 400,000                 |       | 82.0                            |       | 93                | %          |
| 5 & 15  Wayside               |       | Burlington, MA   |       | 12/08/06          |       | 270,000                 |       | —                          |       | 100               | %          |
| One &  Two Eldridge Place     |       | Houston, TX      |       | 12/13/06          |       | 519,000                 |       | 75.0                            |       | 94                | %          |
| 250 West Pratt                         |       | Baltimore, MD    |       | 12/17/04-12/31/06 |       | 368,000                 |       | 36.5                            |       | 96                | %          |
| Centreport Office  Center              |       | Ft Worth, TX     |       | 06/14/07          |       | 133,000                 |       | —                          |       | 100               | %          |
| 200 South Wacker                       |       | Chicago, IL      |       | 11/01/07          |       | 755,000                 |       | 95.5                            |       | 86                | %          |
| One Financial  Place                   |       | Chicago, IL      |       | 11/01/07          |       | 1,036,000               |       | 188.6                           |       | 92                | %          |
| 10 & 120  South Riverside     |       | Chicago, IL      |       | 11/01/07          |       | 1,411,000               |       | 225.0                           |       | 94                | %          |
| 111 Woodcrest                          |       | Cherry Hill, NJ  |       | 11/20/07          |       | 53,000                  |       | —                          |       | 75                | %          |
| 1650 Arch Street                       |       | Philadelphia, PA |       | 12/12/07          |       | 553,000                 |       | 44.0                            |       | 99                | %          |
| United Plaza                           |       | Philadelphia, PA |       | 12/12/07          |       | 617,000                 |       | 67.3                            |       | 98                | %          |
| 11 Stanwix Street                      |       | Pittsburg, PA    |       | 12/12/07          |       | 428,000                 |       | 28.6                            |       | 75                | %          |
| One Oxmoor Place                       |       | Louisville, KY   |       | 12/12/07          |       | 135,000                 |       | 101.2                           | (3)        | 97                | %          |
| Hurstbourne Place                      |       | Louisville, KY   |       | 12/12/07          |       | 235,000                 |       | —                          |       | 80                | %          |
| Hurstbourne Park                       |       | Louisville, KY   |       | 12/12/07          |       | 104,000                 |       | —                          |       | 91                | %          |
| Hurstbourne Plaza                      |       | Louisville, KY   |       | 12/12/07          |       | 94,000                  |       | —                          |       | 55                | %          |
| Forum Office Park                      |       | Louisville, KY   |       | 12/12/07          |       | 328,000                 |       | —                          |       | 82                | %          |
| Lakeview                               |       | Louisville, KY   |       | 12/12/07          |       | 76,000                  |       | —                          |       | 88                | %          |
| Steeplechase  Place                    |       | Louisville, KY   |       | 12/12/07          |       | 77,000                  |       | —                          |       | 80                | %          |
| Hunnington                             |       | Louisville, KY   |       | 12/12/07          |       | 62,000                  |       | —                          |       | 80                | %          |
| City Hall Plaza                        |       | Manchester, NH   |       | 12/12/07          |       | 210,000                 |       | —                          |       | 67                | %          |
| One &  Two Chestnut Place     |       | Worcester, MA    |       | 12/12/07          |       | 218,000                 |       | —                          |       | 89                | %          |
|                                        |            |                  |            |                   |            |                         |            |                                 |            |                   |            |  |

 

33

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| ** **                      | ** ** | ** **         | ** ** | ** **   | ** ** | **Approximate**         | ** ** | ** **                      | ** ** | ** **        | ** ** |
|---------------------------------|------------|--------------------|------------|--------------|------------|-------------------------|------------|---------------------------------|------------|-------------------|------------|
| ** **                      | ** ** | ** **         | ** ** | **Date**     | ** ** | **Rentable**            | ** ** | **Encumbrances**                | ** ** | **Approximate**   | ** ** |
| **Property Name**          | ** ** | **Location**       | ** ** | **acquired** | ** ** | **Square Footage** | ** ** | **(in millions) (1)** | ** ** | **% leased** | ** ** |
| Executive Park                  |       | Louisville, KY     |       | 12/12/07     |       | 109,000                 |       | 5.7                             |       | 81                | %          |
| Energy Centre                   |       | New Orleans, LA    |       | 12/12/07     |       | 757,000                 |       | 51.1                            |       | 94                | %          |
| Bank of America Plaza-Las Vegas |       | Las Vegas, NV      |       | 12/12/07     |       | 256,000                 |       | 50.0                            |       | 98                | %          |
| KeyBank Center                  |       | Cleveland, OH      |       | 12/12/07     |       | 478,000                 |       | 28.1                            |       | 84                | %          |
| One Edgewater Plaza             |       | Staten Island, NY  |       | 12/12/07     |       | 252,000                 |       | 36.1                            | (4)        | 96                | %          |
| Tice Building                   |       | Woodcliff Lake, NJ |       | 12/12/07     |       | 120,000                 |       | —                          |       | 87                | %          |
| 222 Bloomingdale Road           |       | White Plains, NY   |       | 12/12/07     |       | 140,000                 |       | 10.5                            |       | 85                | %          |
| Fifth Third Center - Columbus   |       | Columbus, OH       |       | 12/12/07     |       | 331,000                 |       | 52.5                            |       | 88                | %          |
| City Center                     |       | St. Petersburg, FL |       | 12/12/07     |       | 242,000                 |       | 16.3                            |       | 92                | %          |
| 5104 Eisenhower Boulevard       |       | Tampa, FL          |       | 12/12/07     |       | 130,000                 |       | 19.6                            |       | 100               | %          |
| Royal Caribbean Center          |       | Miramar, FL        |       | 12/12/07     |       | 129,000                 |       | 29.2                            | (5)        | 100               | %          |
| DeVry University                |       | Miramar, FL        |       | 12/12/07     |       | 94,000                  |       | —                          |       | 100               | %          |
| Crescent Center                 |       | Memphis, TN        |       | 12/12/07     |       | 336,000                 |       | 43.0                            |       | 97                | %          |
| Plaza at MetroCenter            |       | Nashville, TN      |       | 12/12/07     |       | 361,000                 |       | 25.0                            |       | 95                | %          |
| Loop Central                    |       | Houston, TX        |       | 12/12/07     |       | 575,000                 |       | 46.0                            |       | 99                | %          |
| Epic Center                     |       | Wichita, KS        |       | 12/12/07     |       | 289,000                 |       | 15.7                            | (6)        | 88                | %          |
| One Brittany Place              |       | Wichita, KS        |       | 12/12/07     |       | 58,000                  |       | —                          |       | 79                | %          |
| Two Brittany Place              |       | Wichita, KS        |       | 12/12/07     |       | 58,000                  |       | —                          |       | 67                | %          |
| 801 Thompson                    |       | Rockville, MD      |       | 12/12/07     |       | 51,000                  |       | 11.0                            |       | 100               | %          |
| 500 East Pratt                  |       | Baltimore, MD      |       | 12/12/07     |       | 280,000                 |       | 58.8                            |       | 98                | %          |
|                            |       |               |       |         |       | 22,224,000              |       | $                               | 2,759.4    |              |       |   |
|                                 |            |                    |            |              |            |                         |            |                                 |            |                   |            |  |

 

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(1)           Encumbrances exclude unamortized premiumsand discounts of approximately $0.6 million.

 

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

 

(3)           Oxmoor Place, Hurstborne Place,Hurstborne Park, Hurstborne Plaza, Forum Office Park, Lakeview, SteeplechasePlace, Hunnington, City Hall Plaza and One & Two Chestnut Place areeach held as collateral for this note payable.

 

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

 

(5)           Royal Caribbean Center and DeVryUniversity are each 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.

 

The following table presentscertain additional information about the seven properties in which we owninterests and account for under the equity method of accounting at December 31,2007:

 
| ** **             | ** ** | ** **       | ** ** | ** **   | ** ** | **Approximate**         | ** ** | ** **                | ** ** | ** **        | ** ** | **Our**       | ** ** |
|------------------------|------------|------------------|------------|--------------|------------|-------------------------|------------|---------------------------|------------|-------------------|------------|---------------|------------|
| ** **             | ** ** | ** **       | ** ** | **Date**     | ** ** | **Rentable**            | ** ** | **Encumbrances (1)** | ** ** | **Approximate**   | ** ** | **Ownership** | ** ** |
| **Property Name** | ** ** | **Location**     | ** ** | **acquired** | ** ** | **Square Footage** | ** ** | **(in millions)**    | ** ** | **% leased** | ** ** | **Interest**  | ** ** |
| Minnesota Center       |       | Bloomington, MN  |       | 10/15/03     |       | 276,000                 |       | $                         | 26.5       |              | 79         | %             | 93.07      | % |
| Enclave on the Lake    |       | Houston, TX      |       | 04/12/04     |       | 171,000                 |       | 6.9                       |       | 100               | %          | 36.31         | %          |
| St. Louis Place        |       | St. Louis, MO    |       | 06/30/04     |       | 337,000                 |       | 6.8                       |       | 90                | %          | 35.71         | %          |
| Colorado Building      |       | Washington, D.C. |       | 08/10/04     |       | 122,000                 |       | 26.7                      |       | 98                | %          | 95.20         | %          |
| Travis Tower           |       | Houston, TX      |       | 10/01/04     |       | 507,000                 |       | 21.8                      |       | 94                | %          | 60.43         | %          |
| Alamo Plaza            |       | Denver, CO       |       | 02/24/05     |       | 191,000                 |       | 10.7                      |       | 99                | %          | 33.93         | %          |
| Wanamaker Building     |       | Philadelphia, PA |       | 12/12/07     |       | 1,390,000               |       | 49.1                      |       | 97                | %          | 60.00         | %          |
|                   |       |             |       |         |       | 2,994,000               |       | $                         | 148.5      |              |       |          |       |   |

 

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(1)This amount representsour notes payable for our ownership interest only.

 

34

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Thefollowing information generally applies to all of our properties:

 

·                  we believe all of ourproperties are adequately covered by insurance and suitable for their intendedpurposes;

 

·                 we have no plans for anymaterial renovations, improvements or development of our properties, except inaccordance with planned budgets;

 

·                 our properties are locatedin markets where we are subject to competition in attracting new tenants andretaining current tenants; and

 

·                  depreciation is provided ona straight-line basis over the estimated useful lives of the buildings.

 

**FutureLease 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, 2007(in thousands):

 

| 2008 |   | $       | 384,525 |   |
|------|--------|---------|---------|--------|
| 2009 |   | 352,985 |    |
| 2010 |   | 319,635 |    |
| 2011 |   | 266,765 |    |
| 2012 |   | 225,559 |    |
| 2013 |   | 187,248 |    |
| 2014 |   | 156,833 |    |
| 2015 |   | 122,988 |    |
| 2016 |   | 94,079  |    |
| 2017 |   | 71,795  |    |

 

**Item 3.                    LegalProceedings.**

 

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

 

**Item 4.                    Submissionof Matters to a Vote of Security Holders.**

 

No matters were submittedto a vote of security holders during the fourth quarter of 2007.

 

35

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**PART II**

 

**Item 5.                    Market for Registrant’sCommon Equity, Related Stockholder Matters and Issuer Purchases of EquitySecurities.**

 

**Market Information**

 

There is no establishedpublic trading market for our common stock. Therefore, there is a risk that a stockholder may not be able to sellour stock at a time or price acceptable to the stockholder.  Pursuant to the Current Offering, we areselling shares of our common stock to the public at a price of $10.00 per shareand at $9.50 per share pursuant to our distribution reinvestment plan.  Unless and until our shares are listed on anational securities exchange, it is not expected that a public market for theshares will develop.

 

In order for Financial Industry Regulatory Authority (“FINRA”)members and their associated persons to participate in the offering and sale ofshares of common stock pursuant to our Current Offering, we are requiredpursuant to NASD Rule 2710(f)(2)(M) to disclose in each annual reportdistributed to stockholders a per share estimated value of the shares, themethod by which it was developed and the date of the data used to develop theestimated value.  In addition, we prepareannual statements of estimated share values to assist fiduciaries of retirementplans subject to the annual reporting requirements of ERISA in the preparationof their reports relating to an investment in our shares.  During our Offerings and for the first threefull fiscal years following the termination of the last public equity offeringof shares of our common stock; the value of the shares is deemed to be theoffering price of $10.00 per share (without regard to purchase price discountsfor certain categories of purchasers), as adjusted for any special distributionof net sales proceeds.  There is nopublic trading market for the shares at this time, and there can be noassurance that stockholders would receive $10.00 per share if such a market didexist and they sold their shares or that they will be able to receive suchamount for their shares in the future.  Nordoes this deemed value reflect the distributions that stockholders would beentitled to receive if our properties were sold and the sale proceeds weredistributed upon liquidation of our company. Such a distribution upon liquidation may be less than $10.00 per shareprimarily due to the fact that the funds initially available for investment inproperties were reduced from the gross offering proceeds in order to payselling commissions and dealer manager fees, organization and offeringexpenses, and acquisitions and advisory fees.

 

We view our offeringstage as complete upon the termination of our first public equity offering thatis not followed by another public equity offering.  For purposes of this definition, we do notconsider a “public equity offering” to include offerings on behalf of sellingstockholders or offerings related to a distribution reinvestment plan, employeebenefit plan or the redemption of interests in our operating partnership,Behringer OP.

 

**Holders**

 

As of March 14,2008, we had approximately 215,021,000 shares of common stock outstanding heldby a total of approximately 50,560 stockholders.

 

**Distributions**

 

We made anelection to qualify as a REIT for federal income tax purposes commencing withour taxable year ending December 31, 2004. As a REIT, we are required to distribute at least 90% of our REITtaxable income to our stockholders annually. Our board declares cash distributions on a quarterly basis, portions ofwhich are paid on a monthly basis. Monthly cash distributions are paid based on daily record anddistribution declaration dates so our investors will be entitled to be paiddistributions beginning on the day that they are admitted as stockholders.  In both 2007 and 2006, approximately $0.3million of distributions were declared and paid related to Behringer OP limitedpartnership units which are recorded as a reduction to minority interest.  All other distributions are recorded tostockholders equity.  Until proceeds fromour Offerings are invested and generating operating cash flow sufficient tomake distributions to stockholders, we have and may continue to pay all or aportion of our distributions from the proceeds of the Offerings or fromborrowings in anticipation of future cash flow. Of the amounts distributed by us in 2007, approximately 82.5%represented a return of capital and 17.5% were distributions from the taxableearnings of real estate operations.  Infiscal years 2007 and 2006, we made cash distributions aggregatingapproximately $111.0 million and $60.1 million, respectively, to ourstockholders.  Of these amounts,approximately $19.4 million and $13.9 million, in fiscal years 2007 and 2006,respectively, was paid using cash generated from our operations.  The remaining amounts were paid from sourcesother than operating cash flow, such as offering proceeds, cash advanced to usby, or reimbursements for expenses or waiver of fees from, our advisor andproceeds from loans including those secured by our assets.

 

Since August 2007,the declared distribution rate has been equal to a daily amount of $.0017260per share of common stock, which is equivalent to an annual distribution rateof 6.3% assuming the share was purchased for $10.00. This change from ahistorical 7% distribution rate to a 6.3% distribution rate resulted from ourboard’s continued review and analysis of the competitive landscape impactingbuyers of commercial real estate.  Our board of directors will continue toevaluate our distribution levels on at least a quarterly basis.

 

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Thefollowing table shows the distributions declared and paid for the fiscal yearsended December 31, 2007 and 2006 (in thousands):

 

| ** **  | ** ** | **Distributions** | ** ** | **Distributions** | ** ** |
|-------------|------------|-------------------|------------|-------------------|------------|
| ** **  | ** ** | **Declared**      | ** ** | **Paid**          | ** ** |
| 2007        |       |              |       |              |       |
| 4th Quarter |       | $                 | 31,982     |              | $          | 31,067 |   |
| 3rd Quarter |       | 31,122            |       | 31,192            |       |
| 2nd Quarter |       | 28,788            |       | 27,028            |       |
| 1st Quarter |       | 22,918            |       | 21,669            |       |
| Total       |       | $                 | 114,810    |              | $          | 110,956 |   |
|        |       |              |       |              |       |
| 2006        |       |              |       |              |       |
| 4th Quarter |       | $                 | 19,726     |              | $          | 18,328 |   |
| 3rd Quarter |       | 16,690            |       | 15,939            |       |
| 2nd Quarter |       | 14,339            |       | 13,873            |       |
| 1st Quarter |       | 12,461            |       | 11,959            |       |
| Total       |       | $                 | 63,216     |              | $          | 60,099 |   |

 

**Recent Sales of UnregisteredSecurities**

 

We sold 1,000 shares ofour convertible stock to Behringer Advisors for $1,000 on March 22,2006.  Pursuant to its terms, theconvertible stock is convertible into shares of our common stock with a valueequal to 15% of the amount by which (1) our enterprise value, includingthe 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 registeredunder the Securities Act of 1933, as amended, and were issued in reliance on Rule 4(2) ofthe Securities Act.

 

**Securities Authorized forIssuance under Equity Compensation Plans**

 

The following tableprovides information regarding our equity compensation plans as of December 31,2007:

 
| **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     |       | 55,500                                                                                                                                               |       | $                                                                                                           | 9.13       |                                                                                                                                        | 11,944,500 | * |
| Equity compensation plans not approved by security holders |       | N/A                                                                                                                                                  |       | N/A                                                                                                         |       | N/A                                                                                                                                         |       |
| Total                                                      |       | 55,500                                                                                                                                               |       | $                                                                                                           | 9.13       |                                                                                                                                        | 11,944,500 | * |

 

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* All shares authorizedfor issuance pursuant to awards not yet granted under our 2005 Incentive AwardPlan.

 

**Share Redemption Program**

 

Our board of directorshas authorized a share redemption program for investors who hold their sharesfor more than one year.  The purchaseprices for redeemed shares are set forth in the prospectus for our CurrentOffering of common stock, as supplemented from time to time.  Our board of directors reserves the right inits sole discretion at any time, and from time to time, to (1) waive theone-year holding period in the event of the death, disability or need forlong-term care, other exigent circumstances such as bankruptcy, a mandatorydistribution requirement under a stockholder’s IRA or with respect to sharespurchased under or through our DRIP or automatic purchase plan, (2) rejectany request for redemption, (3) change the purchase price for redemptions,or (4) terminate, suspend or amend the share redemption program.  Under the terms of the plan, during anycalendar year, we will not redeem in excess of 5% of the weighted averagenumber of shares outstanding during the prior calendar year.  In addition, our board of directors willdetermine whether we have

 

37

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sufficient cash fromoperations to repurchase shares, and such purchases will generally be limitedto proceeds of our DRIP plus 1% of operating cash flow for the previous fiscalyear.  During the quarter ended December 31,2007, 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 2007  |       | —                   |       | $                   | —     |                                   | —     |                                     | (1)        |   |
| November 2007 |       | 703,889                  |       | $                   | 8.84       |                                   | 703,889    |                                     | (1)        |   |
| December 2007 |       | —                   |       | $                   | —     |                                   | —     |                                     | (1)        |   |

 

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| (1) |   | A description of the  maximum number of shares that may be purchased under our redemption program  is included in the narrative preceding this table. |
|-----|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

 

**Item 6.                    SelectedFinancial Data.**

 

At December 31,2007, we owned interests in 75 properties; at December 31, 2006 we ownedinterests in 36 properties; at December 31, 2005, we owned interests in 21properties; at December 31, 2004, we owned interests in seven properties;and at December 31, 2003, we owned an interest in one property.  Accordingly, the selected financial data foreach fiscal year presented below reflects significant increases in allcategories.  The following data should beread in conjunction with our audited consolidated financial statements and thenotes thereto and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” appearing elsewhere in this Annual Report on Form 10-K.The selected financial data presented below has been derived from our auditedconsolidated financial statements (in thousands, except per share amounts).

 
| **As of December 31,**           | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005**  | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------|------------|-----------|------------|----------|------------|-----------|------------|----------|------------|----------|------------|
|                                            |       |      |       |     |       |      |       |     |       |     |       |
| Total assets                                    |       | $         | 5,172,127  |     | $          | 2,694,972 |       | $        | 900,582    |     | $          | 198,888 |   | $ | 11,685 |   |
|                                            |       |      |       |     |       |      |       |     |       |     |       |
| Notes payable                                   |       | $         | 3,198,143  |     | $          | 1,609,702 |       | $        | 353,555    |     | $          | 82,354 |   | $ | 4,333 |   |
| Other liabilities                               |       | 450,338   |       | 167,756  |       | 26,224    |       | 6,613    |       | 281      |       |
| Minority interest (1)                           |       | 18,049    |       | 3,072    |       | 3,375     |       | —   |       | —   |       |
| Stockholders’ equity                       |       | 1,505,597 |       | 914,442  |       | 517,428   |       | 109,921  |       | 7,071    |       |
| Total liabilities and stockholders’ equity |       | $         | 5,172,127  |     | $          | 2,694,972 |       | $        | 900,582    |     | $          | 198,888 |   | $ | 11,685 |   |

 
| **Year ended December 31,** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                       |       |     |       |     |       |     |       |     |       |     |       |
| Rental revenue                             |       | $        | 314,221    |     | $          | 161,306  |       | $        | 31,057     |     | $          | 130 |   | $ | — |   |
| Net loss                                   |       | $        | (41,631    | )        | $          | (22,432  | )          | $        | (5,722     | )        | $          | (1,539 | ) | $ | (289 | ) |
| Basic and diluted loss per share (2)       |       | $        | (0.24      | )        | $          | (0.25    | )          | $        | (0.15      | )        | $          | (0.26 | ) | $ | (1.84 | ) |
| Distributions declared per share (2)       |       | $        | 0.67       |     | $          | 0.70     |       | $        | 0.67       |     | $          | 0.64 |   | $ | 0.58 |   |

 

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| (1)    |   | Minority interest reflects the minority interests  related to certain of our real estate properties and includes 432,586 units of  limited partnership interests in Behringer OP. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                              |
| (2)    |   | Basic and diluted loss  per share and distributions declared per share for each period presented  reflects the effect of 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.**

 

The following discussionand analysis should be read in conjunction with the accompanying consolidatedfinancial statements and the notes thereto.

 

**Critical Accounting Policies andEstimates**

 

Management’s discussionand analysis of financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”.)  The preparation of these financial statementsrequires our management to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure 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.

 

***Principlesof Consolidation and Basis of Presentation***

 

Our consolidatedfinancial statements include our accounts, the accounts of variable interestentities (“VIEs”) in which we are the primary beneficiary and the accounts ofother subsidiaries over which we have control. All inter-company transactions, balances and profits have beeneliminated in consolidation.  Interestsin entities acquired are evaluated for consolidation based on FinancialAccounting Standards Board Interpretation (“FIN”) 46R, which requires theconsolidation of VIEs in which we are deemed to be the primarybeneficiary.  If the interest in theentity is determined not to be a VIE under FIN 46R, then the entity isevaluated for consolidation under the American Institute of Certified PublicAccountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accounting forInvestments in Real Estate Ventures,” as amended by Emerging Issues Task Force(“EITF”) 04-5, “Determining Whether a General Partner, or the General Partnersas a Group, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.”

