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** **

**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** |
|-------|------------|-----------------------------------------------------------------------------------------------------|

 

**Forthe fiscal year ended December 31, 2009**

 

**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**

** **

**Behringer Harvard 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 areacode)

 

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

**None**

 

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

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

(Titleof class)

 

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 whether the Registrant has submitted electronically and posted onits corporate website, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.45 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o  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.

 

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

 

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 has completed a second follow-on offering of its shares of commonstock pursuant to a registration statement on Form S-11. In each of itsprimary offerings, the registrant has sold shares of its common stock for$10.00 per share, with discounts available for certain categories ofpurchasers. The number of shares held by non-affiliates as of June 30,2009 (the last business day of the registrant’s most recently completed secondfiscal quarter) was approximately 291,747,541.

 

Asof March 1, 2010, the registrant had 293,038,022 shares of common stockoutstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Theregistrant incorporates by reference portions of its Definitive Proxy Statementfor the 2010 Annual Meeting of Stockholders, which is expected to be filed nolater than April 30, 2010, into Part III of this Form 10-K tothe extent stated herein.

 

 

 

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**BEHRINGER HARVARD REIT I, INC.**

**FORM 10-K**

**YearEnded December 31, 2009**

 
|             |                                                                                                                    | **Page**   |
|------------------|-------------------------------------------------------------------------------------------------------------------------|------------|
|             | ** **                                                                                                              |       |
|             | **PART I**                                                                                                         |       |
| ** **       | ** **                                                                                                              | ** ** |
| **Item 1.**      | **Business**                                                                                                            | **4**      |
|             |                                                                                                                    |       |
| **Item 1A.**     | **Risk Factors**                                                                                                        | **7**      |
|             |                                                                                                                    |       |
| **Item 1B.**     | **Unresolved  Staff Comments**                                                                                          | **32**     |
|             |                                                                                                                    |       |
| **Item 2.**      | **Properties**                                                                                                          | **33**     |
|             |                                                                                                                    |       |
| **Item 3.**      | **Legal Proceedings**                                                                                                   | **35**     |
|             |                                                                                                                    |       |
| **Item 4.**      | **Reserved**                                                                                                            | **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**                                                                                             | **39**     |
|             |                                                                                                                    |       |
| **Item 7.**      | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                         | **40**     |
|             |                                                                                                                    |       |
| **Item 7A.**     | **Quantitative  and Qualitative Disclosures about Market Risk**                                                         | **57**     |
|             |                                                                                                                    |       |
| **Item 8.**      | **Financial  Statements and Supplementary Data**                                                                        | **57**     |
|             |                                                                                                                    |       |
| **Item 9.**      | **Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure**                               | **57**     |
|             |                                                                                                                    |       |
| **Item 9A (T).** | **Controls and  Procedures**                                                                                            | **57**     |
|             |                                                                                                                    |       |
| **Item 9B.**     | **Other Information**                                                                                                   | **58**     |
|             |                                                                                                                    |       |
|             | **PART III**                                                                                                       |       |
|             |                                                                                                                    |       |
| **Item 10.**     | **Directors,  Executive Officers and Corporate Governance**                                                             | **59**     |
|             |                                                                                                                    |       |
| **Item 11.**     | **Executive  Compensation**                                                                                             | **59**     |
|             |                                                                                                                    |       |
| **Item 12.**     | **Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters**                    | **59**     |
|             |                                                                                                                    |       |
| **Item 13.**     | **Certain  Relationships and Related Transactions, and Director Independence**                                          | **59**     |
|             |                                                                                                                    |       |
| **Item 14.**     | **Principal  Accounting Fees and Services**                                                                             | **59**     |
|             |                                                                                                                    |       |
|             | **PART IV**                                                                                                        |       |
|             |                                                                                                                    |       |
| **Item 15.**     | **Exhibits,  Financial Statement Schedules**                                                                            | **60**     |
|             |                                                                                                                    |       |
| **Signatures**   |                                                                                                                    | **61**     |

 

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**Forward-LookingStatements**

 

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”),including our increasing vacancy rates and our ability to rent space onfavorable terms, our ability to address debt maturities and fund our liquidityrequirements, our intentions to sell certain properties, our need to modifycertain property loans to support the underlying asset values, the value of ourassets, our anticipated capital expenditures, the amount and timing ofanticipated future cash distributions to our stockholders, the estimated pershare value of our common stock and other matters.  Words such as “may,” “anticipates,”“expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,”“could,” “should” and variations of these words and similar expressions areintended to identify forward-looking statements.