 

There are judgments andestimates involved in determining if an entity in which we have made aninvestment is a VIE and if so, if we are the primary beneficiary.  The entity is evaluated to determine if it isa VIE by, among other things, calculating the percentage of equity being riskedcompared to the total equity of the entity. FIN 46R provides some guidelines as to what the minimum equity at riskshould be, but the percentage can vary depending upon the industry and/or thetype of operations of the entity and it is up to management to determine thatminimum percentage as it relates to our business and the facts surrounding eachof our acquisitions.  In addition, evenif the entity’s equity at risk is a very low percentage, we are required by FIN46R to evaluate the equity at risk compared to the entity’s expected futurelosses to determine if there could still in fact be sufficient equity at theentity.  Determining expected futurelosses involves assumptions of various possibilities of the results of futureoperations of the entity, assigning a probability to each possibility and usinga discount rate to 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 ourthe financial statements.

 

***RealEstate***

 

Upon the acquisition ofreal estate properties, we allocate the purchase price of those properties tothe tangible assets acquired, consisting of land, inclusive of associatedrights, and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their relative fair values in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwilland Other Intangible Assets.”  Identifiedintangible assets consist of the fair value of above-market and below-marketleases, in-place leases, in-place tenant improvements and tenant relationships.

 

Upon the completion of abusiness combination, we record the tangible assets acquired, consisting ofland and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their fair values in accordance with SFAS No. 141,“Business Combinations.”  Identifiedintangible assets consist of the fair value of above-market and below-marketleases, in-place leases, in-place tenant improvements and tenantrelationships.  Any amount paid in excessof 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 assets acquired.

 

Initial valuations aresubject to change until our information is finalized, which is no later thantwelve months from the acquisition date.

 

We determine the fairvalue of assumed debt by calculating the net present value of the scheduledmortgage payments using interest rates for debt with similar terms andremaining maturities that management believes we could obtain.  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.

 

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The fair value of thetangible assets acquired, consisting of land and buildings, is determined byvaluing the property as if it were vacant, and the “as-if-vacant” value is thenallocated to land and buildings.  Landvalues are derived from appraisals, and building values are calculated asreplacement cost less depreciation or management’s estimates of the relativefair value of these assets using discounted cash flow analyses or similarmethods.  The value of buildings aredepreciated over the estimated useful life of 25 years using the straight-linemethod.

 

We determine the value ofabove-market and below-market in-place leases for acquired properties based onthe present value (using an interest rate that reflects the risks associatedwith the leases acquired) of the difference between (1) the contractualamounts to be paid pursuant to the in-place leases and (2) management’sestimate of current market lease rates for the corresponding in-place leases,measured over a period equal to the determined lease term.  We record the fair value of above-market andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over thedetermined lease term.

 

The total value ofidentified real estate intangible assets acquired is further allocated toin-place lease values, in-place tenant improvements, in-place leasingcommissions and tenant relationships based on our evaluation of the specificcharacteristics of each tenant’s lease and our overall relationship with thatrespective tenant.  The aggregate valuefor tenant improvements and leasing commissions is based on estimates of thesecosts incurred at inception of the acquired leases, amortized through the dateof acquisition.  The aggregate value ofin-place leases acquired and tenant relationships is determined by applying afair value model.  The estimates of fairvalue of in-place leases includes an estimate of carrying costs during theexpected lease-up periods for the respective spaces considering current marketconditions.  In estimating the carryingcosts that would have otherwise been incurred had the leases not been in place,we include such items as real estate taxes, insurance and other operatingexpenses as well as lost rental revenue during the expected lease-up periodbased on current market conditions.  Theestimates of the fair value of tenant relationships also include costs to executesimilar leases including leasing commissions, legal and tenant improvements aswell as an estimate of the likelihood of renewal as determined by management ona tenant-by-tenant basis.

 

We amortize the value ofin-place leases and in-place tenant improvements to expense over the initial termof the respective leases.  The value oftenant relationship intangibles are amortized to expense over the initial termand any anticipated renewal periods, but in no event does the amortizationperiod for intangible assets exceed the remaining depreciable life of thebuilding.  Should a tenant terminate itslease, the unamortized portion of the in-place lease value and tenantrelationship intangibles would be charged to expense.

 

In allocating thepurchase price of each of our properties, management makes assumptions and usesvarious estimates, including, but not limited to, the estimated useful lives ofthe assets, the cost of replacing certain assets, discount rates used todetermine present values, market rental rates per square foot and the period requiredto lease the property up to its occupancy at acquisition if it werevacant.  Many of these estimates areobtained 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 variouscategories of our real estate assets and/or related intangibles beingoverstated or understated which could result in an overstatement orunderstatement of depreciation and/or amortization expense.  These variances could be material to ourfinancial statements.

 

***Investmentsin Unconsolidated Entities***

 

As of December 31,2007, the “Investments in unconsolidated entities” on our balance sheetincludes our undivided TIC interests in six office buildings and ournon-controlling 60% interest in the Wanamaker Building. Consolidation of theseinvestments is not required as they do not qualify as VIEs as defined in FIN No. 46Rand do not meet the voting interest requirements required for consolidationunder AICPA SOP 78-9 “Accounting for Investments in Real Estate Ventures,” asamended by EITF 04-5 “Determining Whether a General Partner, or the GeneralPartners as a Group, Controls a Limited Partnership or Similar Entity When theLimited Partners have Certain Rights.”

 

We account for theseinvestments using the equity method of accounting in accordance with SOP78-9.  The equity method of accountingrequires these investments to be initially recorded at cost and subsequentlyincreased (decreased) for our share of net income (loss), includingeliminations for our share of inter-company transactions and reduced whendistributions are received.

 

***Impairmentof Long-Lived Assets***

 

For real estate we whollyown, we monitor events and changes in circumstances indicating that thecarrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstancesare present, we assess potential impairment by comparing estimated futureundiscounted operating cash flows expected to be generated over the life of theasset and from its eventual disposition, to the carrying amount of theasset.  In the event that the carryingamount exceeds the estimated future undiscounted operating cash flows, werecognize an impairment loss to adjust the carrying amount of the asset toestimated fair value.

 

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For real estate we ownthrough an investment in a joint venture, TIC interest or other similarinvestment structure, at each reporting date we will compare the estimated fairvalue of our investment to the carrying value. An impairment charge is recorded to the extent the fair value of ourinvestment is less than the carrying amount and the decline in value isdetermined to be other than a temporary decline.  No impairment charges have been taken in2007, 2006 or 2005.

 

In evaluating ourinvestments for impairment, management makes several estimates and assumptions,including, but not limited to, the projected date of disposition of theproperties, the estimated future cash flows of the properties during ourownership and the projected sales price of each of the properties.  A change in these estimates and assumptionscould result in understating or overstating the book value of our investmentswhich could be material to our financial statements.

 

**Overview**

 

We are externally managedand advised by Behringer Advisors. Behringer Advisors is responsible for managing our day-to-day affairsand for identifying and making acquisitions and investments on our behalf.  Substantially all of our business is conductedthrough our operating partnership, Behringer OP.

 

During the year ended December 31,2007, we purchased interests in 39 real estate properties, 38 of which wereacquired in the fourth quarter of 2007. We acquired interests in 34 properties located throughout the UnitedStates on December 12, 2007 when we completed the purchase all of theoutstanding shares of the subsidiaries of IPC and we acquired three propertieslocated in Chicago, Illinois on November 1, 2007.  Additionally, we acquired 111 Woodcrest,located in close proximity to our Woodcrest Corporate Center property in CherryHill, New Jersey, on November 20, 2007, and we acquired Centreport OfficeCenter, located in Ft. Worth, Texas, on June 14, 2007.  As of December 31, 2007, we owned aportfolio of 75 office properties located in 23 states and the District ofColumbia.

### ** **

### **Results of Operations**

### ** **

At December 31,2007, we owned interests in 75 office properties; at December 31, 2006, weowned interests in 36 office properties and at December 31, 2005, we ownedinterests in 21 office properties. Accordingly, our results of operations for each fiscal year presentedreflect significant increases in most categories due to the growth of ourportfolio of properties.  Managementexpects increases in most categories in the future as we purchase additionalreal estate properties and as we begin to realize the full year impact of our2007 acquisitions.

 

*Fiscal year ended December 31, 2007 ascompared to fiscal year ended December 31, 2006*

 

*RentalRevenue.* Rental revenue for the year ended December 31,2007 was generated by our consolidated real estate properties and wasapproximately $314.2 million as compared to approximately $161.3 million forthe year ended December 31, 2006. Approximately 25% of the increase over prior year was due to revenueattributable to properties we acquired in 2007, approximately 73% of theincrease is attributable to properties that were owned for a full year in 2007but owned only during part of 2006, and approximately 2% of the increase isrelated to properties which were held all of 2007 and 2006.

 

*PropertyOperating Expenses.* Property operating expenses for the yearended December 31, 2007 were approximately $75.0 million as compared toapproximately $35.7 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 we 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 approximately2% of the increase is related to properties which were held all of 2007 and2006.

 

*InterestExpense. *Interestexpense for the year ended December 31, 2007 was approximately $100.7million as compared to approximately $50.9 million for the year ended December 31,2006 and was comprised of interest expense and amortization of deferredfinancing fees related to our notes payable associated with our real estate andTIC interest investments.  The increaseis primarily due to our notes payable increasing from $1.6 billion at December 31,2006 to $3.2 billion at December 31, 2007.

 

*RealEstate Taxes. *Realestate taxes for the year ended December 31, 2007 were approximately $43.0million as compared to approximately $22.0 million for the year ended December 31,2006 and were comprised of real estate taxes from each of our consolidated realestate properties. Approximately 27% of the increase over prior year wasattributable to properties we acquired in 2007, approximately 70% of theincrease is attributable to properties that were owned for a full year in 2007but only owned during part of 2006, and approximately 3% of the increase isrelated to properties which were held all of 2007 and 2006.

 

*PropertyManagement Fees.*Property management fees for the year ended December 31,2007 were approximately $9.2 million as compared to approximately $4.9 millionfor the year ended December 31, 2006 and were comprised of propertymanagement fees related to our real estate properties.   The increase in property management fees isprimarily due to our increased number of real estate properties.

 

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*AssetManagement Fees.* Asset management fees for the year ended December 31,2007 were approximately $13.6 million as compared to approximately $5.1 millionfor the year ended December 31, 2006 and were comprised of asset managementfees associated with our real estate properties.  Asset management fees of approximately $1.0million and $2.7 million were waived by Behringer Advisors for the year 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 expenses includingdirectors’ and officers’ insurance premiums, auditing fees, legal fees andother administrative expenses.  Theincrease is primarily due to increased business and franchise taxes, legalexpenses, audit expenses, and directors’ and officers insurance premiums; eachwas associated with the overall growth of the portfolio.

 

*Depreciationand Amortization Expense.*Depreciation and amortizationexpense for the year ended December 31, 2007 was approximately $141.5million as compared to approximately $73.3 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 80% 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 an approximately 2% decrease in depreciation andamortization expense for properties which were held all of 2007 and 2006.

 

*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 and interest income earned on a loan we made to Behringer HarvardMultifamily REIT I, Inc. during 2007. On December 20, 2007, the loanwas paid in full and was terminated.

 

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

 

*Fiscal year ended December 31, 2006 ascompared to fiscal year ended December 31, 2005*

 

*RentalRevenue.* Rental revenue for the year ended December 31,2006 was from our consolidated properties and was approximately $161.3 millionas compared to approximately $31.1 million for the year ended December 31,2005.  The increase in rental revenue wasprimarily due to our increased number of consolidated real estate properties.

 

*PropertyOperating Expenses.* Property operating expenses for the yearended December 31, 2006 were approximately $35.7 million as compared toapproximately $6.5 million for the year ended December 31, 2005 and werecomprised of property operating expenses from our consolidated properties.  The increase in property operating expenseswas primarily due to our increased number of consolidated real estateproperties.

 

*InterestExpense. *Interestexpense for the year ended December 31, 2006 was approximately $50.9million as compared to approximately $13.1 million for the year ended December 31,2005 and was comprised of interest expense and amortization of deferredfinancing fees related to our mortgages associated with our real estate and TICinterest investments.  The increase wasprimarily due to the $1.3 billion increase in our notes payable during 2006.

 

*Rate LockExtension Recoveries. *Therewere no rate lock extension recoveries for the year ended December 31,2006. Rate lock extension recoveries for the year ended December 31, 2005were approximately $0.5 million and represented the refund of interest ratelock extension fees from the year ended December 31, 2004.

 

*RealEstate Taxes. *Realestate taxes for the year ended December 31, 2006 were approximately $22.0million as compared to approximately $3.8 million for the year ended December 31,2005 and were comprised of real estate taxes from each of our consolidatedproperties. The increase in real estate taxes was primarily due to ourincreased number of consolidated real estate properties.

 

*PropertyManagement Fees.*Property management fees for the year ended December 31,2006 were approximately $4.9 million as compared to approximately $1.5 millionfor the year ended December 31, 2005 and were comprised of propertymanagement fees related to our consolidated real estate properties and TICinterest investments. The increase in property management fees was primarilydue to our increased number of consolidated real estate properties.

 

*AssetManagement Fees.* Asset management fees for the year ended December 31,2006 were approximately $5.1 million as compared to approximately $1.9 millionfor the year ended December 31, 2005 and were comprised of assetmanagement fees associated with our consolidated properties and TIC interestinvestments.  Asset management fees ofapproximately $2.7 million were waived by Behringer Advisors for the year endedDecember 31, 2006.

 

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*Generaland Administrative Expense.* General and administrativeexpense for the year ended December 31, 2006 was approximately $1.6million as compared to approximately $1.3 million for the year ended December 31,2005 and was comprised of corporate general and administrative expensesincluding directors’ and officers’ insurance premiums, auditing fees, legal feesand other administrative expenses.

 

*Depreciationand Amortization Expense. *Depreciationand amortization expense for the year ended December 31, 2006 wasapproximately $73.3 million as compared to approximately $15.0 million for theyear ended December 31, 2005 and was comprised of depreciation andamortization expense from each of our consolidated properties.

 

*InterestIncome*. Interest income for the year ended December 31,2006 was approximately $5.0 million as compared to approximately $2.7 millionfor the year ended December 31, 2005 and was comprised of interest incomeassociated with funds on deposits with banks. The increase in 2006 was primarily due to higher cash balances ondeposit with banks.

 

*Equity inEarnings of Investments*. Equity in earnings of investments for the year ended December 31,2006 was approximately $4.8 million as compared to $3.1 million for the yearended December 31, 2005 and was comprised of our share of equity in theearnings of our TIC interest investments. This increase was due to improved earnings at our TIC interestproperties and increases in our TIC ownership interest in Minnesota Center, theColorado Building and the Pratt Building during 2006.

 

**Cash Flow Analysis**

 

At December 31,2007, we owned interests in 75 office properties; at December 31, 2006, weowned interests in 36 office properties and at December 31, 2005, we ownedinterests in 21 office properties. Accordingly, cash flows for each fiscal year presented reflectsignificant differences in most categories due to the growth of our portfolioof properties.

 

*Fiscal year ended December 31, 2007 ascompared to fiscal year 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 $28.6 million adjusted for depreciation and amortization ofapproximately $134.6 million.  During theyear ended December 31, 2006, cash flows provided by operating activitieswere approximately $49.2 million and were primarily comprised of the net lossof approximately $22.4 million adjusted for depreciation and amortization ofapproximately $69.5 million.

 

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 funds received from the issuance ofstock and proceeds from notes payable.

 

*Fiscal year ended December 31, 2006 ascompared to fiscal year ended December 31, 2005*

 

Cashflows provided by operating activities for the year ended December 31,2006 were approximately $49.2 million and were primarily comprised of the netloss of approximately $22.4 million adjusted for depreciation and amortizationof approximately $69.5 million.  Duringthe year ended December 31, 2005, cash flows provided by operatingactivities were approximately $9.0 million and were primarily comprised of thenet loss of approximately $5.7 million adjusted for depreciation andamortization of approximately $15.5 million.

 

Cashflows used in investing activities for the year ended December 31, 2006were approximately $1.6 billion and were primarily comprised of the purchase ofreal estate investments totaling approximately $1.5 billion.  During the year ended    December 31, 2005, cash flows used ininvesting activities were approximately $588.6 million and were comprised primarilyof the purchase of real estate investments.

 

Cashflows provided by financing activities for the year ended December 31,2006 were approximately $1.5 billion and were comprised primarily of proceedsfrom notes payable, net of notes payments, of approximately $1.1 billion andfunds received from the issuance of stock, net of redemptions and offeringcosts, of approximately $454.8 million. During the year ended December 31, 2005, cash flows provided byfinancing activities were approximately $682.3 million and were comprisedprimarily of funds received from the issuance of stock and proceeds from notespayable.

 

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**Liquidity and Capital Resources**

 

***General***

 

Our principal demands forfunds will continue to be for the acquisition of real estate-related assets forthe payment of operating expenses and distributions, and for the payment ofprincipal and interest on our outstanding indebtedness.  Generally, cash needs for items other than theacquisition of real estate-related assets are expected to be met fromoperations, and cash needs for property acquisitions and mortgage loaninvestments are expected to be met from the net proceeds of the CurrentOffering and borrowings.  However, theremay be a delay between the sale of our shares and our purchase of real estaterelated assets and receipt of income from such investments, which could resultin a delay in the benefits to our stockholders of returns generated from ouroperations.  During this period, we maydecide to temporarily invest any uninvested proceeds in investments that couldyield lower returns than our targeted investments in real estate relatedassets.  These lower returns may affectour ability to make distributions or the amount actually distributed.

 

Theamount of monies to be distributed to our stockholders is determined by ourboard of directors and is dependent on a number of factors, including financialcondition, capital expenditure requirements and annual distributionrequirements needed to maintain our status as a REIT under the Code.  Until proceeds from our Offerings are fullyinvested and generating operating cash flow sufficient to fund distributionsmade to stockholders, some or all of our distributions have been, and maycontinue to be, paid from sources other than operating cash flow, such asoffering proceeds, cash advanced to us by, or reimbursements for expenses orwaiver of fees from, our advisor and proceeds from loans including thosesecured by our assets. Of the amounts distributed by us in 2007,approximately 82.5% represented a return of capital and 17.5% weredistributions from the taxable earnings of real estate operations.  In fiscal year 2007, 2006 and 2005, we madecash distributions aggregating approximately $111.0 million, $60.1 million, and$22.4 million, respectively, to our stockholders.  Of these amounts, approximately $19.4million, $13.9 million and $6.3 million, in fiscal years 2007, 2006 and 2005,respectively, was paid using cash generated from our operations.  We can give no assurance that these othersources of funds will be available in the future to fund distributions if cashgenerated from our operations is insufficient.

 

Weexpect that our current properties, along with properties to be acquired in thefuture, will generate sufficient cash flow to cover operating expenses plus payall or a portion of a monthly distribution. Historically, a portion of the distributions have been paid from cashprovided by operations and sources other than operating cash flow, such asoffering proceeds, cash advanced to us or reimbursements of expenses or waiverof fees from our advisor and proceeds from loans, including those secured byour assets.  We can give no assurancethat these sources will be available in the future to fund distributions ifcash generated from our operations is insufficient.

 

Ournotes payable increased in 2007 to approximately $3.2 billion at December 31,2007 as compared to approximately $1.6 billion at December 31, 2006.  This increase is due to notes payable assumedin property acquisitions and borrowings under the credit facility, describedbelow.  Each of our loans iscollateralized by one or more of our properties.  At December 31, 2007, our notes payableinterest rates range from 5.02% to 8.33%, with a weighted average interest rateof approximately 5.73%.  At December 31,2007, our notes payable have maturity dates that range from July 2009 to October 2030.  Our loan agreements generally stipulate thatwe comply with certain reporting and financial covenants.  These covenants include among other things,notifying the lender of any change in management and maintaining minimum debtservice coverage ratios.  At December 31,2007, we were in compliance with each of the debt covenants under our loanagreements.

 

If debt financing is notavailable on terms and conditions we find acceptable, we may not be able toobtain 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 terms and conditions that we find acceptable, welikely will have to reduce the number of properties we can purchase, and thereturn on the properties we do purchase likely will be lower.  In addition, we may find it difficult, costlyor impossible to refinance indebtedness which is maturing.  If interest rates are higher when theproperties are refinanced, we may not be able to finance the properties and ourincome could be reduced. In addition, if we pay fees to lock-in a favorableinterest rate, falling interest rates or other factors could require us toforfeit these fees.

 

Restricted cash as of December 31,2007 and 2006 included approximately $120.7 million and $100.1 million,respectively, held in restricted money market accounts, as required by ourlenders, for anticipated tenant expansions and improvements, property taxes andinsurance for our consolidated properties. As of December 31, 2007, we had commitments of approximately $28.7million for future tenant improvements and lease incentives.

 

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*** ***

***Credit Facility***

 

On December 11, 2007 Behringer Harvard OP enteredinto a secured credit agreement providing for up to $500 million of securedborrowings with KeyBanc Capital Markets and Wachovia Securities as co-leadarrangers and KeyBank National Association as administrative agent (referred toherein as “Lender” and as the “Agent,” in their respective roles), and otherlending institutions that are parties to the credit facility (collectively, the“Lenders”).  This credit facility allows Behringer OP to borrow up to $300million of revolving loans and up to $200 million in a secured term loan. Subject to Lender approval and payments of certain activation fees to the Agentand Lenders, the amount of the revolving credit facility may be increased up to$600 million.  In addition to our use of the proceeds of the creditfacility to pay approximately $340.0 million of the purchase price and closingcosts of acquiring the subsidiaries of IPC, we intend to use the facility forgeneral corporate and working capital purposes.  The Company has acted asa guarantor of the credit facility.

 

The credit facility matures on December 11,2010.  The revolving credit facility may be extended one additional yearupon payment of an extension fee in an amount equal to fifteen basis points onthe total amount of the revolving credit facility in effect on the originalmaturity date. The term loans also may be extended one additional year uponpayment of an extension fee in an amount equal to ten basis points on the totalamount of the term loans outstanding on the original maturity date.