 

These forward-lookingstatements are not historical facts but reflect the intent, belief or currentexpectations of our management based on their knowledge and understanding ofthe business and industry, the economy and other future conditions.  These statements are not guarantees of futureperformance, and we caution stockholders not to place undue reliance onforward-looking statements.  Actualresults may differ materially from those expressed or forecasted in theforward-looking statements due to a variety of risks, uncertainties and otherfactors, including but not limited to the factors listed and described under“Risk Factors” in this Annual Report on Form 10-K and the factorsdescribed below:

 

·                                          market and economic challengesexperienced by the U.S. economy or real estate industry as a whole and thelocal economic conditions in the markets in which our properties are located;

 

·                                          the inability of tenants to continuepaying their rent obligations due to bankruptcy, insolvency or a generaldownturn in their business;

 

·                                          the availability of cash flow fromoperating activities for distributions and capital expenditures;

 

·                                          a decrease in the level of participationunder our distribution reinvestment plan;

 

·                                          our level of debt and the terms andlimitations imposed on us by our debt agreements;

 

·                                          the availability of credit generally, andany failure to refinance or extend our debt as it comes due or a failure tosatisfy the conditions and requirements of that debt;

 

·                                          the need to invest additional equity inconnection with debt refinancings as a result of reduced asset values andrequirements to reduce overall leverage;

 

·                                          future increases in interest rates;

 

·                                          our ability to raise capital in thefuture by issuing additional equity or debt securities, selling our assets orotherwise;

 

·                                          impairment charges;

 

·                                          our ability to retain our executiveofficers and other key personnel of our advisor, our property manager and theiraffiliates;

 

·                                          conflicts of interest arising out of ourrelationships with our advisor and its affiliates;

 

·                                          changes in the level of financial assistanceor support provided by our sponsor or its affiliates;

 

·                                          unfavorable changes in laws orregulations impacting our business or our assets; and

 

·                                          factors that could affect our ability toqualify as a real estate investment trust.

 

Forward-looking statementsin this Annual Report on Form 10-K reflect our management’s view only asof the date of this Report, and may ultimately prove to be incorrect orfalse.  We undertake no obligation toupdate or revise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events or changes to future operating results.  We intend for these forward-lookingstatements to be covered by the applicable safe harbor provisions created by Section 27Aof the Securities Act and Section 21E of the Exchange Act.

 

**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 

 

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covenants to or with anyother parties.  Moreover, theserepresentations, warranties or covenants should not be relied upon asaccurately describing or reflecting the current state of our affairs.

 

**PART I**

 

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

 

**Organization**

 

Behringer Harvard REIT I, Inc.was incorporated in June 2002 as a Maryland corporation and has elected tobe taxed, and currently qualifies, as a real estate investment trust, or REIT,for federal income tax purposes.  Weoperate institutional quality real estate. We completed our first property acquisition in October 2003 and, asof December 31, 2009, we owned interests in 73 office properties locatedin 23 states and the District of Columbia. The properties include 72 operating properties with office space that iscurrently approximately 86% leased to tenants and one property, the initialdevelopment of which was completed in November 2009 but is currentlyunleased and not yet operational.  Forthe year ended December 31, 2009, approximately 46% of our net operatingincome which represents property revenues less property related expenses isderived from properties located in the metro areas of Chicago, Philadelphia andHouston.

 

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

 

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

 

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(“Behringer Harvard Holdings”) and is used by permission.

 

Our common stock is notcurrently listed on a national exchange. However, between 2013 and 2017, management anticipates either listingour common stock on a national securities exchange or liquidating ourassets.  Depending upon then prevailingmarket conditions, it is the intention of our management to consider beginningthe process of listing or liquidating prior to 2013.  In the event we do not obtain listing of ourcommon stock or complete the liquidation of our assets prior to 2017, ourcharter requires us to liquidate our assets, unless a majority of the board ofdirectors and a majority of the independent directors extend such date.

 

**Investment Objectives**

 

Our investment objectivesare:

 

·                       to preserve, protect and returnstockholders’ capital contributions;

 

·                       to maximize cash distributions paid tostockholders;

 

·                       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 ourstockholders, unless a majority of our directors, including a majority of ourindependent directors, extends this date.

 

**Operational and InvestmentPolicies**

 

We operate institutionalquality real estate.  In particular, wehave focused on acquiring institutional quality office properties that webelieve have premier business addresses, desirable locations and high qualityconstruction, and offer personalized amenities, leased to highly creditworthy commercialtenants.  We have focused substantiallyall of our investments in institutional quality office properties, or indevelopment of these types of properties, located in metropolitan cities andsuburban markets in the United States. Our management and members of our board of directors have extensiveexperience in investing in numerous types of properties.  Thus, in addition to office properties, 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 

 

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investment or in change ofcontrol transactions completed on a negotiated basis or otherwise.  We also may invest in collateralizedmortgage-backed securities, mortgage, bridge or mezzanine loans and Section 1031tenant-in-common (“TIC”) interests, including those previously issued byprograms sponsored by Behringer Harvard Holdings or its affiliates, or inentities that make investments similar to the foregoing.  Although all of our investments to date havebeen located in the United States, we also may invest in real estate assetslocated outside the United States.  Ourinvestment strategy is intended to provide stockholders with a geographicallydiversified portfolio of real estate assets.

 

Wehave made our real estate investments in fee title or a long-term leaseholdestate through Behringer OP or indirectly through limited liability companiesor limited partnerships or through investments in joint ventures, co-tenanciesor other co-ownership arrangements.

 

# **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 acquiredbelow-market lease intangibles, each as reflected on our balance sheet at thetime of the calculation without giving effect to any accumulated depreciationor amortization attributable to our real estate assets.  Our policy limitation, however, does notapply to individual real estate assets. As of December 31, 2009, we have borrowed approximately 58% of theaggregate value of our assets.  Thesepercentage amounts would increase if we use any unencumbered real estate assetsto secure additional borrowings or borrow additional amounts on currentlyencumbered assets.  Our board ofdirectors must review our aggregate borrowings at least quarterly.

 

**Distribution Policy**

 

In order toqualify as a REIT for federal income tax purposes, we must distribute at least90% of our REIT taxable income to our stockholders annually.  We currently intend to make distributions toholders of shares of our common stock at least at the level required tomaintain our REIT status unless our results of operations, our generalfinancial condition, general economic conditions or other factors inhibit usfrom doing so.  Distributions areauthorized at the discretion of our board of directors based on its analysis of our forthcoming cash needs, earnings, cashflow, anticipated cash flow, capital expenditure requirements, cash on hand,general financial condition and other factors that our board deemsrelevant.  The board’s decisions also areinfluenced in substantial part by the requirements necessary to maintain ourREIT status under the Internal Revenue Code of 1986, as amended (the “Code”).

 

Distributionsare paid to stockholders as of the monthly record dates selected by our boardof directors.  There can be no assurancethat we will be able to achieve expected cash flows necessary to continue topay distributions at any particular level, or at all.  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               |       | 7.0%                                                                          |       |
| Fiscal Year 2004   |       | $0.6999970 per share               |       | 7.0%                                                                          |       |
| Fiscal Year 2005   |       | $0.6999970 per share               |       | 7.0%                                                                          |       |
| Fiscal Year 2006   |       | $0.6999970 per share               |       | 7.0%                                                                          |       |
| Fiscal Year 2007   |       | $0.6706516 per share               |       | 6.7%                                                                          |       |
| Fiscal Year 2008   |       | $0.6384016 per share               |       | 6.4%                                                                          |       |
| Fiscal Year 2009   |       | $0.4041720 per share               |       | 4.0%                                                                          |       |
| 1st Qtr. 2010 |       | $0.0813000 per share               |       | 3.3%                                                                          |       |

 

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* The average weighted shareprice may be lower than $10.00 per share, and the individual percentage returnmay be greater than the percentage noted, as a result of shares purchasedthrough our distribution reinvestment plan at less than $10.00 per share oracquired in connection with our 10% stock dividend. The annualized percentagereturn assumes the shares were held since January 1 of the stated year.

 

**Public Offerings**

 

We have completed threeprimary public offerings of our common stock. On January 5, 2009, we commenced a public offering of up to60,000,000 shares of common stock currently offered at a price of $9.50 pershare under our Distribution Reinvestment Plan, or “DRP” pursuant to aRegistration Statement on Form S-3 filed under the Securities Act.  

 

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We are offering sharesunder our DRP until the earlier of January 5, 2014 or the date we sell all$570 million worth of shares in this offering. As of December 31, 2009, we had raised a total of approximately$2.9 billion of gross offering proceeds as a result of all of our offerings(inclusive of distribution reinvestments and net of redemptions).

 

As of December 31,2009, we had 292,493,778 shares of our common stock outstanding, which includes275,038,644 shares issued through our primary offerings, 5,521,002 sharesissued as a result of our 10% stock dividend in October 2005, 18,765,847shares issued through distribution reinvestment, and 22,000 shares issued toBehringer Harvard Holdings, offset by 6,853,715 shares redeemed.  Net proceeds for the shares outstanding afterselling commissions, dealer manager fees and organization and offering expensestotaled approximately $2.6 billion.

 

**Tax Status**

 

We have elected to betaxed, and currently qualify, as a REIT for federal income tax purposes.  As long as we qualify for taxation as a REIT,we generally will not be subject to federal income tax at the corporate levelto the extent we distribute annually at least 90% of our “REIT taxable income,”as defined by the Code, to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subjectto federal income tax (including any applicable alternative minimum tax) on ourtaxable income at regular corporate rates. Unless entitled to relief underspecific statutory provisions, we also will be disqualified from taxation as aREIT for the four taxable years following the year in which we lose ourqualification. Even if we qualify as a REIT, we may be subject to certain stateand local taxes on our income and property and to federal income and excisetaxes on our undistributed income.  As ofDecember 31, 2009, and the date of this filing, we believe we are incompliance with all applicable REIT requirements.

 

Weelected for IPC (US), Inc. to be taxed as a REIT for federal income taxpurposes for the tax year ended December 31, 2008.  IPC (US), Inc. is our indirectsubsidiary that we acquired December 12, 2007 as part of our acquisitionof the subsidiaries of IPC US Real Estate Investment Trust (“IPC”).