 

Loans under the credit facility will bear interest atan annual rate that is equal to either (1) the “base rate” (calculated asthe greater of (i) the Agent’s “prime rate” or (ii) 0.5% above theFederal Funds Effective Rate) plus the applicable margin or (2) LIBOR plusthe applicable margin.  The applicable margin for base rate loans willinitially be 0.5% and, depending on the ratio of our consolidated totalindebtedness to our gross asset value, may vary from 0.5% to 0%; the applicablemargin for LIBOR loans will initially be 2.0% and, depending on the ratio ofour consolidated total indebtedness to our gross asset value, may vary from2.0% to 1.5%.  Behringer OP has the right to prepay the outstanding amountof any revolving credit loans or term loans under the credit facility, in wholeor in part, at any time without penalty, provided that any partial payment isin a minimum amount of $1 million.  However, prepaying the term loan priorto December 11, 2008 requires Behringer OP to pay a fee equal to fiftybasis points of the amount of the term loan being prepaid.  As of December 31, 2007, there wasapproximately $200.0 million outstanding under the term loan and approximately$140.0 million outstanding under the revolving credit facility.  As of December 31, 2007, the interestrates for the term loan and revolving credit facility were approximately 5.99%and 7.23%, respectively.  As a result ofthe interest rate swap agreements, the $200.0 million of the borrowings underthe term loan effectively bear interest at fixed rates.

 

**Contractual Obligations**

 

The following tablesummarizes our contractual obligations as of December 31, 2007 (inthousands):

 
| ** **                          | ** ** | **Total** | ** ** | **2008** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **Thereafter** | ** ** |
|-------------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Notes payable principal  (1)        |       | $         | 3,198,748  |     | $          | 11,225   |       | $        | 32,713     |     | $          | 413,520  |       | $              | 596,818    |   | $ | 127,906 |   | $ | 2,016,566 |   |
| Notes payable interest              |       | 1,508,474 |       | 182,943  |       | 181,874  |       | 180,466  |       | 260,071  |       | 233,551  |       | 469,569        |       |
| Obligation to purchase  Oxmoor land |       | 5,696     |       | 5,696    |       | —   |       | —   |       | —   |       | —   |       | —         |       |
| Operating leases                    |       | 30,602    |       | 858      |       | 858      |       | 858      |       | 858      |       | 858      |       | 26,312         |       |
| Total                               |       | $         | 4,743,520  |     | $          | 200,722  |       | $        | 215,445    |     | $          | 594,844  |       | $              | 857,747    |   | $ | 362,315 |   | $ | 2,512,447 |   |

 

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(1) Excludesunamortized discount of approximately $0.6 million.

 

**Funds from Operations**

 

Funds fromoperations (“FFO”) is a non-GAAP financial measure that is widely recognized asa measure of REIT operating performance. FFO is defined by the National Association of Real Estate InvestmentTrusts as net income (loss), computed in accordance with GAAP excludingextraordinary items, as defined by GAAP, and gains (or losses) from sales ofproperty, plus depreciation and amortization on real estate assets, and afteradjustments for unconsolidated partnerships, joint ventures and subsidiaries.  We believe that FFO is helpful to investorsand our management as a measure of operating performance because it excludesdepreciation and amortization, gains and losses from property dispositions, andextraordinary items, and as a result, when compared year to year, reflects theimpact on operations from trends in occupancy rates, rental rates, operatingcosts, development activities, general and administrative expenses, andinterest costs, which is not immediately apparent from net income.  Historical cost accounting for real estateassets in accordance with GAAP implicitly assumes that the value of real estatediminishes predictably over time.  Sincereal estate values have historically risen or fallen with market conditions,many industry investors and analysts have considered the presentation ofoperating results for real estate companies that use historical cost accountingalone to be insufficient.  As a result,our management believes that the use of FFO, together with the required GAAPpresentations, provide a more complete understanding of our performance.  Factors that impact FFO include start-upcosts, fixed costs, delay in buying assets, lower yields on cash held inaccounts pending investment, income from portfolio properties and otherportfolio assets,

 

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interest rates onacquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss), asan indication of our liquidity, nor is it indicative of funds available to fundour cash needs, including our ability to make distributions.

 

Our calculations of FFOfor the years ended December 31, 2007 and 2006 are presented below (inthousands):

 
| ** **                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Net loss                      |       | $        | (41,631    | )        | $          | (22,432 | ) |
|                          |       |     |       |     |       |
| Real estate depreciation  (1) |       | 79,684   |       | 40,305   |       |
| Real estate amortization  (1) |       | 70,849   |       | 42,038   |       |
| Funds from operations  (FFO)  |       | $        | 108,902    |     | $          | 59,911 |   |
|                          |       |     |       |     |       |
| Weighted average shares       |       | 171,544  |       | 89,638   |       |

 

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(1)   This representsthe depreciation and amortization expense of the properties we consolidate andour share of depreciation and amortization expense of the properties which weaccount for under the equity method of accounting.  The expenses of our unconsolidated interestsare reflected in our equity in earnings of investments.

 

*Non-cash Items Included in Net Loss:*

 

Provided below is additional information related toselected non-cash items included in net loss above, which may be helpful inassessing our operating results. Straight-line rental revenue, amortization of intangible lease assetsand liabilities, amortization of lease incentives and bad debt expense of ourinvestment interests are reflected in our equity in earnings of investments andare included in the amounts presented below.

 

·                  Straight-line rental revenue ofapproximately $22.5 million and $7.2 million was recognized for years ended December 31,2007 and 2006, respectively;

 

·                  Amortization of intangible leaseassets and liabilities was recognized as a net decrease to rental revenues ofapproximately $9.9 million and $4.9 million for the years ended December 31,2007 and 2006, respectively;

 

·                  Amortization of lease incentives ofapproximately $1.3 million was recognized as a decrease to rental revenues forthe year ended December 31, 2007. There was no amortization of lease incentives for the year ended December 31,2006;

 

·                  Bad debt expense of approximately$0.4 million and $112,000 was recognized for the years ended December 31,2007 and 2006, respectively; and

 

·                  Amortization of deferred financingcosts of approximately $2.7 million and $1.3 million was recognized as interestexpense for the years ended December 31, 2007 and 2006, respectively.

 

In addition, FFO may beused to fund all or a portion of certain capitalizable items that are excludedfrom FFO, such as capital expenditures and payments of principal ondebt, each of which may impact the amount of cash available fordistribution to our stockholders.

 

Some or all of ourdistributions have been paid from sources other than operating cash flow, suchas offering proceeds, cash advanced to us by, or reimbursements for expenses orwaiver of fees from, our advisor and proceeds from loans including thosesecured by our assets. Given the uncertainty arising from numerous factors,including both the raising and placing of capital in the current real estateenvironment, ultimate FFO performance cannot be predicted with certainty.  For example, if we are not able to timelyinvest net proceeds of our offering at favorable yields, future distributionsdeclared and paid may continue to exceed FFO.

 

**Net Operating Income**

 

Net operating income (“NOI”)is defined as net income, computed in accordance with GAAP, generated fromproperties before interest expense, asset management fees, interest income,general and administrative expenses, depreciation, amortization, equity inearnings of investments, minority interest, income taxes and the gains on saleof assets.  We believe that NOI providesan accurate measure of our operating performance because NOI reflects theoperating performance of our properties and excludes certain items that are notassociated with management of the properties. To facilitate understanding of this financial measure, a reconciliationof net operating income to net income has been provided in accordance withGAAP.  Our calculations of NOI for theyears ended December 31, 2007, 2006 and 2005 are presented below (inthousands):

 

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| ** **                 | ** **                                           | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------|------------------------------------------------------|----------|------------|----------|------------|----------|------------|
| Rental revenue             |                                                 | $        | 314,221    |     | $          | 161,306  |       | $ | 31,057 |   |
|                       |                                                 |     |       |     |       |     |       |
| Operating expenses:        |                                                 |     |       |     |       |     |       |
|                       | Property operating expenses                          |     | 74,976     |     | 35,694     |     | 6,463      |   |
|                       | Real estate taxes                                    |     | 42,980     |     | 21,999     |     | 3,838      |   |
|                       | Property management fees                             |     | 9,233      |     | 4,947      |     | 1,502      |   |
| Total operating expenses   |                                                 | 127,189  |       | 62,640   |       | 11,803   |       |
|                       |                                                 |     |       |     |       |     |       |
| Net operating income       |                                                 | $        | 187,032    |     | $          | 98,666   |       | $ | 19,254 |   |
|                       |                                                 |     |       |     |       |     |       |
| Reconciliation to Net loss |                                                 |     |       |     |       |     |       |
| Net operating income       |                                                 | $        | 187,032    |     | $          | 98,666   |       | $ | 19,254 |   |
|                       |                                                 |     |       |     |       |     |       |
| Less:                      | Depreciation and  amortization                       |     | (141,462   | )        | (73,275    | )        | (15,033    | ) |
|                       | General and administrative  expense                  |     | (2,969     | )        | (1,614     | )        | (1,254     | ) |
|                       | Interest expense and rate  lock extension recoveries |     | (100,729   | )        | (50,877    | )        | (12,612    | ) |
|                       | Asset management fees                                |     | (13,617    | )        | (5,099     | )        | (1,857     | ) |
|                       | Minority interest                                    |     | (16        | )        | —     |     | —     |   |
|                       | Provision for income taxes                           |     | (571       | )        | —     |     | —     |   |
| Add:                       | Interest income                                      |     | 25,540     |     | 4,963      |     | 2,665      |   |
|                       | Gain on sale of assets                               |     | 44         |     | —     |     | —     |   |
|                       | Equity in earnings of  investments                   |     | 5,117      |     | 4,804      |     | 3,115      |   |
|                       |                                                 |     |       |     |       |     |       |   |
| Net loss                   |                                                 | $        | (41,631    | )        | $          | (22,432  | )          | $ | (5,722 | ) |

 

**Off-Balance Sheet Arrangements**

 

We have no off-balancesheet arrangements that are reasonably likely to have a current or futurematerial effect on our financial condition, changes in financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.

 

**New Accounting Pronouncements**

 

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 establishes a singleauthoritative definition of fair value, sets out a framework for measuring fairvalue, and requires additional disclosures about fair value measurements.  SFAS No. 157 applies only to fair valuemeasurements that are already required or permitted by other accountingstandards.  SFAS No. 157 iseffective for fiscal years beginning after November 15, 2007.  We are in the process of determining theeffect the adoption of SFAS 157 will have on our financial statements.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities - Including an Amendment of FASB Statement No. 115.”  The fair value option established bySFAS No. 159 permits all entities to choose to measure eligible itemsat fair value at specified election dates. A business entity will report unrealized gains and losses on items forwhich the fair value option has been elected in earnings (or anotherperformance indicator if the business entity does not report earnings) at eachsubsequent reporting date.  SFAS No. 159is effective for fiscal years beginning after November 15, 2007.  We have not elected the fair valuemeasurement option for any financial assets or liabilities at the present time.

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations.”  ThisStatement replaces SFAS No. 141 “Business Combinations” but retains thefundamental requirement that the acquisition method of accounting, or purchasemethod, be used for all business combinations and for an acquirer to beidentified for each business combination.  This Statement is broader inscope than that of Statement 141, which applied only to business combinationsin which control was obtained by transferring consideration. SFAS 141R appliesthe same method of accounting (the acquisition method) to all transactions andother events in which one entity obtains control over one or more otherbusinesses.  This Statement also makes certain other modifications toStatement 141, including a broader definition of a business and the requirementthat acquisition related costs are expensed as incurred.  This statementapplies to business combinations occurring on or after the beginning of thefirst annual reporting period beginning on or after December 15,2008.  Early adoption is notallowed.  We are currently assessing theeffect SFAS No. 141(R) may have on our consolidated results ofoperations and financial position.

 

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In December 2007,the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements - an amendment of ARB No. 51.”  The objective of FAS No. 160 is toimprove the relevance, comparability, and transparency of the financialinformation that a reporting entity provides in its consolidated financialstatements by establishing accounting and reporting standards for thenoncontrolling interest in a subsidiary and for the deconsolidation of asubsidiary.  It also amends certain ofARB 51’s consolidation procedures for consistency with the requirements of FASBNo. 141(R).  This Statement iseffective for fiscal years, and interim periods within those fiscal years,beginning on or after December 15, 2008. Earlier adoption is prohibited. This Statement shall be applied prospectively as of the beginning of thefiscal year in which this Statement is initially applied, except for thepresentation and disclosure requirements. The presentation and disclosure requirements shall be appliedretrospectively for all periods presented.

 

**Inflation**

 

The real estate markethas not been affected significantly by inflation in the past several years dueto the relatively low inflation rate. The majority of our leases contain inflation protection provisionsapplicable to reimbursement billings for common area maintenance charges, realestate tax and insurance reimbursements on a per square foot basis, or in somecases, annual reimbursement of operating expenses above a certain per squarefoot allowance.

 

**Item 7A. Quantitative and Qualitative Disclosures AboutMarket Risk.**

 

We are exposed tointerest rate changes primarily as a result of our long-term debt used to acquireproperties.  Our interest rate riskmanagement objectives are to limit the impact of interest rate changes onearnings and cash flows and to lower overall borrowing costs. To achieve theseobjectives, we borrow primarily at fixed rates or variable rates with thelowest margins available and in some cases, the ability to convert variablerates to fixed rates. With regard to variable rate financing, we will assessinterest rate cash flow risk by continually identifying and monitoring changesin interest rate exposures that may adversely impact expected future cash flowsand by evaluating hedging opportunities. We may enter into derivative financial instruments such as options,forwards, interest rate swaps, caps or floors to mitigate our interest rate riskon a related financial instrument or to effectively lock the interest rateportion of our variable rate debt.

 

Of our approximately $3.2billion in notes payable at December 31, 2007, approximately $143.0million represented debt subject to variable interest rates.  If our variable interest rates increased 100basis points, we estimate that total annual interest expense would increase byapproximately $1.4 million.

 

As of December 31,2007, we had $340.0 million of notes payable outstanding under our creditfacility, which is a variable rate credit facility.  However, as a result of the interest rateswap agreements; $200.0 million of these borrowings effectively bear interestat fixed rates.

 

A 100 basis pointdecrease in interest rates would result in a net decrease in the fair value ofour interest rate swaps of approximately $5.5 million.  A 100 basis point increase in interest rateswould result in a net increase in the fair value of our interest rate swaps ofapproximately $5.4 million.

 

We do not have anyforeign operations and thus we are not exposed to foreign currencyfluctuations.

 

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

 

The information requiredby this Item 8 is hereby incorporated by reference to our ConsolidatedFinancial Statements beginning on page F-1 of this Annual Report on Form 10-K.

 

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

 

                    None.

 

**Item9A(T).           Controls and Procedures.**

 

*Evaluationof Disclosure Controls and Procedures*

 

Asrequired by Rule 13a-15(b) and Rule 15d-15(b) under theExchange Act, our management, including our Chief Executive Officer and ChiefFinancial Officer, evaluated as of December 31, 2007, the effectiveness ofour disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) andRule 15d-15(e). Based on that evaluation, our Chief Executive Officer andChief Financial Officer, concluded that our disclosure controls and procedures,as of December 31, 2007, were effective for the purpose of ensuring thatinformation required to be disclosed by us in this report is recorded,processed, summarized and reported within the time periods specified by the rules andforms of the Exchange Act and is accumulated and communicated to management,including the Chief Executive Officer and Chief Financial Officer, asappropriate to allow timely decisions regarding required disclosures.

 

Webelieve, however, that a controls system, no matter how well designed andoperated, cannot provide absolute assurance that the objectives of the controlssystems are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud or error, if any, within acompany have been detected.

 

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*Management’sAnnual Report on Internal Control over Financial Reporting*

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting (as defined in Exchange Acts Rules 13a-15(f) and15d-15(f)).  Our management, includingour Chief Executive Officer and Chief Financial Officer evaluated as of December 31,2007, 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 Chief ExecutiveOfficer and Chief Financial Officer concluded that our internal controls, as ofDecember 31, 2007, were effective in providing reasonable assuranceregarding reliability of financial reporting.

 

This annual reportdoes not include an attestation report of the company’s independent registeredpublic accounting firm regarding internal control over financial reporting.Management’s report was not subject to attestation by the Company’s independentregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company to provide onlymanagement’s report in this annual report.

 

*Exclusion of IPC Portfolio and Beacon Portfolio from 2007 InternalControls Assessment              *

* *

As noted elsewherein this Form 10-K, we acquired the Beacon Portfolio and the IPC Portfolioon November 1, 2007 and December 12, 2007, respectively.  Pursuant to guidance from the SEC, we haveexcluded these assets from the assessment of our internal control overfinancial reporting as of December 31, 2007.  As of December 31, 2007, on a standalone basis, the Beacon Portfolio constituted approximately $958.1 millionof our total assets. As of December 31, 2007, on a stand alone basis, theIPC Portfolio constituted approximately $1.6 billion of our total assets.

 

*Changesin Internal Control over Financial Reporting*

 

There has been nochange in internal control over financial reporting that occurred during thequarter ended December 31, 2007 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

**Item 9B. Other Information.**

 

None.

 

49

----

 

**PART III**

 

**Item 10.****                ****Directors, Executive Officers andCorporate Governance.**

 

The information requiredby this Item will be presented in our definitive proxy statement for the annualmeeting of stockholders to be held on June 19, 2008, which is expected tobe filed with the Securities and Exchange Commission on or about April 29,2008, and is incorporated herein by reference.

 

**Item 11.****                ****Executive Compensation.**

 

The information requiredby this Item will be presented in our definitive proxy statement for the annualmeeting of stockholders to be held on June 19, 2008, which is expected tobe filed with the Securities and Exchange Commission on or about April 29,2008, and is incorporated herein by reference.

 

**Item 12.****                ****Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters.**

 

The information requiredby this Item will be presented in our definitive proxy statement for the annualmeeting of stockholders to be held on June 19, 2008, which is expected tobe filed with the Securities and Exchange Commission on or about April 29,2008, and is incorporated herein by reference.

 

**Item 13.****                ****Certain Relationships and RelatedTransactions, and Director Independence.**

 

The information requiredby this Item will be presented in our definitive proxy statement for the annualmeeting of stockholders to be held on June 19, 2008, which is expected tobe filed with the Securities and Exchange Commission on or about April 29,2008, and is incorporated herein by reference.

 

**Item 14.****                ****Principal Accounting Fees andServices.**

 

The information requiredby this Item will be presented in our definitive proxy statement for the annualmeeting of stockholders to be held on June 19, 2008, which is expected tobe filed with the Securities and Exchange Commission on or about April 29,2008, and is incorporated herein by reference.

 

50

----

 

**PART IV**

 

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

 

(a)           *List of Documents Filed.*

 

1.             *Financial Statements*

 

*                               *The list of the financial statementsfiled as part of this Annual Report on Form 10-K is set forth on page F-1herein.

 

2.*            **Financial Statement Schedules*

 

*               *Report of Independent Registered PublicAccounting Firm

 

                Schedule II Valuation and QualifyingAccounts

 

                Schedule III Real Estate and AccumulatedDepreciation

 

3.             *Exhibits*

 

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

 

(b)           *Exhibits.*

 

The exhibits filed inresponse to Item 601 of Regulation S-K are listed on the Exhibit Indexattached hereto.

 

(c)           *Financial Statement Schedules.*

 

All financial statementschedules, except for Schedule II and III (see (a) 2. above), have beenomitted because the required information of such schedules is not present, isnot present in amounts sufficient to require a schedule or is included in thefinancial statements.

 

51

----

 

**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | **Behringer Harvard REIT  I, Inc.** |
|--------|------------------------------------------|
|   |                                     |   |
|   |                                     |   |
| Dated: | March 31, 2008                      | By: | /s/ Robert M. Behringer |
|   |                                     | Robert M. Behringer |
|   |                                     | Chief Executive Officer  and |
|   |                                     | Chairman of the Board  of Directors |
|        |                                          |  |  |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 

 
| March 31, 2008 |   | /s/ Robert M. Behringer                          |
|---------------------|--------|--------------------------------------------------|
|                |   | Robert M. Behringer                              |
|                |   | Chief Executive Officer  and                     |
|                |   | Chairman of the Board  of Directors              |
|                |   | (Principal Executive  Officer)                   |
|                |   |                                             |
|                |   |                                             |
| March 31, 2008 |   | /s/ Robert S. Aisner                             |
|                |   | Robert S. Aisner                                 |
|                |   | President, Chief  Operating Officer and Director |
|                |   |                                             |
|                |   |                                             |
| March 31, 2008 |   | /s/ Gary S. Bresky                               |
|                |   | Gary S. Bresky                                   |
|                |   | Chief Financial Officer                          |
|                |   | (Principal Financial  Officer)                   |
|                |   |                                             |
|                |   |                                             |
| March 31, 2008 |   | /s/ Kimberly Arianpour                           |
|                |   | Kimberly Arianpour                               |
|                |   | Chief Accounting  Officer                        |
|                |   | (Principal Accounting  Officer)                  |
|                |   |                                             |
|                |   |                                             |
| March 31, 2008 |   | /s/ Charles G. Dannis                            |
|                |   | Charles G. Dannis                                |
|                |   | Director                                         |
|                |   |                                             |
|                |   |                                             |
| March 31, 2008 |   | /s/ Steven W. Partridge                          |
|                |   | Steven W. Partridge                              |
|                |   | Director                                         |
|                |   |                                             |
|                |   |                                             |
| March 31, 2008 |   | /s/ G. Ronald Witten                             |
|                |   | G. Ronald Witten                                 |
|                |   | Director                                         |

 

52

----

 

**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
|                                                                                             |   | **Page** |
|--------------------------------------------------------------------------------------------------|--------|----------|
|                                                                                             |   |     |
| **Financial Statements**                                                                         |   |     |
|                                                                                             |   |     |
| Report of Independent Registered Public Accounting  Firm                                         |   | F-2      |
|                                                                                             |   |     |
| Consolidated Balance Sheets as of December 31,  2007 and 2006                               |   | F-3      |
|                                                                                             |   |     |
| Consolidated  Statements of Operations for the Years ended                                       |   |     |
| December 31,  2007, 2006 and 2005                                                           |   | F-4      |
|                                                                                             |   |     |
| Consolidated  Statements of Stockholders’ Equity and Comprehensive Loss for the Years ended |   |     |
| December 31,  2007, 2006 and 2005                                                           |   | F-5      |
|                                                                                             |   |     |
| Consolidated  Statements of Cash Flows for the Years ended                                       |   |     |
| December 31,  2007, 2006 and 2005                                                           |   | F-6      |
|                                                                                             |   |     |
| Notes to Consolidated Financial Statements                                                       |   | F-7      |
|                                                                                             |   |     |
| **Financial Statement Schedule**                                                                 |   |     |
|                                                                                             |   |     |
| Report of Independent Registered Public Accounting  Firm                                         |   | F-25     |
|                                                                                             |   |     |
| Schedule II – Valuation and Qualifying Accounts                                             |   | F-26     |
|                                                                                             |   |     |
| Schedule III – Real Estate and Accumulated  Depreciation                                    |   | F-27     |

 

F-1

----

 

REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Behringer Harvard REIT I, Inc.

Addison, Texas

 

We have audited the accompanying consolidated balance sheets of BehringerHarvard REIT I, Inc. and subsidiaries (the “Company”) as of December 31,2007 and 2006 and the related consolidated statements of operations,stockholders’ equity and comprehensive loss and cash flows for each of thethree years in the period ended December 31, 2007. These financialstatements are the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  The Companyis not required to have, nor were we engaged to perform, an audit of itsinternal control over financial reporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting.  Accordingly, we express nosuch opinion.  An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly, inall material respects, the financial position of the Company at December 31,2007 and 2006, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2007, in conformity withaccounting principles generally accepted in the United States of America.

 

/s/ Deloitte & Touche LLP

 

Dallas, Texas

March 31, 2008

 

F-2

----

 

**Behringer Harvard REIT I, Inc.**

**ConsolidatedBalance Sheets**

**As of December 31, 2007 and 2006**

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

 
| ** **                                                                                                                                                                                              | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Real estate**                                                                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land                                                                                                                                                                                                    |       | $          | 514,520    |       | $          | 269,968 |   |
| Buildings, net                                                                                                                                                                                          |       | 3,359,152  |       | 1,637,738  |       |
| Real estate under development                                                                                                                                                                           |       | 7,038      |       | —     |       |
| **Total real estate**                                                                                                                                                                                   | ** ** | 3,880,710  |       | 1,907,706  |       |
| ** **                                                                                                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                                                               |       | 94,947     |       | 124,948    |       |
| Restricted cash                                                                                                                                                                                         |       | 229,803    |       | 103,343    |       |
| Accounts receivable, net                                                                                                                                                                                |       | 48,030     |       | 21,205     |       |
| Receivables from related parties                                                                                                                                                                        |       | 1,023      |       | 71         |       |
| Prepaid expenses and other assets                                                                                                                                                                       |       | 10,244     |       | 4,139      |       |
| Goodwill                                                                                                                                                                                                |       | 19,922     |       | —     |       |
| Investments in unconsolidated entities                                                                                                                                                                  |       | 203,212    |       | 145,621    |       |
| Deferred financing fees, net                                                                                                                                                                            |       | 42,668     |       | 17,912     |       |
| Notes receivable                                                                                                                                                                                        |       | 13,854     |       | 3,013      |       |
| Lease intangibles, net                                                                                                                                                                                  |       | 627,714    |       | 367,014    |       |
| **Total assets**                                                                                                                                                                                        |       | $          | 5,172,127  |       | $          | 2,694,972 |   |
|                                                                                                                                                                                                    |       |       |       |       |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                    |       |       |       |       |       |
| **Liabilities**                                                                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Notes payable                                                                                                                                                                                           |       | $          | 3,198,143  |       | $          | 1,609,702 |   |
| Accounts payable                                                                                                                                                                                        |       | 7,889      |       | 2,390      |       |
| Payables to related parties                                                                                                                                                                             |       | 8,190      |       | 2,080      |       |
| Acquired below-market leases, net                                                                                                                                                                       |       | 175,589    |       | 98,812     |       |
| Distributions payable                                                                                                                                                                                   |       | 10,951     |       | 7,096      |       |
| Accrued liabilities                                                                                                                                                                                     |       | 126,789    |       | 53,683     |       |
| Convertible debentures                                                                                                                                                                                  |       | 91,180     |       | —     |       |
| Subscriptions for common stock                                                                                                                                                                          |       | 2,984      |       | 3,216      |       |
| Deferred tax liabilities                                                                                                                                                                                |       | 3,869      |       | —     |       |
| Other liabilities                                                                                                                                                                                       |       | 22,897     |       | 479        |       |
| **Total liabilities**                                                                                                                                                                                   |       | 3,648,481  |       | 1,777,458  |       |
| ** **                                                                                                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Commitments and contingencies**                                                                                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                                                                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Minority interest**                                                                                                                                                                                   |       | 18,049     |       | 3,072      |       |
|                                                                                                                                                                                                    |       |       |       |       |       |
| **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, 205,562,785 and 121,884,470 shares issued and outstanding  at December 31, 2007 and December 31, 2006, respectively |       | 21         |       | 12         |       |
| Additional paid-in capital                                                                                                                                                                              |       | 1,834,477  |       | 1,085,806  |       |
| Cumulative distributions and net loss                                                                                                                                                                   |       | (327,527   | )          | (171,376   | )          |
| Accumulated other comprehensive loss                                                                                                                                                                    |       | (1,374     | )          | —     |       |
| **Total stockholders’ equity**                                                                                                                                                                     |       | 1,505,597  |       | 914,442    |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                     |       | $          | 5,172,127  |       | $          | 2,694,972 |   |

 

*See Notes to Consolidated Financial Statements.*

 

F-3

----

 

**Behringer Harvard REIT I, Inc.**

**ConsolidatedStatements of Operations**

**For the Years ended December 31, 2007, 2006 and2005**

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

 
| ** **                                                                                  | ** ** | **2007**    | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------|------------|------------|------------|------------|------------|
|                                                                                        |       |        |       |       |       |       |       |
| **Rental  revenue**                                                                         |       | $           | 314,221    |       | $          | 161,306    |       | $ | 31,057 |   |
| ** **                                                                                  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Expenses**                                                                                | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property operating expenses                                                                 |       | 74,976      |       | 35,694     |       | 6,463      |       |
| Interest expense                                                                            |       | 100,729     |       | 50,877     |       | 13,137     |       |
| Rate lock extension recoveries                                                              |       | —      |       | —     |       | (525       | )          |
| Real estate taxes                                                                           |       | 42,980      |       | 21,999     |       | 3,838      |       |
| Property management fees                                                                    |       | 9,233       |       | 4,947      |       | 1,502      |       |
| Asset management fees                                                                       |       | 13,617      |       | 5,099      |       | 1,857      |       |
| General and administrative                                                                  |       | 2,969       |       | 1,614      |       | 1,254      |       |
| Depreciation and amortization                                                               |       | 141,462     |       | 73,275     |       | 15,033     |       |
| **Total  expenses**                                                                         |       | 385,966     |       | 193,505    |       | 42,559     |       |
| ** **                                                                                  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest  income                                                                            |       | 25,540      |       | 4,963      |       | 2,665      |       |
| Gain on sale  of assets                                                                     |       | 44          |       | —     |       | —     |       |
| **Net loss before income taxes, minority  interest, and equity in earnings of investments** | ** ** | (46,161     | )          | (27,236    | )          | (8,837     | )          |
|                                                                                        |       |        |       |       |       |       |       |
| Provision  for income taxes                                                                 |       | (571        | )          | —     |       | —     |       |
| Minority  interest                                                                          |       | (16         | )          |       |       |       |       |
| Equity in  earnings of investments                                                          |       | 5,117       |       | 4,804      |       | 3,115      |       |
| **Net loss**                                                                                |       | $           | (41,631    | )          | $          | (22,432    | )          | $ | (5,722 | ) |
| ** **                                                                                  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted weighted average shares outstanding**                                  | ** ** | 171,544,399 | ** ** | 89,637,553 | ** ** | 38,220,101 | ** ** |
| ** **                                                                                  | ** ** | ** **  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic  and diluted loss per share**                                                       |       | $           | (0.24      | )          | $          | (0.25      | )          | $ | (0.15 | ) |

 

*See Notes to Consolidated Financial Statements.*

 

F-4

----

 

**Behringer Harvard REIT I, Inc.**

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

**For the Years ended December 31, 2007, 2006 and2005**

**(in thousands)**

 
| ** **                                                          | ** ** | ** **            | ** ** | ** **       | ** ** | ** **     | ** ** | ** **        | ** ** | ** **  | ** ** | **Cumulative** | ** ** | **Accumulated**   | ** ** | ** **             | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|-------------------|------------|-------------|------------|----------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                          | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional** | ** ** | **Distributions** | ** ** | **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, 2005                                |       | —                |       | $                | —     |           | 13,109     |              | $          | 1           |       | $              | 115,626    |              | $          | (5,706                 | )          | $ | — |   | $ | 109,921 |   |
|                                                                |       |                  |       |             |       |           |       |              |       |        |       |           |       |              |       |                   |       |
| Issuance of common stock, net                                       |       | —                |       | —           |       | 48,231         |       | 4                 |       | 429,054     |       | —         |       | —            |       | 429,058                |       |
| Redemption of common stock                                          |       | —                |       | —           |       | (150           | )          | —            |       | (1,370      | )          | —         |       | —            |       | (1,370                 | )          |
| Stock dividend-10%                                                  |       | —                |       | —           |       | 5,521          |       | 1                 |       | 49,136      |       | (49,137        | )          | —            |       | —                 |       |
| Distributions declared on common stock                              |       | —                |       | —           |       | —         |       | —            |       | —      |       | (25,466        | )          | —            |       | (25,466                | )          |
| Shares issued pursuant to Distribution Reinvestment  Plan, net |       | —                |       | —           |       | 1,152          |       | 1                 |       | 11,006      |       | —         |       | —            |       | 11,007                 |       |
| Net loss                                                            |       |                  |       |             |       |           |       |              |       |        |       | (5,722         | )          | —            |       | (5,722                 | )          |
| Balance at December 31, 2005                                   |       | —                |       | —           |       | 67,863         |       | 7                 |       | 603,452     |       | (86,031        | )          | —            |       | 517,428                |       |
| * *                                                            | * *   | * *              | * *   | * *         | * *   | * *       | * *   | * *          | * *   | * *    | * *   | * *       | * *   | * *          | * *   | * *               | * *   |
| 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                 |       |
| Net loss                                                            |       |                  |       |             |       |           |       |              |       |        |       | (22,432        | )          | —            |       | (22,432                | )          |
| 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 |   |

 

*See Notes to Consolidated Financial Statements.*

 

F-5

----

 

**Behringer Harvard REIT I, Inc.**

**ConsolidatedStatements of Cash Flows**

**For the Years ended December 31, 2007, 2006 and2005**

**(in thousands)**

 
| ** **                                                                             | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Cash  flows from operating activities**                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                               |       | $          | (41,631    | )          | $          | (22,432    | )          | $ | (5,722 | ) |
| Adjustments to reconcile net loss to net  cash flows provided by operating activities: |       |       |       |       |       |       |       |
| Minority interest                                                                      |       | 16         |       | —     |       | —     |       |
| Gain on sale of assets                                                                 |       | (44        | )          | —     |       | —     |       |
| Depreciation and amortization                                                          |       | 134,602    |       | 69,470     |       | 15,450     |       |
| Interest income capitalized to notes  receivable                                       |       | (530       | )          | —     |       | —     |       |
| Equity in earnings of investments                                                      |       | (5,117     | )          | (4,804     | )          | (3,115     | )          |
| Distributions from investments                                                         |       | 5,117      |       | 4,804      |       | 3,115      |       |
| Change in accounts receivable                                                          |       | (18,193    | )          | (16,914    | )          | (3,491     | )          |
| Change in prepaid expenses and other assets                                            |       | 2,134      |       | 5,373      |       | 449        |       |
| Change in lease intangibles                                                            |       | (13,986    | )          | (2,838     | )          | (459       | )          |
| Change in accounts payable                                                             |       | 2,502      |       | 1,282      |       | 15         |       |
| Change in accrued liabilities                                                          |       | (1,981     | )          | 14,395     |       | 2,598      |       |
| Change in payables to related parties                                                  |       | 905        |       | 842        |       | 200        |       |
| **Cash  provided by operating activities**                                             |       | 63,794     |       | 49,178     |       | 9,040      |       |
|                                                                                   |       |       |       |       |       |       |       |
| **Cash  flows from investing activities**                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Purchases of tenant-in-common interests                                                |       | (4,430     | )          | (19,565    | )          | (14,958    | )          |
| Return of investments in tenant-in-common  interests                                   |       | 5,812      |       | 6,226      |       | 7,256      |       |
| Purchases of real estate                                                               |       | (895,701   | )          | (1,480,037 | )          | (564,025   | )          |
| Escrow deposits and pre-acquisition costs on  real estate to be acquired               |       | (922       | )          | 2,890      |       | 4,879      |       |
| Capital expenditures for real estate                                                   |       | (24,471    | )          | (8,059     | )          | (380       | )          |
| Notes receivable advances                                                              |       | (36,000    | )          | (3,013     | )          | —     |       |
| Proceeds from notes receivable                                                         |       | 36,533     |       | —     |       | —     |       |
| Receivable from related parties                                                        |       | (500       | )          | —     |       | —     |       |
| Change in restricted cash                                                              |       | (126,693   | )          | (76,217    | )          | (21,409    | )          |
| **Cash  used in investing activities**                                                 |       | (1,046,372 | )          | (1,577,775 | )          | (588,637   | )          |
|                                                                                   |       |       |       |       |       |       |       |
| **Cash  flows from financing activities**                                              | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Financing costs                                                                        |       | (27,420    | )          | (14,594    | )          | (3,533     | )          |
| Proceeds from notes payable                                                            |       | 340,000    |       | 1,112,449  |       | 271,734    |       |
| Payments on notes payable                                                              |       | (2,102     | )          | (701       | )          | (533       | )          |
| Payments on capital lease obligations                                                  |       | (24        | )          | —     |       | —     |       |
| Loan deposits on real estate to be acquired                                            |       | —     |       | 2,576      |       | (2,356     | )          |
| Issuance of common and convertible stock                                               |       | 799,125    |       | 514,004    |       | 481,621    |       |
| Redemptions of common stock                                                            |       | (19,984    | )          | (3,648     | )          | (1,370     | )          |
| Offering costs                                                                         |       | (86,208    | )          | (55,518    | )          | (52,563    | )          |
| Distributions                                                                          |       | (55,293    | )          | (30,313    | )          | (11,346    | )          |
| Conversion of debentures                                                               |       | (270       | )          | —     |       | —     |       |
| Change in subscriptions for common stock                                               |       | (232       | )          | 2,162      |       | (1,892     | )          |
| Change in subscription cash received                                                   |       | 232        |       | (2,162     | )          | 1,892      |       |
| Change in payables to related parties                                                  |       | 4,753      |       | 548        |       | 618        |       |
| **Cash  provided by financing activities**                                             |       | 952,577    |       | 1,524,803  |       | 682,272    |       |
|                                                                                   |       |       |       |       |       |       |       |
| Net change in cash and cash equivalents                                                |       | (30,001    | )          | (3,794     | )          | 102,675    |       |
| Cash and cash equivalents at beginning of  year                                        |       | 124,948    |       | 128,742    |       | 26,067     |       |
| Cash and cash equivalents at end of year                                               |       | $          | 94,947     |       | $          | 124,948    |       | $ | 128,742 |   |

 

*See Notes to Consolidated Financial Statements.*

 

F-6

----

 

Behringer Harvard REIT I, Inc.

Notes to ConsolidatedFinancial Statements

 

**1.****            ****Business**

 

***Organization***

 

BehringerHarvard REIT I, Inc. and our subsidiaries (which may be referred to as the“Company,” “we,” “us,” or “our”) was incorporated in June 2002 as a Marylandcorporation and has elected to be taxed, and currently qualifies, as a realestate investment trust (“REIT”) for federal income tax purposes.  We acquire and operate institutional qualityreal estate.  In particular, we focusprimarily on acquiring institutional quality office properties that we believehave premier business addresses, desirable locations, personalized amenities,high quality construction and highly creditworthy commercial tenants.

 

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 wholly-owned subsidiaries, BHR BusinessTrust, a Maryland business trust, and BHR Partners, LLC, a Delaware limitedliability company, are limited partners of Behringer OP.

 

Weare externally managed and advised by Behringer Advisors, LLC, a Texas limitedliability company organized in June 2007 (“Behringer Advisors”).  Behringer Advisors is responsible formanaging our day-to-day affairs and for identifying and making acquisitions andinvestments on our behalf.  Prior to June 30,2007, we were advised by Behringer Advisors LP, a Texas limited partnership,which was merged into Behringer Advisors solely to change the type of entity.

 

***Public Offerings***

 

OnFebruary 19, 2003, we commenced a public offering (the “Initial Offering”)of up to 80,000,000 shares of common stock offered at a price of $10.00 pershare pursuant to a Registration Statement on Form S-11 filed under theSecurities Act of 1933, as amended (the “Securities Act”).  The Initial Offering also covered theregistration of up to 8,000,000 shares offered pursuant to our distributionreinvestment plan (“DRIP”) and up to 3,520,000 shares issuable tobroker-dealers pursuant to warrants whereby participating broker-dealers wouldhave the right to purchase one share for every 25 shares they sold pursuant tothe Initial Offering.  We terminated theInitial Offering on February 19, 2005.

 

OnFebruary 11, 2005, we commenced a second public offering (the “SecondOffering”) of up to 80,000,000 shares of common stock offered at a price of$10.00 per share pursuant to a Registration Statement on Form S-3 filedunder the Securities Act.  The SecondOffering also covered the registration of up to 16,000,000 shares offeredpursuant to our DRIP.  We subsequentlyconverted the Second Offering to a Registration Statement on Form S-11 andreallocated the shares of common stock in the Second Offering to offer90,000,000 shares of common stock at a price of $10.00 per share and up to5,473,684 shares pursuant to our DRIP.  In addition, we increased theaggregate amount of the Second Offering by 2,945,017 shares in a relatedregistration statement on Form S-11. We terminated the Second Offering on October 20, 2006 in alljurisdictions except the Commonwealth of Pennsylvania, and we terminated theSecond Offering in the Commonwealth of Pennsylvania on February 9, 2007.

 

OnOctober 20, 2006, we commenced a third public offering (the “CurrentOffering” and together with the Initial Offering and Second Offering, the “Offerings”)of up to 200,000,000 shares of common stock offered at a price of $10.00 pershare pursuant to a Registration Statement on Form S-11 filed under theSecurities Act. The Current Offering also covers the registration of up to50,000,000 shares offered pursuant to our DRIP. The Current Offering will terminate on or before October 6, 2008unless earlier terminated, fully subscribed or extended.

 

Asof December 31, 2007, we had 205,562,785 shares of our common stockoutstanding, which includes the effect of a 10% stock dividend issued on October 1,2005 and including the effect of distribution reinvestments, redemptions, and22,000 shares issued to Behringer Harvard Holdings, LLC (“Behringer HarvardHoldings”).  As of December 31,2007, we had no shares of preferred stock issued and outstanding, options topurchase 55,500 shares of common stock outstanding at a weighted averageexercise price of $9.13 and warrants to purchase 750,937 shares of common stockfrom the Initial Offering issued for the benefit of participating individualbroker-dealers, each adjusted for the 10% stock dividend if issued prior to September 30,2005.  At December 31, 2007,Behringer OP had 432,586 units of limited partnership interest outstanding tothird parties, after giving effect to the 10% stock dividend we 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.  The weighted average number of shares andearnings per share data for each reported period throughout this report reflectthe effects of the stock dividend.

 

F-7

----

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

Weadmit new stockholders pursuant to the Offerings at least monthly.  All subscription proceeds are held in aseparate account until the subscribing investors are admitted asstockholders.  Upon admission of newstockholders, subscription proceeds are transferred to operating cash and maybe utilized as consideration for investments and the payment or reimbursementof dealer manager fees, selling commissions, offering expenses and operatingexpenses.  Until required for suchpurposes, net offering proceeds are held in short-term, liquid investments.

 

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 accounting principlesgenerally accepted in the United States of America (“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 long-lived assets, depreciation and amortizationand allowance for doubtful accounts. Actual results could 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 entities are evaluated for consolidation under the AmericanInstitute of Certified Public Accountants’ (“AICPA”) Statement of Position (“SOP”)78-9, “Accounting for Investments in Real Estate Ventures,” as amended byEmerging Issues Task Force (“EITF”) 04-5, “Determining Whether a General Partner,or the General Partners as a Group, Controls a Limited Partnership or SimilarEntity When 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, inclusiveof associated 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 andtenant relationships.

 

Uponthe completion of a business combination, we record the tangible assetsacquired, consisting of land and buildings, any assumed debt, identifiedintangible assets and asset retirement obligations based on their fair valuesin accordance with SFAS No. 141, “Business Combinations.”  Identified intangible assets consist of thefair value of above-market and below-market leases, in-place leases, in-placetenant improvements and tenant relationships. Any amount paid in excess of the fair value of the acquired assets andliabilities is recorded as goodwill.  Ifthe value of the assets and liabilities exceeds the total purchase price, thenthe resulting negative goodwill is allocated to the tangible 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 obtain.  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.

 

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 are calculatedas replacement cost less depreciation or management’s estimates of the

 

F-8

----

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

relative fair value of these assets usingdiscounted cash flow analyses or similar methods.  The value of buildings are depreciated overthe estimated useful life of 25 years using the straight-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 the determinedterm lease term.  We record the fairvalue of above-market and below-market leases as intangible assets or intangibleliabilities, respectively, and amortize them as an adjustment to rental incomeover 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 and in-place tenant improvements toexpense over the initial term of the respective leases.  The value of tenant relationship intangiblesare amortized to expense over the initial term and any anticipated renewalperiods, but 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 relationshipintangibles would be charged to expense. The estimated remaining useful lives for acquired lease intangiblesrange from 7 months to 11.0 years.  Anticipated amortization associated with the acquired lease intangiblesfor each of the following five years ended December 31 is as follows (inthousands):

 
| ** **           | ** ** | **Lease**       | ** ** |
|----------------------|------------|-----------------|------------|
| **Year Ending** | ** ** | **Intangibles** | ** ** |
| 2008                 |       | $               | 104,081    |   |
| 2009                 |       | 79,275          |       |
| 2010                 |       | 70,474          |       |
| 2011                 |       | 52,578          |       |
| 2012                 |       | 42,180          |       |
|                      |            |                 |            |  |

 

Asof December 31, 2007 and 2006, accumulated depreciation and amortizationrelated to our consolidated real estate properties and related leaseintangibles were as follows (in thousands):

 
| ** **                           | ** ** | ** **        | ** ** | ** **      | ** ** | **Acquired**     | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| ** **                           | ** ** | **Buildings and** | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** |
| **2007**                             | ** ** | **Improvements**  | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** |
| Cost                                 |       | $                 | 3,475,898  |            | $          | 727,872          |       | $ | (198,516 | ) |
| Less:  depreciation and amortization |       | (116,746          | )          | (100,158        | )          |             | 22,927     |   |
| Net                                  |       | $                 | 3,359,152  |            | $          | 627,714          |       | $ | (175,589 | ) |

 
| ** **                           | ** ** | ** **        | ** ** | ** **      | ** ** | **Acquired**     | ** ** |
|--------------------------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|
| ** **                           | ** ** | **Buildings and** | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** |
| **2006**                             | ** ** | **Improvements**  | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** |
| Cost                                 |       | $                 | 1,680,077  |            | $          | 413,594          |       | $ | (107,840 | ) |
| Less:  depreciation and amortization |       | (42,339           | )          | (46,580         | )          | 9,028            |       |
| Net                                  |       | $                 | 1,637,738  |            | $          | 367,014          |       | $ | (98,812 | ) |

 

F-9

----

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

***Cash and Cash Equivalents***

 

Weconsider investments in highly-liquid money market funds with original maturitiesof three months or less to be cash equivalents.