 

**Competition**

 

We are subject to significantcompetition in seeking tenants for our properties.  The competition for highly creditworthytenants is intense, and we may be required to provide rent concessions, incurcharges for tenant improvements and other inducements, or we may not be able tolease vacant space timely, all of which would adversely impact our results ofoperations.  We also compete with sellersof similar properties when we sell properties, which may result in ourreceiving lower proceeds from the disposal, or which may result in our notbeing able to dispose of such properties due to the lack of an acceptablereturn.  Further, if we were in aposition to acquire properties, we compete with other buyers who are interestedin properties we may acquire, which may result in an increase in the amountthat we pay for such properties or may result in us ultimately not being ableto acquire such properties.  Some of ourcompetitors, including larger REITs, have substantially greater financial resourcesthan we do and generally may be able to accept more risk.  They also mayenjoy significant competitive advantages that result from, among other things,a lower cost of capital and enhanced operating efficiencies.

 

**Regulations**

 

Our investments andoperations are subject to various federal, state, local and foreign laws,ordinances and regulations, including, among other things, zoning regulations,land use controls, environmental controls relating to air and water quality,noise pollution and indirect environmental impacts such as increased motorvehicle activity.  We believe that wehave all permits and approvals necessary under current law to operate ourinvestments.

 

**Environmental**

 

As an owner of realestate, we are subject to various environmental laws of federal, state andlocal governments. Compliance with existing laws has not had a material adverseeffect on our capital expenditures, earnings or competitive position, andmanagement does not believe it will have such an impact in the future.  However, we cannot predict the impact of unforeseenenvironmental contingencies or new or changed laws or regulations on ourproperties.

 

**Employees**

 

We have noemployees.  The employees of BehringerAdvisors and other affiliates of Behringer Harvard Holdings manage our businessand perform a full range of services for us, includingacquisitions/dispositions, property management, capital markets, accounting,legal, asset management, investor relations and other general andadministrative responsibilities.

 

We are dependent onaffiliates of Behringer Harvard Holdings for services that are essential to us,including the services listed above.  Inthe event that these companies were unable to provide these services to us, wewould be required to provide such services ourselves or obtain such servicesfrom other sources.

 

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**Financial Information AboutIndustry Segments**

 

Our current businessconsists of owning, operating, acquiring, developing, investing in anddisposing of real estate assets.  Weinternally evaluate operating performance on an individual property level andview all of our real estate assets as one industry segment, and, accordingly,all of our properties are aggregated into one 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 DRP 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.**

 

****The factors described belowrepresent our principal risks.  Other factors may exist that we do notconsider to be significant based on information that is currently available orthat we are not currently able to anticipate. ****Theoccurrence of any of the risks discussed below could have a material adverseaffect on our business, financial condition, results of operations and abilityto pay distributions to our stockholders. ****Ourstockholders may be referred to as “you” or “your” in this Item 1A, “RiskFactors” section.****

 

**Risks Related to OurBusiness in General**

** **

***Recent market disruptions will likely adversely impact mostaspects of our operating results and operating condition.***

 

The globalfinancial markets have undergone pervasive and fundamental disruptions. Thedisruption has had and may continue to have an adverse impact on theavailability of credit to businesses, generally, and has resulted in and couldlead to further weakening of the U.S. and global economies.  Our business will likely be affected bymarket and economic challenges experienced by the U.S. economy or real estateindustry as a whole or by the local economic conditions in the markets in whichour properties are located, including the current dislocations in the creditmarkets and general global economic recession. Availability of debt financing secured by commercial real estate hasdeclined, as a result of tightened underwriting standards.  These conditions have and may continue tomaterially affect the value of our investment properties, and will likelycontinue to affect our ability to pay distributions, the availability or theterms of financing that we have or may anticipate utilizing, and our ability tomake principal and interest payments on, or refinance, any outstanding debtwhen due.  These challenging economicconditions will also continue to impact the ability of certain of our tenantsto enter into new leasing transactions or satisfy rental payments underexisting leases.  Specifically, thecurrent conditions, or similar conditions existing in the future, may have thefollowing consequences:

 

·                                          the financial condition of our tenants, many of whichare financial, legal and other professional firms, may be adversely affected,which result in us having to increase concessions, reduce rental rates or makecapital improvements beyond those contemplated at the time we acquired theproperties in order to maintain occupancy levels or to negotiate for reducedspace needs, which results in a decrease in our occupancy levels;

 

·                                          a continuing increase in the number of bankruptcies orinsolvency proceedings of our tenants and lease guarantors, which could delayour efforts to collect rent and any past due balances under the relevant leasesand ultimately could preclude collection of these sums;

 

·                                          significant job losses in the financial andprofessional services industries have occurred and may continue to occur, whichmay decrease demand for our office space and result in lower occupancy levels,which will result in decreased revenues and which could diminish the value ofour properties, which depend, in part, upon the cash flow generated by ourproperties;

 

·                                          credit spreads for major sources of capital maycontinue to widen as stockholders demand higher risk premiums, resulting inlenders increasing the cost for debt financing;

 

·                                          our ability to borrow on terms and conditions that wefind acceptable, or at all, may be limited, which could result in ourinvestment operations generating lower overall economic returns and a reducedlevel of cash flow, which could potentially impact our ability to makedistributions to our stockholders at current levels, reduce our ability topursue acquisition opportunities if any, and increase our interest expense;

 