 

***Restricted Cash***

 

Restricted cash includessubscription proceeds that are held in a separate account until the subscribinginvestors are admitted as stockholders. We admit new stockholders at least monthly.  Upon acceptance of stockholders, shares ofstock are issued, and we receive the subscription proceeds.  Restricted cash as of December 31, 2007and 2006 also included approximately $120.7 million and $100.1 million,respectively, held in restricted money market accounts, as required by ourlenders, for anticipated tenant expansions and improvements, property taxes andinsurance for our consolidated properties. Restricted cash of December 31, 2007 also includedapproximately $91.2 million held by a trustee that will be used for thepurpose of paying interest and principal amounts due on the convertibledebentures. We had no restricted cash held for convertible debentures atDecember 31, 2006.

 

***Accounts Receivable***

 

Accounts receivableprimarily consist of receivables from tenants of our consolidated real estateproperties.  Our allowance for doubtfulaccounts was approximately $0.5 million and $96,000 as of December 31,2007 and 2006, respectively.

 

***Prepaid Expenses and Other Assets***

 

Prepaid expenses and otherassets include prepaid directors’ and officers’ insurance, rate lock loandeposits for future borrowings to make future acquisitions, escrow deposits forthe purchase of properties that we have contracted to acquire, as well asprepaid insurance and real estate taxes of properties we consolidate.

 

***Goodwill***

 

Goodwill consists ofgoodwill created in association with our purchase of all of the outstandingshares of the subsidiaries of IPC US Real Estate Investment Trust (“IPC”)through a business combination that was completed on December 12, 2007.

 

***Investments in Unconsolidated Entities***

 

Investmentsin unconsolidated entities consists of our undivided tenant-in-common (“TIC”)interests in various office buildings located in Colorado, Minnesota, Missouri,Texas and the District of Columbia and our non-controlling 60% interest in theWanamaker Building, located in Pennsylvania. Consolidation of these investments is not required as they do notqualify as VIEs as defined in FIN No. 46R and do not meet the controlrequirement required for consolidation under SOP 78-9, as amended byEITF 04-5.

 

Weaccount for these investments using the equity method of accounting inaccordance with SOP 78-9, as amended by EITF 04-5.  The equity method of accounting requiresthese investments to be initially recorded at cost and subsequently increased(decreased) for our share of net income (loss), including eliminations for ourshare of inter-company transactions and reduced when distributions arereceived.  We use the equity method ofaccounting because the shared decision-making involved in these investmentscreates an opportunity for us to have some influence on the operating andfinancial decisions of these investments and thereby creates someresponsibility by us for a return on our investment.  Therefore, it is appropriate to include ourproportionate share of the results of operations of these investments in ourearnings or losses.

 

***Impairment of Long-Lived 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.

 

Forreal estate we own through an investment in a limited partnership, jointventure, TIC interest or other similar investment structure, at each reportingdate management will compare the estimated fair value of our investment to thecarrying value.  An impairment charge isrecorded to the extent the fair value of our investment is less than thecarrying amount and the decline in value is determined to be other than atemporary decline.  There were noimpairment charges during the years ended December 31, 2007, 2006 or 2005.

 

F-10

----

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

***Deferred Financing Fees***

 

Deferred financing fees arerecorded at cost and are amortized using a straight-line method thatapproximates the effective interest method over the life of the relateddebt.  Accumulated amortization ofdeferred financing fees was approximately $4.2 million and $1.8 million as of December 31,2007 and 2006, respectively.

 

***Notes Receivable***

 

Wehold a $10.0 million mezzanine loan on the Galleria Office Towers in Houston,Texas.  This investment earns interestmonthly at a rate of LIBOR plus 750 basis points.  The loan has a maturity date of December 31,2008, with one additional one-year extension remaining.  Monthly payments of interest only arerequired with principal due at maturity. As of December 31, 2007, the loan was earning interest at 12.53%.

 

Notesreceivable includes an approximately $3.0 million mortgage loan we made relatedto raw land held by third parties for future development of additional officebuildings at the Terrace in Austin, Texas. We have the exclusive right of first offer to participate in the futuredevelopment of the raw land.  The annualinterest rate under the loan is fixed at 7.75% through the maturity date of June 21,2013.  Initial monthly payments ofinterest only at a rate of 6.50% per annum are required through the maturitydate.  The difference between the annualinterest rate and 6.50% will be accrued and added to the principal amountannually on the anniversary date of the note. We purchased the developed portion of the Terrace, an office park thatcurrently includes four buildings, in June 2006 from parties related tothe borrower of this mortgage loan.

 

***Convertible Debentures***

 

Aspart of our acquisition of the subsidiaries of IPC, we assumed a liability forconvertible debentures that had not been converted as of the date of theacquisition.  We also received an equalamount of restricted cash which is held by a trustee in the form of cash andshort-term U.S. treasury bills.  Therestricted cash will be used by the trustee for the purpose of paying interestand principal amounts due on the debentures as well as for the payment of anyfuture conversions as required by the original indenture agreements.

 

***Asset Retirement Obligations***

 

We record the fair value of any conditional asset retirementobligations in accordance with FIN No. 47, “Accounting forConditional Asset Retirement Obligations,” if they can be reasonably estimated.  Aspart of the anticipated renovation of acquired properties, we will incur futurecosts for the abatement of regulated materials, primarily asbestos-containingmaterials, as required under environmental regulations.  Our estimate of the fair value of theliabilities is based on future anticipated costs to be incurred for the legalremoval or remediation of the regulated materials.  As of    December 31, 2007 and 2006, the balance of our asset retirementobligation is approximately $12.6 million and $0.5 million, respectively, andis included in other liabilities.

 

***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, 2007, 2006 and 2005 wasapproximately $22.3 million, $6.8 million and $1.2 million, respectively.  As discussed above, our rental revenue alsoincludes amortization of above- and below-market leases. Revenues relating tolease 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 funds certain organization and offering costs on our behalf.  We are required to reimburse our advisor forsuch organization and offering costs up to 1.5% of the cumulative capitalraised in the Current Offering. Our advisor received up to 2.5% and 2.0% ofgross offering proceeds for reimbursement of organization and offering expensesincurred in connection with the Initial Offering and the Second Offering,respectively.  Organization and offeringcosts include items such as legal and accounting fees, marketing, promotionaland printing costs.  All offering costsare recorded as an offset to additional paid-in capital, and all organizationcosts are recorded as an expense at the time we become liable for the paymentof these amounts.

 

***Income Taxes***

 

Wehave elected to be taxed as a REIT under Sections 856 through 860 of the InternalRevenue Code of 1986, as amended (the “Code”), and have qualified as a REITsince the year ended December 31, 2004. To qualify as a REIT, we must meet a number of organizational andoperational requirements, including a requirement that we distribute at least90% 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

 

F-11

----

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

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 ending 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.will be treated as a taxable REIT subsidiary of the company for federal incometax purposes.  We believe we can recoverthe cost of our investment in the subsidiaries of IPC without ultimatelyincurring a tax liability attributable to any underlying difference between thetax basis of the acquired assets and the financial reporting basis as a resultof applying fair value in purchase accounting. Accordingly, we have not recorded an income tax provision, or deferredtaxes, except for the net operating loss carry-forward and other deferred taxliabilities discussed below, with respect to IPC.

 

On December 31,2001, the IRS released revised temporary and proposed regulations concerningthe treatment of net built-in gain of C-corporation assets that become assetsof a REIT in a carryover basis transaction. The regulations generally requirethe C-corporation to recognize gain and be subject to corporate-level tax as ifit 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 gain recognized within ten years of the acquisition of IPC (US),Inc. and subsidiaries. However, we do not intend to dispose of any of theassets subject to this built-in gain in a manner that would trigger the taxliability.

 

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. and subsidiaries atthe time of acquisition are generally available for future use and can offsetany realized built-in gain subject to tax. As of December 31, 2007, IPC (US), Inc. and subsidiaries hadapproximately $52 million of federal and state NOL carryovers, and the deferredtax assets associated with the NOL carryovers is approximately $21 million atDecember 31, 2007.  Based on ourexpectation to elect REIT status for IPC (US) Inc. in 2008 and not to recognizeany built-in gain during the ten year period after the IPC acquisition, avaluation allowance has been established for approximately $21 million, as wedo not expect to realize the acquired NOL carryover deferred tax asset.  The NOL carry-forwards will begin to expirein 2023. In addition, at December 31, 2007, we have deferred taxliabilities of approximately $3.9 million related to various state taxingjurisdictions.

 

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 examinations. In addition, we believe that it is more likely than not thatour tax positions related to the taxable REIT subsidiaries will be sustained inany tax examination.

 

OnMay 18, 2006, the State of Texas enacted a new law which replaced thethen-current state franchise tax with a “margin tax.”  In general, legal entities that conductbusiness in Texas are subject to the Texas margin tax, including previouslynon-taxable entities such as REITs.  Forthe year ended December 31, 2007, we recognized a current and deferredprovision of approximately $0.6 million related to the Texas margin tax.  Also, a current tax obligation ofapproximately $0.5 million has been recorded at December 31, 2007 inassociation with this tax.  

 

***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 Financial Accounting Standards Board (“FASB”)SFAS No. 123R, “Share-BasedPayment.” In the modified prospective method, compensation cost is recognizedfor all share-based payments granted after the effective date and for allunvested awards granted prior to the effective 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 yearended December 31, 2007, we had no significant compensation cost relatedto these stock options.

 

***Concentration of Credit Risk***

 

AtDecember 31, 2007, we had cash and cash equivalents and restricted cashdeposited in certain financial institutions in excess of federally insuredlevels.  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.

 

F-12

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Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

***Minority Interest***

 

Wehold a direct or indirect majority interest in certain real estate partnershipsand thus, consolidate the 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 year.

 

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 31,2007 and 2006, Behringer OP had 432,586 units of limited partnership interestoutstanding with third parties, after giving effect to the 10% stock dividendissued October 1, 2005.  These unitsof limited partnership interest are convertible into an equal number of sharesof 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 31,2007, we had options to purchase 55,500 shares of common stock outstanding at aweighted average exercise price of $9.13 and warrants to purchase 750,937shares of common stock outstanding from the Initial Offering at $10.91 pershare which were issued for the benefit of participating individualbroker-dealers, each adjusted for the 10% stock dividend issued October 1,2005 if issued prior to September 30, 2005.  At December 31, 2007, Behringer OP had432,586 units of limited partnership interest outstanding with third parties,after giving effect to the 10% stock dividend issued October 1, 2005.  These units of limited partnership interestare convertible into an equal number of shares of our common stock.  The weighted average shares and earnings pershare for all periods presented in this report reflect the effects of the stockdividend.  These options, warrants 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, “Disclosuresabout Segments of an Enterprise and Related Information,” establishesstandards for reporting financial and descriptive information about anenterprise’s reportable segments.  Our current business consists of owning, managing, operating, leasing,acquiring, developing, investing in and disposing of real estate assets.  All of our consolidated revenues are from ourconsolidated real estate properties.  Ourchief operating decision maker evaluates operating performance on an individualproperty level and views all of our real estate assets as one industry segment,and, accordingly, all of our properties are aggregated into one reportablesegment.

 

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

 

InSeptember 2006, the 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.  SFAS No. 157is effective for fiscal years beginning after November 15, 2007.  We are in the process of determining theeffect the adoption of SFAS 157 will have on our financial 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.  SFAS No. 159 is effective for fiscalyears beginning after November 15, 2007. We have not elected the fair value measurement option for any financialassets or liabilities at the present time.

 

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, or purchase method, be used for all business combinationsand for an acquirer to be identified for each business combination.  ThisStatement is broader in scope than that of Statement 141, which applied only tobusiness combinations in which control was obtained by transferringconsideration. SFAS 141R applies the same method of accounting (the acquisitionmethod) to all transactions and other events in which one entity obtainscontrol over one or more other businesses.  This Statement also makes certainother modifications to Statement 141, including a broader definition of abusiness and the requirement that acquisition related costs are expensed asincurred.  This statement applies to business combinations occurring on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  Early

 

F-13

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Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

adoption is not allowed.  We are currently assessing the effect SFAS No. 141(R) mayhave on our consolidated results of operations and financial position.

 

InDecember 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements - anamendment of ARB No. 51.”  Theobjective of FASB No. 160 is to improve the relevance, comparability, andtransparency of the financial information that a reporting entity provides inits consolidated financial statements by establishing accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  It alsoamends certain of ARB 51’s consolidation procedures for consistency with therequirements of FASB No. 141(R). This Statement is effective for fiscal years, and interim periods withinthose fiscal years, beginning on or after December 15, 2008.  Earlier adoption is prohibited.  This Statement shall be applied prospectivelyas of the beginning of the fiscal year in which this Statement is initiallyapplied, except for the presentation and disclosure requirements.  The presentation and disclosure requirementsshall be applied retrospectively for all periods presented.

 

**4.             Acquisitions**

 

***Real Estate Asset Acquisitions***

 

The following table provides asummary of the real estate assets we acquired during the fiscal year endedDecember 31, 2007:

 
| ** **                         | ** ** | ** **      | ** ** | ** **   | ** ** | **Approximate Rentable** | ** ** | ** **             | ** ** | **Approximate Purchase Price** | ** ** |
|------------------------------------|------------|-----------------|------------|--------------|------------|--------------------------|------------|------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | ** **      | ** ** | **Date**     | ** ** | **Square Footage**       | ** ** | **Encumbrances**       | ** ** | **(including closing costs)**  | ** ** |
| **Property Name**             | ** ** | **Location**    | ** ** | **acquired** | ** ** | **(unaudited)**          | ** ** | **(in millions)** | ** ** | **(in millions)**         | ** ** |
| ** **                         | ** ** | ** **      | ** ** | ** **   | ** ** | ** **               | ** ** | ** **             | ** ** | ** **                     | ** ** |
| Centreport  Office Center          |       | Ft. Worth, TX   |       | 06/14/07     |       | 133,000                  |       | $                      | —     |                           | $          | 18.9 |   |
| 200 South  Wacker                  |       | Chicago, IL     |       | 11/01/07     |       | 755,000                  |       | 95.5                   |       | 160.1                          |       |
| One  Financial Place               |       | Chicago, IL     |       | 11/01/07     |       | 1,036,000                |       | 188.6                  |       | 325.0                          |       |
| 10 &  120 South Riverside |       | Chicago, IL     |       | 11/01/07     |       | 1,411,000                |       | 225.0                  |       | 371.4                          |       |
| 111  Woodcrest                     |       | Cherry Hill, NJ |       | 11/20/07     |       | 53,000                   |       | —                 |       | 6.7                            |       |
|                               |       |            |       |         |       | 3,388,000                |       | $                      | 509.1      |                           | $          | 882.1 |   |

 

***Business Combination***

 

OnDecember 12, 2007, we completed the purchase of the subsidiaries of IPC,which includes a portfolio of interests in 34 office properties, comprising atotal of approximately 9.6 million square feet of rentable space.  Theacquisition diversifies our portfolio from a geographic prospective.  The total purchase price of this acquisitionwas approximately $1.4 billion.  Theacquisition was funded with approximately $363.8 million of cash, approximately$739.8 million of assumed debt and borrowings of approximately $340.0 millionunder a secured credit facility.

 

Theacquired intangible assets and liabilities are amortized over the terms of theacquired leases or remaining lives of the assumed mortgages.  The estimated weighted average remainingterms of the acquired leases is approximately 5.8 years and the estimatedweighted average remaining lives of the assumed loans is approximately 7.1years.  We are in the process offinalizing the allocation, which is subject to change until our information isfinalized, no later than twelve months from the acquisition date.

 

Thefollowing summary provides the initial allocation of assets and liabilities ofthe subsidiaries of IPC as of the date of acquisition (in thousands).

 
| ** **                             | ** ** | **Allocation** | ** ** |
|----------------------------------------|------------|----------------|------------|
| Land                                   |       | $              | 168,860    |   |
| Buildings                              |       | 1,026,395      |       |
| Lease  intangibles                     |       | 186,487        |       |
| Cash                                   |       | 14,706         |       |
| Restricted  cash                       |       | 127,770        |       |
| Other assets                           |       | 26,162         |       |
| Goodwill                               |       | 19,922         |       |
| Notes  receivable                      |       | 10,844         |       |
| Investment  in unconsolidated entities |       | 54,081         |       |
| Liabilities  assumed                   |       | (916,076       | )          |
| Minority  interest                     |       | (15,324        | )          |
| Net assets  acquired                   |       | $              | 703,827    |   |

 

F-14

----

** **

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

Thefollowing is a summary of the properties of the IPC subsidiaries we acquired:

 
| ** **                         | ** ** | ** **         | ** ** | ** **     | ** ** | **Approximate Rentable** | ** ** |
|------------------------------------|------------|--------------------|------------|----------------|------------|--------------------------|------------|
| ** **                         | ** ** | ** **         | ** ** | **Percentage** | ** ** | **Square Footage**       | ** ** |
| **Property Name**             | ** ** | **Location**       | ** ** | **ownership**  | ** ** | **(unaudited)**          | ** ** |
| ** **                         | ** ** | ** **         | ** ** | ** **     | ** ** | ** **               | ** ** |
| Wanamaker  Building                |       | Philadelphia, PA   |       | 60             | %          | 1,390,000                |       |
| 1650 Arch  Street                  |       | Philadelphia, PA   |       | 90             | %          | 553,000                  |       |
| United Plaza                       |       | Philadelphia, PA   |       | 100            | %          | 617,000                  |       |
| 11 Stanwix  Street                 |       | Pittsburg, PA      |       | 100            | %          | 428,000                  |       |
| One Oxmoor  Place                  |       | Louisville, KY     |       | 100            | %          | 135,000                  |       |
| Hurstbourne  Place                 |       | Louisville, KY     |       | 100            | %          | 235,000                  |       |
| Hurstbourne  Park                  |       | Louisville, KY     |       | 100            | %          | 104,000                  |       |
| Hurstbourne  Plaza                 |       | Louisville, KY     |       | 100            | %          | 94,000                   |       |
| Forum Office  Park                 |       | Louisville, KY     |       | 100            | %          | 328,000                  |       |
| Lakeview                           |       | Louisville, KY     |       | 100            | %          | 76,000                   |       |
| Steeplechase  Place                |       | Louisville, KY     |       | 100            | %          | 77,000                   |       |
| Huntington                         |       | Louisville, KY     |       | 100            | %          | 62,000                   |       |
| Executive  Park                    |       | Louisville, KY     |       | 100            | %          | 109,000                  |       |
| Energy  Centre                     |       | New Orleans, LA    |       | 88             | %          | 757,000                  |       |
| Bank of  America Plaza-NV          |       | Las Vegas, NV      |       | 100            | %          | 256,000                  |       |
| KeyBank  Center                    |       | Cleveland, OH      |       | 100            | %          | 478,000                  |       |
| Edgewater  Plaza                   |       | Staten Island, NY  |       | 100            | %          | 252,000                  |       |
| Tice  Building                     |       | Woodcliff Lake, NJ |       | 100            | %          | 120,000                  |       |
| 222  Bloomingdale Road             |       | White Plains, NY   |       | 100            | %          | 140,000                  |       |
| Fifth Third  Center - Columbus     |       | Columbus, OH       |       | 100            | %          | 331,000                  |       |
| City Center                        |       | St. Petersburg, FL |       | 100            | %          | 242,000                  |       |
| Eisenhower  Blvd                   |       | Tampa, FL          |       | 100            | %          | 130,000                  |       |
| Royal  Carribean Center            |       | Miramar, FL        |       | 86             | %          | 129,000                  |       |
| DeVry  Institute                   |       | Miramar, FL        |       | 86             | %          | 94,000                   |       |
| Crescent  Center                   |       | Memphis, TN        |       | 100            | %          | 336,000                  |       |
| Metro Center                       |       | Nashville, TN      |       | 100            | %          | 361,000                  |       |
| Loop Central                       |       | Houston, TX        |       | 100            | %          | 575,000                  |       |
| Epic Center                        |       | Wichita, KS        |       | 100            | %          | 289,000                  |       |
| One Brittany  Place                |       | Wichita, KS        |       | 100            | %          | 58,000                   |       |
| Two Brittany  Place                |       | Wichita, KS        |       | 100            | %          | 58,000                   |       |
| City Hall  Place                   |       | Manchester, NH     |       | 100            | %          | 210,000                  |       |
| 801 Thompson                       |       | Rockville, MD      |       | 100            | %          | 51,000                   |       |
| One &  Two Chestnut Place |       | Worchester, MA     |       | 100            | %          | 218,000                  |       |
| 500 East  Pratt                    |       | Baltimore, MD      |       | 100            | %          | 280,000                  |       |
|                               |       |               |       |           |       | 9,573,000                |       |

 

Our Consolidated Statementsof Operations include the operations of the subsidiaries of IPC for the periodfrom December 12, 2007 (the date of acquisition) through December 31,2007. The following summary presents the results of operations (in thousands)for the years ended December 31, 2007 and 2006, on an unaudited pro formabasis, as if the transaction had occurred as of January 1 of therespective years. The proforma results are for illustrative purposes only anddo not purport to be indicative of the actual results that would have occurredhad the transaction occurred on January 1 of the respective years, nor arethey indicative of results of operations that may occur in the future.

 

F-15

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BehringerHarvard REIT I, Inc.