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·                                          a further reduction in the amount of capital that isavailable to finance real estate, which, in turn, could lead to a decline inreal estate values generally, slow real estate transaction activity, reduce theloan to value ratio upon which lenders are willing to lend, and result indifficulty refinancing our debt, including our debt coming due in late 2011related to our credit facility, assuming its one-year extension in December 2010,and a significant portion of our Chicago portfolio;

 

·                                          the value of certain of our properties has likelydecreased below the amounts we paid for them, which may limit our ability todispose of assets at attractive prices or to obtain debt financing secured byour properties and may reduce the availability of unsecured loans;

 

·                                          the value and liquidity of our short-term investmentscould be reduced as a result of the dislocation of the markets for ourshort-term investments and increased volatility in market rates for suchinvestments or other factors; and

 

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

 

Further, in light of thecurrent economic conditions, we cannot provide assurance that we will be ableto sustain the current level of our distributions.  If the conditionscontinue, our board may further reduce or cease our distributions in order toconserve cash.

 

***Unless we generate sufficient cash flow from operating activitiesto cover distributions to our stockholders and capital requirements of ourproperties, we will make distributions from other sources, including cash onhand, which may negatively impact our ability to sustain or pay distributions.***

 

***Distributionsare authorized at the discretion of our board of directors based on itsanalysis of our forthcoming cash needs, earnings, cash flow, anticipated cashflow, capital expenditure requirements, cash on hand, general financialcondition and other factors that our board deems relevant.  Actual cash available for distribution mayvary substantially from estimates. Historically, the amount of our declared distributions has exceeded ourcash flow from operating activities, but because of the participation level inour DRP, which results in a reinvestment of distributions in shares of ourcommon stock, the net cash that we have historically been required to pay indistributions has been less than cash flow from operating activities.  However, cash flow from operating activitieshas been insufficient to fund both the net cash required to fund distributionsand the capital requirements of our properties. For example, in 2009, our properties required approximately $68.5million for capital expenditures (excluding real estate under development) andthe net cash required to fund distributions was approximately $60.2 million,but our cash flow from operating activities was only $63.0 million.   As a result, a portion of the net cash requiredfor distributions and capital expenditures was funded from cash on hand, whichincludes proceeds from our final offering.***

*** ***

***If the level ofparticipation in our DRP decreases, the net cash required to fund distributionsmay exceed cash flow from operating activities before funding any of thecapital requirements of our properties. Further, if cash flow from operating activities continues to beinsufficient to fund both the net cash required to fund distributions and thecapital requirements of our properties, a portion of distributions willcontinue to be funded with cash on hand or from other sources, and the level ofour distributions may not be sustainable. For example, we may generate cash to pay distributions from financingactivities, components of which may include borrowings (including borrowingssecured by our assets) in anticipation of future operating cash flow.  In addition, from time to time, our advisorand its affiliates have agreed, but are not required, to waive or defer all, ora portion, of the acquisition, asset management or other fees or otherincentives due to them, enter into lease agreements for unleased space, paygeneral administrative expenses or otherwise supplement investor returns inorder to increase the amount of cash available to make distributions to our stockholders.  To the extent distributions exceed net cashor cash flow generated by operations or financing activities, the level ofdistributions may not be sustainable and our board of directors could furtherreduce or eliminate distributions.***

 

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***The current offering price of shares under our DRP likelyexceeds the price at which we will offer shares under the DRP following anestimation of value of our shares of common stock.***

 

### **We intend to conduct a valuation of our shares ofcommon stock in accordance with our valuation policy and determine theestimated value as of June 30, 2010. After determining the per share estimated value, the purchase price ofthe shares of common stock offered under our DRP will be equal to the per shareestimated value.  Due to the continuingimpact of the disruptions in the financial and real estate markets on thevalues of our investments, we expect that the estimated value per share of ourcommon stock when determined will be less than $9.50 per share.**

### ** **

***If participation in the DRP decreases, our capital would beconstrained and we would have to use a greater proportion of our cash on hand,cash flow from operations, or investing or financing activities to meet ourgeneral cash requirements.***

 

***The proceeds that we receive from participants choosing toreinvest distributions in additional shares has historically been an importantsource of capital for us.  To the extentthat a material number of DRP participants choose to terminate or reduce theirlevel of participation, our capital would be further constrained, and we wouldhave to use a greater proportion of our cash on hand, cash flow fromoperations, or investing or financing activities to meet our general cashrequirements, which would reduce cash available for distributions and couldresult in our board of directors further reducing or ceasing distributions.***

*** ***

***Ifparticipation in the DRP decreases, we may not have sufficient funds availableto redeem all shares submitted for redemption pursuant to the share redemptionprogram, and we may not be able to redeem shares.***

 

Weredeem shares under our share redemption program but subject to some importantrestrictions and limitations.  Forexample, the funds used for redemption during any period may not exceed theamount of gross proceeds generated from the sale of shares through the DRPduring the period consisting of the preceding four fiscal quarters for whichfinancial statements are available, less any redemptions during the sameperiod.  In addition, our board may, from time to time, in its solediscretion, further limit the funds that we use to redeem shares.  We cannot predict with any certainty howmuch, if any, DRP proceeds will be available to fund redemptions under ourshare redemption program.  Ifparticipation in the DRP decreases and fewer proceeds are generated from DRPsales, then our ability to redeem shares under our share redemption programwill be further limited and we may not be able to redeem shares submitted to usfor redemption.

 

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

 

On March 24,2009, our board suspended, until further notice, redemptions other than thosesubmitted in respect of a stockholder’s death, disability or need for long-termcare, therefore reducing the potential liquidity of a stockholder’sinvestment.  Further, on November 12,2009, our board limited the funds that we may use to redeem shares to $10million for 2010 proportional to each redemption period.  Our board of directors, in its solediscretion, may amend, suspend or terminate our share redemption program at anytime it determines that doing so is in our best interest, or may further reduceor limit the number of shares purchased under the share redemption program ifit determines the funds otherwise available to fund the program are needed forother purposes.  There is no assurancethat the program will remain in place, and it could be further limited.

 

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

 

We are permitted to acquire, and historicallyhave acquired, real properties and other real estate-related investments byassuming either existing financing secured by the asset or by borrowing newfunds.  In addition, we may incur orincrease our mortgage debt by obtaining loans secured by some or all of ourassets to obtain funds to acquire additional investments or to paydistributions to our stockholders.  Wealso may borrow funds if necessary to satisfy the requirement that wedistribute at least 90% of our annual “REIT taxable income,” or otherwise as isnecessary or advisable to assure that we maintain our qualification as a REITfor federal income tax purposes.

 

Although our charter imposes limits on ourtotal indebtedness, there is no limit on the amount we may invest in any singleproperty or other asset or on the amount we can borrow to purchase anyindividual property or other investment. Further, we may exceed the limits set forth in our charter if approvedby a majority of our independent directors.

 

In addition to our charter limitation, ourboard of directors has adopted a policy to generally limit our aggregateborrowings to approximately 55% of the aggregate value of our assets, which isdefined as our total assets plus acquired below-market leaseintangibles, each as reflected on our balance sheet at the time of thecalculation without giving effect to any accumulated depreciation oramortization attributable to our real estate assets, unless substantial justification exists that 

 

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borrowing a greater amountis in our best interests.  Our policylimitation, however, does not apply to individual real estate assets.

 

We do not borrow money secured by aparticular real property unless we, at the time of the borrowing, believe theproperty’s future projected cash flow is sufficient to service the mortgagedebt.  However, if there is a shortfallin cash flow, then the amount available for distributions to stockholders maybe affected.  Principal and interestpayments reduce cash that would otherwise be available for other purposes.  Further, incurring mortgage debt increasesthe risk of loss because (1) loss in investment value is generally borneentirely by the borrower until such time as the investment value declines belowthe principal balance of the associated debt and (2) 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.  We have experienced defaultsresulting in our having to transfer properties to the respective lenders, andmay be required to do so again if our loans do not support the underlying assetvalues.  For tax purposes, a foreclosureis treated as a sale of the property for a purchase price equal to the outstandingbalance of the debt secured by the mortgage. If the outstanding balance of the debt secured by the mortgage exceedsour tax basis in the property, we would recognize taxable income onforeclosure, but would not receive any cash proceeds.  We also may provide full or partialguarantees to lenders of mortgage debt to our indirect subsidiaries that ownour properties.  If we guarantee debt 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.

 

***Our substantial indebtedness adversely affects our financial health andoperating flexibility.***

 

As a result of oursubstantial indebtedness, we are required to use a material portion of our cashflow to service principal and interest on our debt, which limits the cash flowavailable for other purposes.  In addition,we may not generate sufficient cash flow after debt service to, among otherthings, fund capital expenditures or continue paying distributions in the nearterm or at all.

 

Our level of debtand the limitations imposed on us by our debt agreements could have significantadverse consequences to us, regardless of our ability to refinance or extendour debt, including:

 

·                                          limiting our ability to borrow additionalamounts for, among other things, working capital, capital expenditures, debtservice requirements, execution of our business plan or other purposes;

 

·                                          limiting our ability to use operatingcash flow in other areas of our business or to pay distributions.  Our credit facility, for example, restrictsus from paying distributions if the aggregate distributions paid or declaredduring a period of four consecutive quarters exceeds 95% of our funds fromoperations, during that period, and restricts us from paying any distributions,other than as required to maintain our REIT qualification, or any advisory feesif an event of default has occurred and is continuing.  Funds from operations, as defined in thecredit facility agreement, is equal to net income (or loss), computed inaccordance with GAAP, excluding gains (or losses) from extraordinary items or non-recurringgains or losses (but including gains or losses on sales of real estate in theordinary course of business, e.g. build to suits), plus depreciation andamortization,  plus acquisition expenses required to be expensed beginningin January 2009, plus asset management fees that are subordinate to theobligations, and after adjustments for unconsolidated partnerships and jointventures.  Adjustments for unconsolidated partnerships and joint ventureswill be recalculated to reflect funds from operations on the same basis;

 

·                                          increasing our vulnerability to generaladverse economic and industry conditions;

 

·                                          limiting our ability to capitalize onbusiness opportunities and to react to competitive pressures and adversechanges in government regulation;

 

·                                          limiting our ability to fund capitalexpenditures, tenant improvements and leasing commissions; and

 

·                                          limiting our ability or increasing thecosts to refinance our indebtedness.