Notes to ConsolidatedFinancial Statements

 
| ** **                                             | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|--------------------------------------------------------|------------|------------|------------|------------|------------|
| Total  revenue                                         |       | $          | 570,088    |       | $          | 550,483 |   |
| Total  expenses                                        |       | (732,012   | )          | (714,082   | )          |
| Interest  income                                       |       | 25,540     |       | 4,963      |       |
| Gain on sale  of assets                                |       | 44         |       | 66,514     |       |
| Benefit/(provision)  for Income taxes                  |       | 686        |       | (4,166     | )          |
| Minority  interest                                     |       | (2,851     | )          | (4,399     | )          |
| Equity in  earnings (losses) of investments            |       | (1,139     | )          | 11,130     |       |
| 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 | ) |

 

**5.****            ****Investments in Unconsolidated Entities**

 

The following is a summaryof our investments in unconsolidated entities as of December 31, 2007 and2006 (in thousands):

 
| ** **             | ** ** | **2007**      | ** ** | **2006**      | ** ** | **2007**               | ** ** | **2006**               | ** ** |
|------------------------|------------|---------------|------------|---------------|------------|------------------------|------------|------------------------|------------|
| ** **             | ** ** | **ownership** | ** ** | **ownership** | ** ** | **Carrying Value**     | ** ** | **Carrying Value**     | ** ** |
| **Property Name** | ** ** | **Interest**  | ** ** | **Interest**  | ** ** | **of Investment** | ** ** | **of Investment** | ** ** |
| Minnesota  Center      |       | 93.07         | %          | 93.07         | %          | $                      | 41,144     |                   | $          | 42,405 |   |
| Enclave on  the Lake   |       | 36.31         | %          | 36.31         | %          | 8,598                  |       | 9,196                  |       |
| St. Louis  Place       |       | 35.71         | %          | 35.71         | %          | 10,613                 |       | 10,984                 |       |
| Colorado  Building     |       | 95.20         | %          | 81.49         | %          | 43,763                 |       | 37,831                 |       |
| Travis Tower           |       | 60.43         | %          | 60.43         | %          | 31,295                 |       | 32,510                 |       |
| Alamo Plaza            |       | 33.93         | %          | 30.58         | %          | 13,527                 |       | 12,695                 |       |
| Wanamaker  Building    |       | 60.00         | %          | —        |       | 54,272                 |       | —                 |       |
| Total                  |       |          |       |          |       | $                      | 203,212    |                   | $          | 145,621 |   |

 

Ourinvestments in unconsolidated entities as of December 31, 2007 and 2006consisted of our proportionate share of the combined assets and liabilities ofour investment properties as follows (in thousands):

 
| ** **                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|
| Land                                          |       | $        | 79,423     |     | $          | 33,380 |   |
| Buildings,  net                               |       | 259,382  |       | 166,589  |       |
| Lease  intangibles, net                       |       | 52,039   |       | 27,498   |       |
| Cash and  cash equivalents                    |       | 12,650   |       | 3,783    |       |
| Restricted  cash                              |       | 18,850   |       | 15,286   |       |
| Accounts  receivable and other assets         |       | 7,621    |       | 3,825    |       |
| Total assets                                  |       | $        | 429,965    |     | $          | 250,361 |   |
|                                          |       |     |       |     |       |
| Notes  payable (1)                            |       | $        | 81,772     |     | $          | — |   |
| Acquired  below market lease intangibles, net |       | 13,854   |       | 2,983    |       |
| Other  liabilities                            |       | 12,264   |       | 5,668    |       |
| Total  liabilities                            |       | 107,890  |       | 8,651    |       |
|                                          |       |     |       |     |       |
| Equity                                        |       | 322,075  |       | 241,710  |       |
| Total  liabilities and equity                 |       | $        | 429,965    |     | $          | 250,361 |   |

 

----

|   | (1) | This amount represents the notes payable for the  Wanamaker Building only. Each of the TIC investors, including us, is a  borrower under the TIC notes payable. Our portion of the TIC notes payable  was approximately $99.4 million and approximately $95.4 million at  December 31, 2007 and 2006, respectively and is reflected in the  consolidated notes payable on our balance sheet. |
|--------|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-16

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BehringerHarvard REIT I, Inc.

Notes to ConsolidatedFinancial Statements

 

In2007, we recorded approximately $5.1 million of equity in earnings andapproximately $10.9 million of distributions from our investments inunconsolidated entities. During 2007, we increased our TIC interest in two ofour TIC properties and we acquired a 60% non-controlling interest in theWanamaker Building, as part of our acquisition of the subsidiaries of IPC in December 2007.During 2006, we increased our ownership in two of our TIC properties and weacquired all of the remaining TIC interests in the Pratt Building, and since December 31,2006, the Pratt Building was our wholly-owned consolidated property. Our equityin earnings from these investments is our proportionate share of the combinedearnings of our unconsolidated properties for the years ended December 31,2007, 2006 and 2005 as follows (in thousands):

 
| ** **                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Revenue                                                |       | $        | 41,223     |     | $          | 46,941   |       | $ | 42,584 |   |
|                                                   |       |     |       |     |       |     |       |
| Operating  expenses:                                   |       |     |       |     |       |     |       |
| Operating  expenses                                    |       | 11,512   |       | 13,227   |       | 11,867   |       |
| Property  taxes                                        |       | 5,493    |       | 5,870    |       | 5,249    |       |
| Total  operating expenses                              |       | 17,005   |       | 19,097   |       | 17,116   |       |
|                                                   |       |     |       |     |       |     |       |
| Operating  income                                      |       | 24,218   |       | 27,844   |       | 25,468   |       |
|                                                   |       |     |       |     |       |     |       |
| Non-operating  (income) expenses:                      |       |     |       |     |       |     |       |
| Depreciation  and amortization                         |       | 14,986   |       | 18,486   |       | 18,823   |       |
| (Interest  income)/interest expense and bank fees, net |       | 373      |       | (368     | )          | (156     | )          |
| Total  non-operating expenses                          |       | 15,359   |       | 18,118   |       | 18,667   |       |
|                                                   |       |     |       |     |       |     |       |
| Net income                                             |       | $        | 8,859      |     | $          | 9,726    |       | $ | 6,801 |   |
| Company’s  share of net income                    |       | $        | 5,117      |     | $          | 4,804    |       | $ | 3,115 |   |
| Company’s  share of total distributions           |       | $        | 10,929     |     | $          | 11,030   |       | $ | 10,371 |   |

 

**6.****             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. Minority interest in partnerships represents thethird-party partners’ proportionate share of the equity in consolidated realestate partnerships. Income and losses are allocated to minority interestholders based on their weighted average percentage ownership during the year.

 

Minorityinterest also includes units of limited partnership interests issued byBehringer 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, Behringer OP had 432,586 units of limited partnership interestoutstanding with third parties, after giving effect to the 10% stock dividendissued October 1, 2005. These units of limited partnership interest areconvertible into an equal number of shares of our common stock.

 

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

 
| ** **                 | ** ** | **Year ended December 31,** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Non-controlling  interests |       | $                                | 15,267     |   | $ | — |   |
| Limited  partnership units |       | 2,782                            |       | 3,072 |   |
|                       |       | $                                | 18,049     |   | $ | 3,072 |   |

 

**7.****             CapitalizedCosts**

 

We capitalize interest,property taxes, insurance and construction costs on our real estate propertiesunder development, which include the development of a new building at EldridgePlace in Houston, Texas and the development of a parking facility at ourBurnett Plaza property in Ft. Worth, Texas. For the year ended December 31,2007, we capitalized a total of approximately $7.0 million in costs associatedwith real estate under development, including approximately $0.3 million ininterest for real estate under development.

 

F-17

----

 

BehringerHarvard REIT I, Inc.

Notes to ConsolidatedFinancial Statements

 

**8.****             LeasingActivity**

 

Futureminimum base rental payments due to us under non-cancelable leases in effect asof December 31, 2007, for properties we consolidate are as follows (inthousands):

 
| 2008       |   | $       | 384,525   |   |
|------------|--------|---------|-----------|--------|
| 2009       |   | 352,985 |      |
| 2010       |   | 319,635 |      |
| 2011       |   | 266,765 |      |
| 2012       |   | 225,559 |      |
| Thereafter |   | 947,634 |      |
| Total      |   | $       | 2,497,103 |   |

 

**9.****         DerivativeInstruments and Hedging Activities**

 

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 31,2007, we recognized a comprehensive loss of approximately $1.4 million toadjust the carrying amount of these interest rate swaps to fair value at December 31,2007.

 

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.  During 2007, the swap agreementreduced interest expense by approximately $0.1 million. The following tablesummarizes the notional value and fair value of our derivative financialinstrument as of December 31, 2007. The notional value provides anindication of the extent of our involvement in this instrument at December 31,2007, but does not represent exposure to credit, interest rate, or market risks(in thousands).

 
| **Hedge Type**            | ** ** | **Notional Value** | ** ** | **Interest Swap  Pay Rate** | ** ** | **Interest Swap  Receive Rate** | ** ** | **Maturity**            | ** ** | **Fair Value** | ** ** |
|--------------------------------|------------|-------------------------|------------|----------------------------------|------------|--------------------------------------|------------|-------------------------|------------|----------------|------------|
| Interest rate swap - cash flow |       | $100,000                |       | 3.9925%                          |       | 30-day LIBOR                         |       | December 13,  2010 |       | $              | (614       | ) |
| Interest rate swap - cash flow |       | $100,000                |       | 3.9925%                          |       | 30-day LIBOR                         |       | December 13,  2010 |       | $              | (614       | ) |

 

Overtime the unrealized loss held in accumulated other comprehensive income relatedto certain cash flow hedges will be reclassified to earnings, of whichapproximately $26,000 is expected to be reclassified in 2008. No amounts werereclassified to earnings for the year ended December 31, 2007. Thisreclassification will correlate with the recognition of the hedged interestpayment in earnings. There was no hedge ineffectiveness during the year ended December 31,2007.

 

**10.****          NotesPayable**

 

Our notes payable hasincreased to approximately $3.2 billion at December 31, 2007 fromapproximately $1.6 billion at December 31, 2006 as a result of borrowingsand assumptions of debt related to our property acquisitions, as well as thecredit facility we entered into in December 2007. Each of our mortgageloans is collateralized by one or more of our properties. At December 31,2007, our notes payable interest rates range from 5.02% to 8.33%, with aweighted average interest rate of approximately 5.73%. Of our approximately$3.2 billion in notes payable at December 31, 2007, approximately $143.0million represented debt subject to variable interest rates. At December 31,2007, our notes payable have maturity dates that range from July 2009 to October 2030.Our loan agreements generally stipulate that we comply with certain reportingand financial covenants. These covenants include among other things, notifyingthe lender of any change in management and maintaining minimum debt servicecoverage ratios. At December 31, 2007 and 2006, we were in compliance witheach of the debt covenants under our loan agreements. As of February 1,2008 we were in default on an approximately $28.5 million loan agreementrelated to failure to make certain escrow payments on a loan assumed as part ofour acquisition of the subsidiaries of IPC. On March 19, 2008, inconnection with a planned transfer of the associated asset, we entered into anamendment to the loan agreement under which the lender has agreed not toaccelerate the loan.

 

F-18

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BehringerHarvard REIT I, Inc.

Notes to ConsolidatedFinancial Statements

 

Thefollowing table summarizes our notes payable as of December 31, 2007 (inthousands):

 
| **Principal payments due in:** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|------------|------------|
| 2008                                          |       | $          | 11,225     |   |
| 2009                                          |       | 32,713     |       |
| 2010                                          |       | 413,520    |       |
| 2011                                          |       | 596,818    |       |
| 2012                                          |       | 127,906    |       |
| Thereafter                                    |       | 2,016,566  |       |
| unamortized discount                          |       | (605       | )          |
| Total                                         |       | $          | 3,198,143  |   |

 

 

**11.          Convertible Debentures**

 

As of December 31,2007, we had a liability for convertible debentures of approximately $91.2million. The balance reflects the liability assumed in the acquistion of the subsidiariesof IPC for the convertible debentures that had not been converted prior to theacquisition. We have restricted cash on our balance sheet that is held by atrustee in the form of cash and short-term U.S. treasury bills that will beused 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 asrequired by the original indenture agreements. The convertible debentures areconvertible at the option of the holder at a conversion price of $9.75 perunit.

 

**12.          Stockholders’ Equity**

 

***Capitalization***

 

Asof December 31, 2007, we had 205,562,785 shares of our common stockoutstanding, including the effect of distribution reinvestments, redemptions,and 22,000 shares issued to Behringer Harvard Holdings and shares issued on October 1,2005 pursuant to a 10% stock dividend. On May 11, 2005, our Board ofDirectors declared a special 10% stock dividend for holders on record as of September 30,2005 to be issued on October 1, 2005. The weighted average shares andearnings per share for each period presented in this report reflect the effectsof the stock dividend. As of December 31, 2006, we had 121,884,470 sharesof our common stock outstanding, including 22,000 shares owned by BehringerHarvard Holdings and the 10% stock divided issued in 2005. As of December 31,2007 and 2006, we had no shares of preferred stock issued and outstanding. Asof December 31, 2007, options to purchase 55,500 shares of common stockwere outstanding and none had been exercised. As of December 31, 2006,options to purchase 40,500 shares of common stock were outstanding. As of December 31,2007 and 2006, warrants to purchase 750,937 shares from the Initial Offeringhad been issued for the benefit of participating individual broker-dealers. 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. As of December 31, 2007 and 2006, 432,586 units of limitedpartnership interests in Behringer OP had been issued, which includes the 10%stock dividend issued October 1, 2005. These limited partnership interestsare convertible into an equal number of shares of our common stock. We sold1,000 shares of our convertible stock to Behringer Advisors for $1,000 on March 22,2006. Pursuant to its terms, the convertible stock is convertible into sharesof our common stock with a value equal to 15% of the amount by which (1) ourenterprise value, including the total amount of distributions paid to ourstockholders, exceeds (2) the sum of the aggregate capital invested bystockholders plus a 9% cumulative, non-compounded, annual return on suchcapital.

 

## ***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.SinceAugust 2007, the declared distributions has been equal to a daily amountof $.0017260 per share of common stock, which is equivalent to an annualdistribution rate of 6.3% assuming the share was purchased for $10.00.

 

Wehave a distribution reinvestment plan (“DRIP”) whereby stockholders may electto reinvest any cash distribution in additional shares of common stock. We recordall distributions when declared, except that the stock issued through the DRIPis recorded when the shares are actually issued. In both 2007 and 2006,approximately $0.3 million of distributions declared in connection with ourlimited partnership units are recorded as a reduction to minority interest. Ofthe amounts distributed by us in 2007, approximately 82.5% represented a returnof capital and 17.5% were distributions from the taxable earnings of realestate operations. The following are the distributions declared during theyears ended December 31, 2007 and 2006 (in thousands):

 

F-19

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BehringerHarvard REIT I, Inc.

Notes to ConsolidatedFinancial Statements

 
| ** **  | ** ** | **Total** | ** ** | **Cash** | ** ** | **DRIP** | ** ** |
|-------------|------------|-----------|------------|----------|------------|----------|------------|
| 2007        |       |      |       |     |       |     |       |
| 4th Quarter |       | $         | 31,982     |     | $          | 15,259   |       | $ | 16,723 |   |
| 3rd Quarter |       | 31,122    |       | 15,123   |       | 15,999   |       |
| 2nd Quarter |       | 28,788    |       | 14,305   |       | 14,483   |       |
| 1st Quarter |       | 22,918    |       | 11,607   |       | 11,311   |       |
| Total       |       | $         | 114,810    |     | $          | 56,294   |       | $ | 58,516 |   |
|        |       |      |       |     |       |     |       |
| 2006        |       |      |       |     |       |     |       |
| 4th Quarter |       | $         | 19,726     |     | $          | 9,989    |       | $ | 9,737 |   |
| 3rd Quarter |       | 16,690    |       | 8,409    |       | 8,281    |       |
| 2nd Quarter |       | 14,339    |       | 7,143    |       | 7,196    |       |
| 1st Quarter |       | 12,461    |       | 6,201    |       | 6,260    |       |
| Total       |       | $         | 63,216     |     | $          | 31,742   |       | $ | 31,474 |   |

 

***Share Redemption Program***

 

Ourboard of directors has authorized a share redemption program for investors whohold their shares for more than one year. The purchase price for the redeemedshares is set forth in the prospectus for our Current Offering of common stockas supplemented from time to time. Our board of directors reserves the right inits sole discretion at any time, and from time to time, to (1) waive theone-year holding period in the event of the death, disability or bankruptcy ofa stockholder or other exigent circumstances, (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 not redeem in excess of 5% of the weightedaverage number of shares outstanding during the twelve-month period immediatelyprior 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 distributionreinvestment plan plus 1% of operating cash flow for the previous fiscal year. Weredeemed approximately 2.3 million shares for approximately $20.0 million inthe year ended December 31, 2007; we redeemed approximately 680,000 sharesfor approximately $5.9 million in the year ended December 31, 2006; and weredeemed approximately 150,000 shares for approximately $1.4 million in theyear ended December 31, 2005.

 

**13.          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 employees, directors and consultants of our affiliates. The2005 Incentive Award Plan replaced the Non-Employee Director Stock Option Plan,the Non-Employee Director Warrant Plan and the 2002 Employee Stock Option Plan,each of which was terminated upon the approval of the 2005 Incentive AwardPlan. As of December 31, 2007, we had options to purchase 55,500 shares ofcommon stock outstanding at a weighted average exercise price of $9.13. Theseoptions vest over one year from the date granted and have a maximum term of tenyears. All of these options were anti-dilutive for the years ended December 31,2007, 2006 and 2005.

 

**14.          Related Party Transactions**

 

Ouradvisor and certain of its affiliates received fees and compensation inconnection with our Offerings, and in connection with the acquisition,management and sale of our assets.

 

BehringerSecurities LP (“Behringer Securities”), an affiliate of our advisor, serves asthe dealer manager for the Offerings and receives commissions of up to 7% ofgross offering proceeds (1% for sales under our DRIP) before reallowance ofcommissions earned by participating broker-dealers. In connection with theCurrent Offering, up to 2.5% of gross proceeds before reallowance toparticipating broker-dealers are paid to Behringer Securities as a dealermanager fee; except that no dealer manager fee is paid on purchases madepursuant to our DRIP. In connection with the Initial Offering and the SecondOffering, up to 2.5% and 2.0%, respectively, of gross proceeds beforereallowance to participating broker-dealers were paid to Behringer Securitiesas a dealer manager fee; except that no dealer manager fee was paid onpurchases made pursuant to our DRIP. In the Current Offering, BehringerSecurities reallows all of its commissions to participating broker-dealers andreallows 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 may reallow, in the aggregate, no 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 no 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. In the year ended

 

F-20

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BehringerHarvard REIT I, Inc.

Notes to ConsolidatedFinancial Statements

 

December 31, 2007,Behringer Securities’ commissions and dealer manager fees totaled approximately$54.8 million and approximately $20.0 million, respectively, and were recordedas a reduction of additional paid-in capital. In the year ended December 31, 2006, Behringer Securities’ commissionsand dealer manager fees totaled approximately $34.8 million and approximately$10.9 million, respectively, and were recorded as a reduction of additionalpaid-in capital.

 

Ouradvisor, Behringer Advisors, or its affiliates, receives up to 1.5% of grossoffering proceeds for reimbursement of offering expenses incurred in connectionwith the Current Offering; except that no offering expenses are reimbursed withrespect to purchases made pursuant to our DRIP. Reimbursement of offering expenses incurred in connection with theInitial Offering and Second Offering were made at the rate of 2.5% and 2% ofgross offering proceeds, respectively; except that no offering expenses werereimbursed with respect to purchases made pursuant to our DRIP.  Approximately $12.0 million and $9.5 millionof offering expenses were reimbursable by us and were recorded as a reductionof additional paid-in capital for the years ended December 31, 2007 and2006, respectively.  Behringer Advisorsor its affiliates determines the amount of offering expenses owed based onspecific invoice identification as well as an allocation of costs to us andother Behringer Harvard programs, based on respective equity offering resultsof those entities in offering.

 

Inconnection with the Initial Offering and for acquisitions made prior to February 11,2005, Behringer Advisors or its affiliates also received acquisition andadvisory fees of up to 3% of the contract purchase price of each asset for theacquisition, development or construction of real property or, with respect toany mortgage loan, up to 3% of the funds advanced for the purchase or making ofa mortgage loan.  In connection with theSecond Offering and Current Offering, Behringer Advisors or its affiliatesreceive acquisition and advisory fees of up to 2.5% of (1) the purchaseprice of real estate investments acquired directly by us, including any debtattributable to these investments, or (2) when we make an investmentindirectly through another entity, our pro rata share of the gross asset valueof real estate investments held by that entity. Behringer Advisors or its affiliates also receive up to 0.5% of thecontract purchase price of the real estate assets we acquire or, with respectto the making or purchase of a mortgage loan up to 0.5% of the funds advanced,for reimbursement of expenses related to making investments.  Behringer Advisors received approximately$67.5 million and $46.6 million in acquisition and advisory fees and expensesfor the investments we acquired for the years ended December 31, 2007 and2006, respectively.  We capitalize thesefees as part of our real estate, goodwill or investments in unconsolidatedentities.

 

Wehave paid and expect to pay in the future HPT Management Services LP (“HPTManagement”), our property manager and an affiliate of our advisor, fees forthe management and leasing of our properties, which may be subcontracted tounaffiliated third parties.  We expectthese fees to equal 3% of gross revenues of the respective property, plusleasing commissions based upon the customary leasing commission applicable tothe geographic location of the respective property.  In the event that we contract directly with anon-affiliated third party property manager in respect of a property, we willpay HPT Management an oversight fee equal to 1% of gross revenues of theproperty managed.  In no event will wepay both a property management fee and an oversight fee to HPT Management withrespect to any particular property.  Weincurred and expensed fees of approximately $8.5 million, $4.3 million and $1.5million in the years ended December 31, 2007, 2006, and 2005 respectively,for the services provided by HPT Management in connection with our real estateand TIC investments.

 

Inconnection with the Initial Offering, we paid Behringer Advisors an annualasset management fee of 0.5% of aggregate asset value for periods prior to March 2005.  Any portion of the asset management fee maybe deferred and paid in a subsequent year. In connection with the Second Offering and the Current Offering,depending on 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 budget 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).  In the year ended December 31, 2007 weincurred and expensed approximately $13.6 million of asset managementfees.  In the year ended December 31,2006, we incurred and expensed approximately $5.1 million of asset managementfees.  Asset management fees ofapproximately $1.0 million and $2.7 million were waived for the years ended December 31,2007 and 2006, respectively.  In the yearended December 31, 2005 we incurred and expensed approximately $1.9million of asset management fees.

 

Wepay Behringer Advisors or its affiliates a debt financing fee equal to 1% ofthe amount available under any debt made available to us.  We incurred approximately $17.8 million and$11.1 million of such debt financing fees for the years ended December 31,2007 and 2006, respectively.

 

Behringer Advisors or its affiliates is also paid fees if the advisorprovides a substantial amount of services, as determined by our independentdirectors, in connection with the sale of one or more properties.  In such event, we will pay the advisor anamount not exceeding the lesser of: (A) one-half of the aggregatebrokerage commission paid (including the subordinated disposition fee) or ifnone is paid, the amount that customarily would be paid, or (B) (1) 3%of the sales price

 

F-21

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BehringerHarvard REIT I, Inc.

Notes to ConsolidatedFinancial Statements

 

ofeach property sold, or (2) in the case of the sale of any asset other thanreal property, 3% of the sales price of such assets.  This fee will not be earned or paid unlessand until the investors have received total distributions (excluding the 10%stock dividend) in an amount equal to or greater than the sum of the aggregatecapital contributions by investors plus a 9% annual, cumulative,non-compounded, return on such capital contributions.  Subordinated disposition fees that are notpayable at the date of sale, because investors have not yet received theirrequired minimum distributions, will be deferred and paid at such time as thesesubordination conditions have been satisfied. In addition, after investors have received a return of their capitalcontributions and a 9% annual, cumulative, non-compounded return, thenBehringer Advisors is entitled to 15% of remaining net sales proceeds.  Subordinated participation in net salesproceeds that are not payable at the date of sale, because investors have notyet received their required minimum distribution, will be deferred and paid atsuch time as the subordination conditions have been satisfied.  The subordinated participation in net salesproceeds will be reduced or eliminated upon the determination of the number ofshares of common stock issuable upon conversion of our convertible stock.