 

***We may not be able to refinance or repay our indebtedness.***

 

We may not be ableto refinance or repay our existing indebtedness.  At December 31, 2009, our notes payablehad maturity dates that range from October 2010 to May 2017.  Approximately $209.2 million, orapproximately 7%, of our December 31, 2009 outstanding debt matures in2010, $150.0 million of which represents the revolving loans under our creditfacility which matures in December 2010 and can be extended for oneyear.  Approximately $542.3 million, or 

 

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approximately 18%, of ourDecember 31, 2009 outstanding debt matures in 2011.  Due to (1) potentially reduced values ofour investments, (2) limited cash flows from operating activities, (3) ourdebt level, (4) limited access to commercial real estate mortgages in thecurrent market and (5) material changes in lending parameters, includinglower loan-to-value ratios, we face significant challenges refinancing ourcurrent debt on acceptable terms or at all.

 

Further, we maynot have the funds necessary to repay our debt as it matures.  Therefore, failure to refinance or extend ourdebt as it comes due, or a failure to satisfy the conditions and requirementsof that debt, could result in an event of default.  We have experienced, and may continue toexperience, defaults or events of default with respect to our existingindebtedness, which has required us to either restructure the debt in a waythat is supported by the underlying asset values of the propertiescollateralizing the debt or to purchase or pay off the debt at a discount.  In situations where we have been unable torestructure the debt or to purchase or pay off the debt at a discount, we havetransferred the underlying property to the lender.  We can provide no assurance that, withrespect to any other indebtedness that we may be unable to repay, we will beable to restructure that debt or to purchase or pay off that debt at a discount,which could result in lenders accelerating that debt or foreclosing on therelated property.  If our debt isaccelerated, the value of our assets may not be sufficient to repay the debt infull.  If we are unable to refinance orrepay our debt as it comes due and maintain sufficient cash flow, our business,financial condition and results of operations will be materially and adverselyaffected.  Furthermore, even if we areable to obtain extensions on our existing debt, those extensions may include operationaland financial covenants significantly more restrictive than our current debtcovenants.  Any extensions will alsorequire us to pay certain fees to, and expenses of, our lenders.  Any fees and cash flow restrictions willaffect our ability of fund our ongoing operations from our operating cash flowsand, among other things, our ability to pay distributions.

 

***We may not be able to raise capital to repay debt or finance ouroperations.***

 

We are evaluating various options to raise capital,including through the sale of certain of our assets or interests in assets orequity offerings.  There can be noassurance that any of these options will be successful.  If we sell assets, it will likely have theeffect of reduced cash flow from operating activities.  Further, if we decide to raise capital byoffering shares of common or preferred stock, or any other securities that areconvertible into, exercisable or exchangeable for our capital stock, theissuance would have the effect of diluting the proportionate equity interestand voting power of our existing stockholders.

 

The economic climate generally and property specificissues, such as vacancies and lease terminations have negatively affected thevalue of our investment properties and therefore reduces our ability to sellthese properties on acceptable terms even if Behringer Advisors believes thatdoing so would be in our best interest. Our ability to sell our properties is also negatively affected by theweakness of the credit markets, which increases the cost and difficulty forpotential purchasers to acquire financing, as well as by the illiquid nature ofreal estate.  Finally, the currenteconomic environment may encourage potential purchasers to offer lessattractive terms for our properties. These conditions also negatively affect our ability to raise capitalthrough other means, including through the sale of equity either in the form ofcommon or preferred stock.

 

***Stockholders have limited control over changes inour policies and operations.***

 

Our board of directors determines our major policies,including those regarding investment policies and strategies, financing,growth, debt capitalization, REIT qualification and distributions.  Ourboard of directors may amend or revise certain of these and other policieswithout a vote of the stockholders.

 

***We may not successfullyprovide stockholders with a liquidity event.***

 

***We anticipate providing our stockholders with a liquidityevent by, for example, listing our common stock on a national securitiesexchange or selling our assets and distributing the proceeds to ourstockholders.  Our board is not requiredto consider the process of listing or liquidation prior to February 2013,subject to then prevailing market conditions. Market conditions and other factors could cause us to delay a liquidityevent beyond this period and to defer a stockholder vote or any liquidationevent indefinitely.  Therefore, if wedelay a liquidity event or are not successful in implementing our exitstrategy, your shares will continue to be illiquid.***

*** ***

***If we internalize ourmanagement functions, the percentage of our outstanding common stock owned byour other stockholders may be reduced, and we could incur other significantcosts associated with being self-managed.***

*** ***

***At some point in the future, we may consider internalizingthe functions performed for us by our advisor and property manager.  The method by which we could internalizethese functions could take many forms, although the method or cost ofinternalizing cannot be determined or estimated at this time.  If we acquired our advisor and propertymanager as***

 