 

Upon listing of our commonstock on a national securities exchange, a listing fee will be paid toBehringer Advisors equal to 15% of the amount by which the market value of ouroutstanding stock plus distributions we paid prior to listing exceeds the sumof (1) the total amount of capital raised from investors and (2) a 9%annual, cumulative, non-compounded return to investors on their capitalcontributions.  The subordinated listingfee will be reduced or eliminated upon the determination of the number ofshares of common stock issuable upon conversion of our convertible stock.  Upon termination of the Advisory Agreementwith Behringer Advisors, a performance fee will be paid to Behringer Advisorsof 15% of the amount by which our appraised asset value at the time of suchtermination exceeds the aggregate capital contributions contributed byinvestors plus payment to investors of a 9% annual, cumulative, non-compoundedreturn on the capital contributed by investors. Persons independent of us and independent of our advisor will performsuch appraisal of our asset value.  Noperformance fee will be paid if we have already paid or become obligated to payBehringer Advisors a listing fee.  Thesubordinated performance fee will be reduced or eliminated upon thedetermination of the number of shares of common stock issuable upon conversionof our convertible stock.

 

Wewill reimburse Behringer Advisors for all expenses it pays or incurs inconnection with the services it provides to us, subject to the limitation thatwe will not reimburse for any amount by which the advisor’s operating expenses(including the asset management fee) at the end of the four fiscal quartersimmediately preceding the date reimbursement is sought exceeds the greater of: (1) 2%of our average invested assets, or (2) 25% of our net income for that fourquarter period other than any additions to reserves for depreciation, bad debtsor other similar non-cash reserves and any gain from the sale of our assets forthat period.

 

AtDecember 31, 2007, we had a payable to related parties of approximately$8.2 million.  This balance consistsprimarily of offering costs payable to Behringer Advisors and management feespayable to HPT Management.  At December 31,2007, we had a receivable from related parties of approximately $1.0million.  This balance consists primarilyof reimbursements due from HPT Management. At December 31, 2006, we had a payable to related parties ofapproximately $2.1 million.  This balanceconsisted primarily of management fees payable to HPT Management andcommissions payable to Behringer Securities.

 

Weare dependent on Behringer Advisors, Behringer Securities 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.

 

**15.          Commitments and Contingencies**

 

Asof December 31, 2007, we had commitments of approximately $28.7 millionfor future tenant improvements and lease incentives.

 

Wehave a land purchase agreement for our One Oxmoor Place property located inLouisville, Kentucky under which we pay annual rental payments of approximately$0.3 million.  We are committed topurchase the land for approximately $5.4 million on or before December 31,2008.   This liability is included in ourother liabilities at December 31, 2007.

 

**16.          Fair Value Disclosure of FinancialInstruments**

 

Wedetermined the following disclosure of estimated fair values using availablemarket information and appropriate valuation methodologies.  However, considerable judgment is necessaryto interpret market data and develop the related estimates of fair value.Accordingly, the estimates presented herein are not necessarily indicative ofthe amounts

 

F-22

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BehringerHarvard REIT I, Inc.

Notes to ConsolidatedFinancial Statements

 

that could be realized upon disposition ofthe financial instruments.  The use ofdifferent market assumptions and/or estimation methodologies may have amaterial effect on the estimated fair value amounts.

 

Asof December 31, 2007 and 2006, management estimated the carrying value ofcash and cash equivalents, restricted cash, accounts receivable, accountspayable, accrued expenses and other liabilities and distributions payable wereat amounts that reasonably approximated their fair value based on theirhighly-liquid nature and/or short-term maturities.  The carrying value of our notes receivablereasonably approximates fair value based on expected interest rates for notesto similar borrowers with similar terms and remaining maturities.

 

Thenotes payable totaling approximately $3.2 billion as of December 31, 2007have a fair value of approximately $3.1 billion based upon interest rates fornotes with similar terms and remaining maturities that management believes wecould obtain.  The notes payable totalingapproximately $1.6 billion as of December 31, 2006 had a fair valueapproximately an equal amount based upon interest rates for notes with similarterms and remaining maturities that management believes could have beenobtained as of that date.

 

Thefair value estimate presented herein is based on information available to ourmanagement as of December 31, 2007 and 2006. Although our management isnot aware of any factors that would significantly affect the estimated fairvalue amount, such amount has not been comprehensively revalued for purposes ofthese consolidated financial statements since that date, and current estimatesof fair value may differ significantly from the amounts presented herein.

 

**17.****         ****Supplemental Cash FlowInformation**

 

Supplemental cash flowinformation is summarized below for the years ended December 31, 2007,2006 and 2005:

 
| ** **                                                                 | ** ** | **2007**   | ** ** | **2006**   | ** ** | **2005**   | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Interest  paid, net of amounts capitalized**                             |       | $          | 94,158     |       | $          | 44,163     |       | $ | 11,998 |   |
|                                                                       |       |       |       |       |       |       |       |
| **Non-cash  investing activities:**                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Property and equipment additions in accrued  liabilities                   |       | $          | 3,742      |       | $          | 3,075      |       | $ | 700 |   |
|                                                                       |       |       |       |       |       |       |       |
| **Non-cash  financing activities:**                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Common stock issued in distribution  reinvestment plan                     |       | $          | 56,283     |       | $          | 29,786     |       | $ | 11,007 |   |
| Stock dividend                                                             |       | —     |       | —     |       | 49,487     |       |
| Limited partnership units issued in  purchase of real estate               |       | —     |       | —     |       | 3,500      |       |
| Mortgage notes assumed in property  acquisitions and business combinations |       | 1,251,086  |       | 144,400    |       | —     |       |

 

**18.          Stock Dividend**

 

OnMay 11, 2005, our Board of Directors declared a special 10% stock dividendfor holders of record as of September 30, 2005, with an issue date of October 1,2005.  In accordance with SFAS No. 128,“Earnings per Share,” we are required to reflect the effects of the stock dividendin our weighted average shares outstanding for each of the periods presented inour financial statements.  Therefore, theearnings per share for each period presented reflects the effects of the stockdividend.

 

F-23

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BehringerHarvard REIT I, Inc.

Notes to ConsolidatedFinancial Statements

 

**19.          Quarterly Results (Unaudited)**

 

Presentedbelow is a summary of the unaudited quarterly financial information for theyears ended December 31, 2007 and 2006 (in thousands except per sharedata):

 
| **2007 Quarters ended**    | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
|                                 |       |              |       |             |       |                  |       |                 |       |
| Rental  revenue                      |       | $                 | 73,467     |             | $          | 68,811                |       | $                    | 70,748     |   | $ | 101,195 |   |
| 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 | ) |

 
| **2006 Quarters ended**    | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|--------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
|                                 |       |              |       |             |       |                  |       |                 |       |
| Rental  revenue                      |       | $                 | 22,560     |             | $          | 31,892                |       | $                    | 47,856     |   | $ | 58,998 |   |
| Net loss                             |       | (585              | )          | (3,039           | )          | (8,375                | )          | (10,433              | )          |
| Weighted  average shares outstanding |       | 71,707            |       | 81,585           |       | 93,959                |       | 110,818              |       |
| Basic and  diluted loss per share    |       | $                 | (0.01      | )                | $          | (0.04                 | )          | $                    | (0.09      | ) | $ | (0.09 | ) |

 

**20.          Subsequent Events**

 

On January 15, 2008, weacquired a three-story office building containing approximately 143,000(unaudited) rentable square feet located on approximately nine acres(unaudited) of land in Houston, Texas (“Westway One”).  The purchase price of Westway One ofapproximately $34.8 million was paid entirely from cash on hand.

 

On February 15, 2008,we sold 9100 Mineral Circle (Cyprus Building) located in Englewood, Coloradofor a contract purchase price of approximately $27 million.

 

*****

 

F-24

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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, 2007 and 2006 and foreach of the three years in the period ended December 31, 2007, and have issued our report thereon dated March 31,2008; such financial statements and report are included elsewhere in this Form 10-K.  Our audits also included the consolidatedfinancial statement schedules of the Company listed in Item 15.  The financial statement schedules are theresponsibility of the Company’s management. Our responsibility is to express an opinion based on our audits.  In our opinion, such consolidated financialstatement schedules, when considered in relation to the basic consolidatedfinancial statements taken as a whole, present fairly, in all materialrespects, the information set forth therein.

 

 
| /s/  Deloitte & Touche LLP |   |
|-------------------------------------|--------|
|                                |
| Dallas, Texas                       |
| March 31, 2008                 |

 

F-25

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**Valuation and Qualifying Accounts**

**Schedule II**

**December 31, 2007**

**( 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, 2007                 |       | $                                            | 96         |                                          | $          | 351                                      |       | $              | 93         |                                       | $          | — |   | $ | 540 |   |
| Year ended  December 31, 2006                 |       | 42                                           |       | 103                                           |       | —                                   |       | 49             |       | 96                                         |       |
| Year ended  December 31, 2005                 |       | 1                                            |       | 45                                            |       | —                                   |       | 4              |       | 42                                         |       |
|                                                    |            |                                              |            |                                               |            |                                          |            |                |            |                                            |            |  |  |  |  |  |

 

F-26

----

 

**Real Estateand Accumulated Depreciation**

**Schedule III**

**December 31, 2007**

**(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** | ** ** |
| 9100 Mineral  Circle (Cyprus Building) |       | Englewood, CO    |       | —                    |       | $2,056            |       | $15,500         |       | $2,883          |       | $20,439                  |       | $1,866           |       | 1988             |       | 12/16/04     |       |
| Ashford Perimter                       |       | Atlanta, GA      |       | 35,005                    |       | 8,555             |       | 31,662          |       | 3,484           |       | 43,701                   |       | 4,397            |       | 1982             |       | 01/06/05     |       |
| 2383 Utah                              |       | El Segundo, CA   |       | 20,000                    |       | 13,727            |       | 9,990           |       | 81              |       | 23,798                   |       | 1,072            |       | 1968             |       | 04/21/05     |       |
| Lawson Commons                         |       | St. Paul, MN     |       | 58,300                    |       | 2,021             |       | 75,881          |       | 175             |       | 78,077                   |       | 7,611            |       | 1999             |       | 06/10/05     |       |
| Downtown Plaza                         |       | Long Beach, CA   |       | 12,650                    |       | 4,127             |       | 11,874          |       | 473             |       | 16,474                   |       | 1,278            |       | 1982             |       | 06/14/05     |       |
| Gateway 12                             |       | Diamond Bar, CA  |       | 70,750                    | (3)        | 1,600             |       | 6,319           |       | 10              |       | 7,929                    |       | 611              |       | 1999             |       | 07/20/05     |       |
| Gateway 22                             |       | Diamond Bar, CA  |       | —                    |       | 3,862             |       | 7,691           |       | 47              |       | 11,600                   |       | 746              |       | 1999             |       | 07/20/05     |       |
| Gateway 23                             |       | Diamond Bar, CA  |       | —                    |       | 5,295             |       | 10,864          |       | 23              |       | 16,182                   |       | 1,053            |       | 1999             |       | 07/20/05     |       |
| Southwest Center                       |       | Tigard, OR       |       | —                    |       | 2,106             |       | 16,317          |       | 400             |       | 18,823                   |       | 1,615            |       | 2001             |       | 07/20/05     |       |
| 17655 Waterview                        |       | Richardson, TX   |       | —                    |       | 2,932             |       | 28,876          |       | 26              |       | 31,834                   |       | 2,793            |       | 1998             |       | 07/20/05     |       |
| Buena Vista Plaza                      |       | Burbank, CA      |       | 22,000                    |       | 3,806             |       | 28,368          |       | 50              |       | 32,224                   |       | 2,745            |       | 1991             |       | 07/28/05     |       |
| One Financial  Plaza                   |       | Minneapolis, MN  |       | 43,000                    |       | 10,689            |       | 39,482          |       | 593             |       | 50,764                   |       | 3,920            |       | 1960             |       | 08/02/05     |       |
| Riverview Tower                        |       | Knoxville, TN    |       | 30,250                    |       | 2,740             |       | 35,181          |       | 255             |       | 38,176                   |       | 3,211            |       | 1985             |       | 10/05/05     |       |
| 1325 G Street                          |       | Washington, D.C. |       | 100,000                   |       | 71,313            |       | 60,681          |       | 1,062           |       | 133,056                  |       | 5,119            |       | 1969             |       | 11/15/05     |       |
| Woodcrest  Corporate Center            |       | Cherry Hill, NJ  |       | 50,400                    |       | 5,927             |       | 49,977          |       | 1,781           |       | 57,685                   |       | 4,026            |       | 1960             |       | 01/11/06     |       |
| Burnett Plaza                          |       | Ft Worth, TX     |       | 114,200                   |       | 3,376             |       | 157,171         |       | 4,421           |       | 164,968                  |       | 11,563           |       | 1983             |       | 02/10/06     |       |
| AMEC Paragon  I & II          |       | Houston, TX      |       | 16,300                    |       | 2,550             |       | 23,338          |       | 33              |       | 25,921                   |       | 1,637            |       | 1999/2003        |       | 03/14/06     |       |
| Paces West                             |       | Atlanta, GA      |       | 84,000                    |       | 8,838             |       | 88,172          |       | 1,915           |       | 98,925                   |       | 5,934            |       | 1987/89          |       | 04/19/06     |       |
| 222 South  Riverside Plaza             |       | Chicago, IL      |       | 202,000                   |       | 29,787            |       | 190,111         |       | 11,297          |       | 231,195                  |       | 12,466           |       | 1971             |       | 06/02/06     |       |
| The Terrace  Office Park               |       | Austin, TX       |       | 131,000                   |       | 17,330            |       | 124,551         |       | 672             |       | 142,553                  |       | 7,585            |       | 1997-2002        |       | 06/21/06     |       |
| 600 &  619 Alexander Road     |       | Princeton, NJ    |       | 16,500                    |       | 3,000             |       | 16,700          |       | 711             |       | 20,411                   |       | 1,027            |       | 1983/85          |       | 06/28/06     |       |
| Grandview II                           |       | Birmingham, AL   |       | 17,000                    |       | 1,625             |       | 19,274          |       | 188             |       | 21,087                   |       | 913              |       | 1998             |       | 10/20/06     |       |
| Bank of America  Plaza -Charlotte      |       | Charlotte, NC    |       | 150,000                   |       | 26,656            |       | 185,215         |       | 2,398           |       | 214,269                  |       | 8,715            |       | 1974             |       | 10/26/06     |       |
| Three Parkway                          |       | Philadelphia, PA |       | 67,125                    |       | 7,905             |       | 69,033          |       | 2,094           |       | 79,032                   |       | 3,265            |       | 1970             |       | 10/30/06     |       |
| 4440 El Camino  Real                   |       | Los Altos, CA    |       | 27,343                    |       | 4,412             |       | 30,794          |       | 29              |       | 35,235                   |       | 1,438            |       | 2000             |       | 11/02/06     |       |
| Fifth Third  Center-Cleveland          |       | Cleveland, OH    |       | 49,250                    |       | 1,424             |       | 52,075          |       | 753             |       | 54,252                   |       | 2,287            |       | 1991             |       | 11/16/06     |       |
| Resurgens Plaza                        |       | Atlanta, GA      |       | 82,000                    |       | —            |       | 92,980          |       | 3,194           |       | 96,174                   |       | 4,196            |       | 1988             |       | 11/30/06     |       |
| 5 & 15  Wayside               |       | Burlington, MA   |       | —                    |       | 8,917             |       | 61,709          |       | 50              |       | 70,676                   |       | 2,470            |       | 1999/2001        |       | 12/08/06     |       |
| One &  Two Eldridge Place     |       | Houston, TX      |       | 75,000                    |       | 6,605             |       | 89,506          |       | 4,942           |       | 101,053                  |       | 3,674            |       | 1984/86          |       | 12/13/06     |       |
| 250 W. Pratt                           |       | Baltimore, MD    |       | 36,548                    |       | 6,700             |       | 39,861          |       | 5,582           |       | 52,143                   |       | 2,443            |       | 1986             |       | 12/04-12/06  |       |
| Centreport Office  Center              |       | Ft Worth, TX     |       | —                    |       | 3,175             |       | 12,917          |       | 12              |       | 16,104                   |       | 259              |       | 1999             |       | 06/14/07     |       |
| 200 South Wacker                       |       | Chicago, IL      |       | 95,500                    |       | 7,842             |       | 141,981         |       | 294             |       | 150,117                  |       | 947              |       | 1981             |       | 11/01/07     |       |
| One Financial  Place                   |       | Chicago, IL      |       | 188,600                   |       | 23,285            |       | 265,099         |       | 209             |       | 288,593                  |       | 1,767            |       | 1984             |       | 11/01/07     |       |
| 10 & 120  South Riverside     |       | Chicago, IL      |       | 225,000                   |       | 40,476            |       | 311,716         |       | 268             |       | 352,460                  |       | 2,078            |       | 1965             |       | 11/01/07     |       |
| 111 Woodcrest                          |       | Cherry Hill, NJ  |       | —                    |       | 1,000             |       | 5,417           |       | —          |       | 6,417                    |       | 18               |       | 1964             |       | 11/20/07     |       |
| 1650 Arch Street                       |       | Philadelphia, PA |       | 43,995                    |       | 24,000            |       | 60,825          |       | —          |       | 84,825                   |       | —           |       | 1974             |       | 12/12/07     |       |
| United Plaza                           |       | Philadelphia, PA |       | 67,280                    |       | 23,736            |       | 90,001          |       | 188             |       | 113,925                  |       | —           |       | 1975             |       | 12/12/07     |       |
| 11 Stanwix Street                      |       | Pittsburg, PA    |       | 28,595                    |       | 5,348             |       | 18,101          |       | —          |       | 23,449                   |       | —           |       | 1970             |       | 12/12/07     |       |
| One Oxmoor Place                       |       | Louisville, KY   |       | 101,165                   | (4)        | 2,851             |       | 17,614          |       | 34              |       | 20,499                   |       | —           |       | 1989             |       | 12/12/07     |       |
| Hurstbourne Place                      |       | Louisville, KY   |       | —                    |       | 4,587             |       | 30,203          |       | 21              |       | 34,811                   |       | —           |       | 1982             |       | 12/12/07     |       |
| Hurstbourne Park                       |       | Louisville, KY   |       | —                    |       | 2,297             |       | 12,728          |       | 5               |       | 15,030                   |       | —           |       | 1971             |       | 12/12/07     |       |
| Hurstbourne Plaza                      |       | Louisville, KY   |       | —                    |       | 4,000             |       | 10,054          |       | —          |       | 14,054                   |       | —           |       | 1971             |       | 12/12/07     |       |
| Forum Office Park                      |       | Louisville, KY   |       | —                    |       | 6,811             |       | 32,548          |       | 6               |       | 39,365                   |       | —           |       | 1984             |       | 12/12/07     |       |
| Lakeview                               |       | Louisville, KY   |       | —                    |       | 1,468             |       | 8,574           |       | —          |       | 10,042                   |       | —           |       | 1989             |       | 12/12/07     |       |
| Steeplechase  Place                    |       | Louisville, KY   |       | —                    |       | 1,766             |       | 7,424           |       | —          |       | 9,190                    |       | —           |       | 1989             |       | 12/12/07     |       |
| Hunnington                             |       | Louisville, KY   |       | —                    |       | 978               |       | 5,507           |       | —          |       | 6,485                    |       | —           |       | 1986             |       | 12/12/07     |       |
| City Hall Plaza                        |       | Manchester, NH   |       | —                    |       | 2,516             |       | 27,509          |       | —          |       | 30,025                   |       | —           |       | 1982             |       | 12/12/07     |       |
| One &  Two Chestnut Place     |       | Worcester, MA    |       | —                    |       | 2,903             |       | 15,715          |       | (1,149          | )          | 17,469                   |       | —           |       | 1990             |       | 12/12/07     |       |

 

F-27

----

 

**Real Estate and Accumulated Depreciation**

**Schedule III**

**December 31, 2007**

**(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** | ** ** |
| Executive Park                  |       | Louisville, KY     |       | 5,721                     |       | —            |       | 6,311           |       | 11              |       | 6,322                    |       | —           |       | 1973             |       | 12/12/07     |       |
| Energy Centre                   |       | New Orleans, LA    |       | 51,131                    |       | 6,134             |       | 82,597          |       | (38             | )          | 88,693                   |       | —           |       | 1984             |       | 12/12/07     |       |
| Bank of America Plaza-Las Vegas |       | Las Vegas, NV      |       | 50,000                    |       | 10,914            |       | 86,101          |       | —          |       | 97,015                   |       | —           |       | 1975             |       | 12/12/07     |       |
| KeyBank Center                  |       | Cleveland, OH      |       | 28,063                    |       | 2,031             |       | 21,495          |       | —          |       | 23,526                   |       | —           |       | 1969             |       | 12/12/07     |       |
| One Edgewater Plaza             |       | Staten Island, NY  |       | 36,102                    | (5)        | 12,789            |       | 26,292          |       | 3               |       | 39,084                   |       | —           |       | 1919             |       | 12/12/07     |       |
| Tice Building                   |       | Woodcliff Lake, NJ |       | —                    |       | 2,500             |       | 18,118          |       | —          |       | 20,618                   |       | —           |       | 1988             |       | 12/12/07     |       |
| 222 Bloomingdale Road           |       | White Plains, NY   |       | 10,472                    |       | —            |       | 13,990          |       | —          |       | 13,990                   |       | —           |       | 1980             |       | 12/12/07     |       |
| Fifth Third Center - Columbus   |       | Columbus, OH       |       | 52,500                    |       | 3,500             |       | 54,242          |       | —          |       | 57,742                   |       | —           |       | 1928             |       | 12/12/07     |       |
| City Center                     |       | St. Petersburg, FL |       | 16,253                    |       | 5,200             |       | 30,955          |       | 3               |       | 36,158                   |       | —           |       | 1984             |       | 12/12/07     |       |
| 5104 Eisenhower Boulevard       |       | Tampa, FL          |       | 19,608                    |       | 2,602             |       | 25,054          |       | —          |       | 27,656                   |       | —           |       | 1998             |       | 12/12/07     |       |
| Royal Caribbean Center          |       | Miramar, FL        |       | 29,166                    | (6)        | 7,250             |       | 25,876          |       | —          |       | 33,126                   |       | —           |       | 2001             |       | 12/12/07     |       |
| DeVry University                |       | Miramar, FL        |       | —                    |       | 5,300             |       | 15,633          |       | —          |       | 20,933                   |       | —           |       | 2002             |       | 12/12/07     |       |
| Crescent Center                 |       | Memphis, TN        |       | 43,000                    |       | 6,383             |       | 59,286          |       | 213             |       | 65,882                   |       | —           |       | 1986             |       | 12/12/07     |       |
| Plaza at MetroCenter            |       | Nashville, TN      |       | 25,000                    |       | 3,341             |       | 35,333          |       | 323             |       | 38,997                   |       | —           |       | 1985             |       | 12/12/07     |       |
| Loop Central                    |       | Houston, TX        |       | 46,000                    |       | 11,653            |       | 86,587          |       | 89              |       | 98,329                   |       | —           |       | 1980-1982        |       | 12/12/07     |       |
| Epic Center                     |       | Wichita, KS        |       | 15,732                    | (7)        | 951               |       | 19,609          |       | —          |       | 20,560                   |       | —           |       | 1987             |       | 12/12/07     |       |
| One Brittany Place              |       | Wichita, KS        |       | —                    |       | 926               |       | 3,478           |       | —          |       | 4,404                    |       | —           |       | 1984             |       | 12/12/07     |       |
| Two Brittany Place              |       | Wichita, KS        |       | —                    |       | 926               |       | 1,666           |       | 144             |       | 2,736                    |       | —           |       | 1984             |       | 12/12/07     |       |
| 801 Thompson                    |       | Rockville, MD      |       | 11,016                    |       | 3,200             |       | 10,578          |       | —          |       | 13,778                   |       | —           |       | 1963             |       | 12/12/07     |       |
| 500 East Pratt                  |       | Baltimore, MD      |       | 58,800                    |       | —            |       | 66,390          |       | —          |       | 66,390                   |       | —           |       | 2004             |       | 12/12/07     |       |
| Totals                          |       |               |       | $                         | 2,759,320  |              | $          | 514,520         |       | $               | 3,432,677  |                     | $          | 50,258           |       | $                | 3,997,455  |         | $          | 116,745 |   |   |   |   |   |
|                                 |            |                    |            |                           |            |                   |            |                 |            |                 |            |                          |            |                  |            |                  |            |              |            |  |  |  |  |  |  |

 

----

Each of our properties has a depreciable lifeof 25 years

 
| (1) |   | Excludes  unamortized premiums and discounts.                                                                                                                                                                                                |
|-----|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | The  aggregate cost for federal income tax purposes is equal to the gross amount  carried at the close of the period.                                                                                                                        |
| (3) |   | Gateway 12,  Gateway 22, Gateway 23, Southwest Center and 17655 Waterview are each held as  collateral for this note payable.                                                                                                                |
| (4) |   | Oxmoor  Place, Hurstborne Place, Hurstborne Park, Hurstborne Plaza, Forum Office  Park, 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 as collateral for this  note payable.                                                                                                                                             |
| (7) |   | Epic Center,  One Brittany Place and Two Brittany Place are each held as collateral for  this note payable.                                                                                                                                  |

 

Asummary of activity for real estate and accumulated depreciation for the yearsended December 31, 2007, 2006 and 2005 is as follows (in thousands):

 
| ** **                    | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** | **Year ended**             | ** ** |
|-------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **December 31, 2007** | ** ** | **December 31, 2006** | ** ** | **December 31, 2005** | ** ** |
| Real Estate:                  |       |                       |       |                       |       |                       |       |
| Balance at  beginning of year |       | $                          | 1,950,045  |                       | $          | 516,239                    |       | $ | 17,556 |   |
| Additions                     |       | 2,047,410                  |       | 1,433,806                  |       | 498,683                    |       |
| Balance at  end of the year   |       | $                          | 3,997,455  |                       | $          | 1,950,045                  |       | $ | 516,239 |   |
|                          |       |                       |       |                       |       |                       |       |
| Accumulated  depreciation:    |       |                       |       |                       |       |                       |       |
| Balance at  beginning of year |       | $                          | 42,339     |                       | $          | 6,808                      |       | $ | — |   |
| Depreciation  expense         |       | 74,406                     |       | 35,531                     |       | 6,808                      |       |
| Balance at  end of the year   |       | $                          | 116,745    |                       | $          | 42,339                     |       | $ | 6,808 |   |

 

****

 

F-28

----

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                     |
|---------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **          | ** ** | ** **                                                                                                                                                                                                                                                                                                                                          |
| 3.1                 |       | Seventh Articles of Amendment and Restatement (previously filed and  incorporated by reference to Form 8-K filed on June 26, 2007)                                                                                                                                                                                                        |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 3.1.1               |       | Certificate of Correction to the Seventh Articles of Amendment and  Restatement (previously filed and incorporated by reference to Form 8-K  filed on March 17, 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 22, 2006)                                                                                                                                                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 4.1                 |       | Form of Subscription Agreement (previously filed and  incorporated by reference to Exhibit 4.1 to the Registrant’s  Registration Statement on Form S-11 filed on October 4, 2006)                                                                                                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 4.2                 |       | Distribution  Reinvestment Plan of the Registrant, effective as of October 23, 2006  (previously filed and incorporated by reference to Exhibit 4.2 to the  Registrant’s Registration Statement on Form S-11 filed on October 4,  2006)                                                                                    |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 4.3                 |       | Automatic  Purchase Plan of the Registrant, effective as of October 23, 2006  (previously filed and incorporated by reference to Exhibit 4.3 to  Registrant’s Registration Statement on Form S-11 filed on  October 4, 2006)                                                                                               |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 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)                                                                                                                                                   |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 10.3                |       | Fourth  Amended and Restated Property Management and Leasing Agreement among  Registrant, Behringer Harvard Operating Partnership I LP and HPT Management  Services, Inc. (previously filed and incorporated by reference to  Form 8-K filed on January 5, 2007)                                                                     |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 10.4                |       | Reserved.                                                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 10.5                |       | Behringer  Harvard REIT I, Inc. Non-Employee Director Stock Option Plan (previously  filed and incorporated by reference to Amendment No. 1 to Registrant’s  Registration Statement on Form S-11, Commission File No. 333-91532,  filed on September 3, 2002)                                                         |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 10.6                |       | Form of  Option Agreement under Non-Employee Director Stock Option Plan (previously filed  and incorporated by reference to Amendment No. 2 to Registrant’s  Registration Statement on Form S-11, Commission File No. 333-91532,  filed on November 1, 2002)                                                          |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 10.7                |       | 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)                                                                                                                      |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 10.8                |       | 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) |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 10.9                |       | Reserved.                                                                                                                                                                                                                                                                                                                                           |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 10.10               |       | Form of Office Lease  between Behringer Harvard TIC Management Services LP and Behringer Harvard  Exchange Concepts LP regarding the Travis Tower (previously filed and  incorporated by reference to Form 10-Q for the period ended  September 30, 2005 filed on November 14, 2005)                                       |
|                |       |                                                                                                                                                                                                                                                                                                                                                |
| 10.11               |       | Form of Office Lease  between Behringer Harvard TIC Management Services LP and Behringer Harvard  Exchange Concepts LP regarding Alamo Plaza  (previously filed and  incorporated by reference to Form 10-Q for the period ended  September 30, 2005 filed on November 14, 2005)                                      |

 

----

 
| 10.12  |   | Loan  Agreement between Bear Stearns Commercial Mortgage, Inc. and Behringer  Harvard Paces West, LLC (previously filed and incorporated by  reference to Form 8-K filed on April 25, 2006)                                                                                                                                                        |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.13  |   | Promissory  Note made between Bear Stearns Commercial Mortgage, Inc. and Behringer  Harvard Paces West, LLC (previously filed and incorporated by  reference to Form 8-K filed on April 25, 2006)                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.14  |   | Deed  to Secure Debt, Assignment of Leases and Rents and Security Agreement by  Behringer Harvard Paces West, LLC, as borrower for the benefit of Mortgage  Electronic Registration Systems, Inc. as nominee of Bear Stearns  Commercial Mortgage, Inc. (previously filed and incorporated by  reference to Form 8-K filed on April 25, 2006) |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.15  |   | Indemnity  Agreement made by Behringer Harvard Paces West, LLC and Behringer Harvard  REIT I, Inc., in favor of Bear Stearns Commercial Mortgage, Inc. (previously  filed and incorporated by reference to Form 8-K filed on April 25,  2006)                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.16  |   | Assignment  of Leases and Rents by Behringer Harvard Paces West, LLC, as borrower to  Mortgage Electronic Registration Systems, Inc. as nominee of Bear  Stearns Commercial Mortgage, Inc. (previously filed and  incorporated by reference to Form 8-K filed on April 25, 2006)                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.17  |   | Loan  Agreement between Greenwich Capital Financial Products, Inc. and  Behringer Harvard South Riverside, LLC (previously filed and  incorporated by reference to Form 8-K filed on June 8, 2006)                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.18  |   | Promissory  Note made between Greenwich Capital Financial Products, Inc. and  Behringer Harvard South Riverside, LLC (previously filed and  incorporated by reference to Form 8-K filed on June 8, 2006)                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.19  |   | Mortgage,  Assignment of Leases and Rents and Security Agreement and Fixture Filing by  Behringer Harvard South Riverside, LLC, as borrower in favor of Greenwich  Capital Financial Products, Inc. (previously filed and  incorporated by reference to Form 8-K filed on June 8, 2006)                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.20  |   | Guaranty  Agreement made by Behringer Harvard REIT I, Inc., in favor of Greenwich  Capital Financial Products, Inc. (previously filed and  incorporated by reference to Form 8-K filed on June 8, 2006)                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.21  |   | Assignment  of Leases and Rents by Behringer Harvard South Riverside, LLC, as borrower in  favor of Greenwich Capital Financial Products, Inc. (previously  filed and incorporated by reference to Form 8-K filed on June 8,  2006)                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.22  |   | Stock  Purchase and Sale Agreement between Beacon Capital Strategic Partners III,  L.P. and Behringer Harvard Operating Partnership I, LP (previously  filed and incorporated by reference to Form 8-K filed on June 8,  2006)                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.23  |   | Development  Option Agreement between W&G Partnership, Ltd., Desta Three Partnership,  Ltd., Desta Six Partnership, Ltd. and Behringer Harvard Holdings, LLC  (previously filed and incorporated by reference to Form 8-K filed on  June 27, 2006)                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.24  |   | Agreement  Concerning Development Rights between Behringer Harvard Operating Partnership  I LP and Behringer Harvard Holdings, LLC (previously filed and incorporated  by reference to Form 8-K filed on June 27, 2006)                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.25  |   | Purchase  and Sale Agreement between Desta One Partnership, LTD, Desta Two Partnership,  LTD, Desta Five Partnership, LTD and Harvard Property Trust, LLC (previously  filed and incorporated by reference to Form 8-K filed on June 27,  2006)                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.26  |   | Amended  and Restated First Amendment to Purchase and Sale Agreement between Desta One  Partnership, LTD, Desta Two Partnership, LTD, Desta Five Partnership, LTD and  Harvard Property Trust, LLC (previously filed and incorporated by reference  to Form 8-K filed on June 27, 2006)                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.27  |   | Loan  Agreement between Lehman Brothers Bank, FSB and Behringer Harvard Terrace LP  (previously filed and incorporated by reference to Form 8-K filed on  June 27, 2006)                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.28  |   | Promissory  Note made between Lehman Brothers Bank, FSB and Behringer Harvard Terrace LP  (previously filed and incorporated by reference to Form 8-K filed on  June 27, 2006)                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                              |
| 10.29  |   | Deed  of Trust and Security Assignment by Behringer Harvard Terrace LP, as borrower  to Barnet B. Skelton, Jr. as trustee for the benefit of Lehman Brothers  Bank, FSB (previously filed and incorporated by reference to Form 8-K  filed on June 27, 2006)                                                                                       |

 

----

 
| 10.30  |   | Guaranty  made by Behringer Harvard REIT I, Inc., in favor of Lehman Brothers  Bank, FSB (previously filed and incorporated by reference to Form 8-K  filed on June 27, 2006)                                                                                                                                                             |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.31  |   | Assignment  of Leases and Rents by Behringer Harvard Terrace LP, as borrower to Lehman  Brothers Bank, FSB (previously filed and incorporated by reference to  Form 8-K filed on June 27, 2006)                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.32  |   | Promissory  Note made between W&G Partnership, Ltd. and Behringer Harvard Operating  Partnership I LP (previously filed and incorporated by reference to  Form 8-K filed on June 27, 2006)                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.33  |   | Deed  of Trust by W&G Partnership, Ltd, as borrower, to Randall S. Osbourne as  trustee for the benefit of Behringer Harvard Operating Partnership I LP  (previously filed and incorporated by reference to Form 8-K filed on  June 27, 2006)                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.34  |   | Purchase  and Sale Agreement between GA-Paces West, LLC and Harvard Property Trust, LLC  (previously filed and incorporated by reference to Form 10-Q for the  period ended June 30, 2006, filed on August 14, 2006)                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.35  |   | Letter  Agreement, dated May 2, 2006, between Behringer Advisors LP and  Behringer Harvard REIT I, Inc. regarding waiver of asset management fees  (previously filed and incorporated by reference to Form 10-Q for the  period ended June 30, 2006, filed on August 14, 2006)                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.36  |   | Letter  Agreement, dated August 9, 2006, between Behringer Advisors LP and  Behringer Harvard REIT I, Inc. regarding waiver of asset management fees  (previously filed and incorporated by reference to Form 10-Q for the  period ended June 30, 2006, filed on August 14, 2006)                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.37  |   | Assignment  Agreement by and between BRE/TZ Acquisitions, L.L.C. and Harvard Property  Trust, LLC dated September 11, 2006 regarding Bank of America Plaza  (previously filed and incorporated by reference to Form S-11/A filed on  October 4, 2006)                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.38  |   | Assignment  of Assignment Agreement by Harvard Property Trust, LLC to Behringer Harvard  Operating Partnership I LP dated September 20, 2006 regarding Bank of  America Plaza (previously filed and incorporated by reference to  Form S-11/A filed on October 4, 2006)                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.39  |   | Reinstatement  and First Amendment to Assignment Agreement by and between BRE/TZ  Acquisitions, L.L.C. and Behringer Harvard Operating Partnership I LP dated  September 20, 2006 regarding Bank of America Plaza (previously filed and  incorporated by reference to Form S-11/A filed on October 4, 2006)                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.40  |   | Purchase  and Sale Agreement by and between BRE/TZ Acquisitions, L.L.C. and Trizec  Holdings, LLC dated September 21, 2006 regarding Bank of America Plaza  (previously filed and incorporated by reference to Form S-11/A filed on  October 4, 2006)                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.41  |   | Purchase  and Sale Agreement between AGL Investments No. 2 Limited Partnership  L.L.L.P. and Harvard Property Trust, LLC dated September 22, 2006  regarding Three Parkway (previously filed and incorporated by reference to  Form S-11/A filed on October 4, 2006)                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.42  |   | Purchase  and Sale Agreement between North Atlanta Realty Acquisitions  Company, Inc. and Harvard Property Trust, LLC dated September 29,  2006 regarding Resurgens Plaza (previously filed and incorporated by  reference to Form S-11/A filed on October 4, 2006)                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.43  |   | Loan  Agreement between Citigroup Global Markets Realty Corp. and Behringer Harvard  101 South Tryon LP (previously filed and incorporated by reference to  Form 8-K filed on November 1, 2006)                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.44  |   | Promissory  Note made between Citigroup Global Markets Realty Corp. and Behringer Harvard  101 South Tryon LP (previously filed and incorporated by reference to  Form 8-K filed on November 1, 2006)                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.45  |   | Deed  of Trust, Assignment of Leases and Rents and Security Agreement and Fixture  Filing by Behringer Harvard 101 South Tryon LP, as borrower, to Donald F.  Simone, Esq., as trustee, for the benefit of Citigroup Global Markets  Realty Corp. (previously filed and incorporated by reference to Form 8-K  filed on November 1, 2006) |
|   |   |                                                                                                                                                                                                                                                                                                                                                     |
| 10.46  |   | Assignment  of Leases and Rents by Behringer Harvard 101 South Tryon LP, as borrower to  Citigroup Global Markets Realty Corp. (previously filed and incorporated by  reference to Form 8-K filed on November 1, 2006)                                                                                                                         |

 

----

 
| 10.47  |   | Guaranty  of Recourse Obligations made by Behringer Harvard REIT I, Inc., in favor  of Citigroup Global Markets Realty Corp. (previously filed and incorporated  by reference to Form 8-K filed on November 1, 2006)                                                                                                                    |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.48  |   | Loan Agreement between JP  Morgan Chase Bank, N.A. and Behringer Harvard Three Parkway, LLC (previously  filed and incorporated by reference to Form 8-K filed on  November 3, 2006)                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.49  |   | Promissory  Note made between JP Morgan Chase Bank, N.A. and Behringer Harvard Three  Parkway, LLC (previously filed and incorporated by reference to Form 8-K  filed on November 3, 2006)                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.50  |   | Open-End  Mortgage, Assignment of Leases and Rents and Security Agreement and Fixture  Filing by Behringer Harvard Three Parkway, LLC, as borrower, for the benefit  of JP Morgan Chase Bank, N.A. (previously filed and incorporated by reference  to Form 8-K filed on November 3, 2006)                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.51  |   | Assignment  of Leases and Rents by Behringer Harvard Three Parkway, LLC, as borrower to  JP Morgan Chase Bank, N.A. (previously filed and incorporated by reference to  Form 8-K filed on November 3, 2006)                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.52  |   | Guaranty  Agreement made by Behringer Harvard REIT I, Inc., in favor of JP Morgan  Chase Bank N.A. (previously filed and incorporated by reference to  Form 8-K filed on November 3, 2006)                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.53  |   | Sale,  Purchase and Escrow Agreement between North Atlanta Realty Acquisition  Company, Inc. and Harvard Property Trust, LLC (previously filed and  incorporated by reference to Form 8-K filed on November 30, 2006)                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.54  |   | Loan  Agreement between Keybank National Association and Behringer Harvard 945 East  Paces Ferry Road, LLC (previously filed and incorporated by reference to  Form 8-K filed on November 30, 2006)                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.55  |   | Promissory  Note made between Keybank National Association and Behringer Harvard 945 East  Paces Ferry Road, LLC (previously filed and incorporated by reference to  Form 8-K filed on November 30, 2006)                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.56  |   | Fee  and Leasehold Deed to Secure Debt and Security Agreement by Behringer Harvard  945 East Paces Ferry Road, LLC, as borrower for the benefit of Keybank  National Association (previously filed and incorporated by reference to  Form 8-K filed on November 30, 2006)                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.57  |   | Assignment  of Leases and Rents by Behringer Harvard 945 East Paces Ferry Road, LLC, as  borrower to Keybank National Association (previously filed and incorporated  by reference to Form 8-K filed on November 30, 2006)                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.58  |   | Guaranty  Agreement made by Behringer Harvard 945 East Paces Ferry Road, LLC and  Behringer Harvard REIT I, Inc., in favor of Keybank National Association  (previously filed and incorporated by reference to Form 8-K filed on  November 30, 2006)                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.59  |   | Reinstatement  of and First Amendment to Sale, Purchase and Escrow Agreement between North  Atlanta Realty Acquisition Company, Inc. and Harvard Property Trust, LLC  (previously filed and incorporated by reference to Form 8-K filed on  November 30, 2006)                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.60  |   | Reinstatement  of and Second Amendment to Sale, Purchase and Escrow Agreement between North  Atlanta Realty Acquisition Company, Inc. and Harvard Property Trust, LLC  (previously filed and incorporated by reference to Form 8-K filed on  November 30, 2006)                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.61  |   | Purchase  Agreement between TR Eldridge Place Corp. and Harvard Property Trust, LLCLoan Agreement between  Wachovia Bank, National Association and Behringer Harvard Eldridge Place LP  (previously filed and incorporated by reference to Form 8-K filed on  December 19, 2006)                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.62  |   | Loan  Agreement between Wachovia Bank, National Association and Behringer Harvard  Eldridge Place LP (previously filed and incorporated by reference to  Form 8-K filed on December 19, 2006)                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.63  |   | Promissory  Note made between Wachovia Bank, National Association and Behringer Harvard  Eldridge Place LP previously filed and incorporated by reference to  Form 8-K filed on December 19, 2006)                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                   |
| 10.64  |   | Deed  of Trust, Assignment of Leases and Rents, Security Agreement and Fixture  Filing by Behringer Harvard Eldridge Place LP, as borrower to William D.  Cleveland, Esq., as trustee, for the benefit of Wachovia Bank, National  Association (previously filed and incorporated by reference to Form 8-K  filed on December 19, 2006) |

 

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| 10.65  |   | Assignment  of Leases and Rents by Behringer Harvard Eldridge Place LP, as borrower to  Wachovia Bank, National Association (previously filed and incorporated by  reference to Form 8-K filed on December 19, 2006)                                                                                                                                                                                                                                                                                                    |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.66  |   | Guaranty  Agreement made by Behringer Harvard REIT I, Inc., in favor of Wachovia  Bank, National Association (previously filed and incorporated by reference to  Form 8-K filed on December 19, 2006)                                                                                                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.67  |   | Form of  Agreement made by Behringer Harvard REIT I, Inc. and its Directors  (previously filed and incorporated by reference to Form 8-K filed on February 15,  2007)                                                                                                                                                                                                                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.68  |   | Form of  Agreement made by Behringer Harvard REIT I, Inc. and its Officers  (previously filed and incorporated by reference to Form 8-K filed on  February 15, 2007)                                                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.69  |   | Revolving  Credit, Security and Guaranty Agreement among Behringer Harvard Multifamily  OP LP, as borrower, Behringer Harvard Multifamily REIT I, Inc.,  Behringer Harvard Holdings, LLC and Subsidiary Guarantor parties hereto from  time to time, as guarantors, and Behringer Harvard Operating Partnership I  LP, as lender and agent (previously filed and incorporated by reference to  Exhibit 10.195 to Registrant’s Post Effective Amendment No. 5 to  Form S-11 filed on April 24, 2007) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.70  |   | 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)                                                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.71  |   | 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)                                                                                                                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.72  |   | 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)                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.73  |   | 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)                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.74  |   | 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)                                                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.75  |   | 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)                                                                                                                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.76  |   | 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                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.77  |   | 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)                                                                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.78  |   | 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)                                                                                                                                                                                                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.79  |   | Promissory  Note B between by One Financial Place Property LLC and Wachovia Bank,  National Association, dated July 13, 2006                                                                                                                                                                                                                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.80  |   | 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)                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.81  |   | 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)                                                                                                                                                                                                                                                     |

 

----

 
| 10.82  |   | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.83  |   | 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                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.84  |   | 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)                                                                                                                                                                                                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.85  |   | 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) |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.86  |   | 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)                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.87  |   | 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)                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.88  |   | 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 *                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 10.89  |   | 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)                                                                                                                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 21.1   |   | List  of Subsidiaries *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 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 *                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

 

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* filed herewith

 

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