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***part of aninternalization, the amount and form of any consideration that we would pay inthis type of transaction could take many forms. For example, we could acquire the advisor and property manager through amerger in which we issue shares of our common stock for all of the outstandingcommon stock or assets of these entities. Issuing shares of our common stock would reduce the percentage of ouroutstanding shares owned by stockholders prior to any transaction.  Further, issuing promissory notes couldreduce our net income, cash flow from operations and our ability to makedistributions to you particularly if internalizing these functions does notproduce cost savings.   There is noassurance that internalizing our management functions would ultimately provebeneficial to us and our stockholders. For example, we may not realize the perceived benefits or we may not beable to properly integrate a new staff of managers and employees or we may notbe able to effectively replicate the services provided previously by ouradvisor, property manager or their affiliates. In addition, we may not be able to effect an internalization plan thatenables us to retain all of the employees of our advisor or property manager orto maintain a relationship with our sponsor. Internalization transactions involving the acquisition of advisors orproperty managers affiliated with entity sponsors have also, in some cases,been the subject of litigation.  Even ifthese claims are without merit, we could be forced to spend significant amountsof money defending claims which would, among other things, reduce the amount offunds available for us to invest in real estate or to pay distributions.***

*** ***

***Your percentage interest inBehringer Harvard REIT I will be reduced if we issue additional shares.***

*** ***

Existing stockholders 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 obtaining stockholder approval.  Shares may beissued in the discretion of our board of directors.  The percentage of ouroutstanding shares owned by stockholders at the time of any issuance willlikely be reduced if we (1) sell additional shares in the future,including those issued pursuant to the distribution reinvestment plan, (2) sellsecurities that are convertible into shares of our common stock, (3) issueshares of our common stock in a private offering of securities, (4) issueshares of common stock upon the conversion of the convertible stock, (5) issueshares of our common stock upon the exercise of the options granted to ourindependent directors or employees of Behringer Advisors and HPT Management,our property management company, or their affiliates, (6) issue shares toour advisor, HPT Management or their successors or assigns, 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 OP may beexchanged for shares of our common stock, any merger, exchange or conversionbetween Behringer OP and another entity ultimately could result in the issuanceof a substantial number of shares of our common stock, therefore reducing thenumber of outstanding shares owned by our other stockholders.   Further, our board of directors couldauthorize the issuance of stock with terms and conditions that subordinate therights of the current holders of our common stock or 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 provide a premium price for ourstockholders.  Because of these and otherreasons described in this “Risk Factors” section, you should not expect to beable to own a significant percentage of our shares.

 

***The failure of any bank inwhich we deposit our funds could reduce the amount of cash we have available topay distributions and make additional investments.***

*** ***

We have diversified our cash and cashequivalents between several banking institutions in an attempt to minimizeexposure to any one of these entities. However, the FDIC generally only insures limited amounts per depositorper insured bank.  We have cash and cashequivalents and restricted cash deposited in interest bearing transactionaccounts at certain financial institutions exceeding these federally insuredlevels.  If any of the bankinginstitutions in which we have deposited funds ultimately fails, we may lose ourdeposits over the federally insured levels. The loss of our deposits would reduce the amount of cash we haveavailable to distribute or invest.

 

***We are uncertain of oursources for funding of future capital needs, which could adversely affect thevalue of our investments.***

*** ***

We completed our lastprimary offering of shares in December 2008 and are only offering sharesthrough our DRP.   Unless we selladditional equity, our ability to fund future property capital needs, such astenant improvements, leasing commissions and capital expenditures, will dependon our ability to borrow, sell assets or interests in assets or to generateadditional cash flows from operations. We establish capital reserves on a property-by-property basis, as wedeem appropriate.  In addition to anyreserves we establish, a lender may require escrow of reserves in excess of ourestablished 

 

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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.  If we do not have sufficient reserves or generatesufficient cash from operations to fund capital improvements throughout thelife of the investment in a property, we may be required to defer necessaryimprovements to the property which may cause the property to suffer from agreater risk of obsolescence or a decline in value, or a greater risk ofdecreased cash flow as a result of fewer potential tenants being attracted tothe property.  If this happens, we maynot be able to maintain projected rental rates for effected properties, and ourresults of operations and ability to pay distributions may be negativelyimpacted.

 

***Interest-only indebtedness may increase our risk ofdefault and ultimately may reduce our funds available for distribution to ourstockholders.***

*** ***

We have financed, and may continue tofinance, our property acquisitions or any re-financings using interest-onlymortgage indebtedness.  During the interest only period, the amount ofeach scheduled payment is less than that of a traditional amortizing mortgageloan.  The principal balance of the mortgage loan will not be reduced(except in the case of prepayments) because there are no scheduled monthlypayments of principal during this period.  After the interest-only period,we will be required either to make scheduled payments of amortized principaland interest or to make a lump-sum or “balloon” payment at maturity.  These required principal or balloon paymentswill increase the amount of our scheduled payments and may increase our risk ofdefault under the related mortgage loan and will reduce the funds availablefor, among other things, distribution to our stockholders.

 

***Increases in interest rates could increase theamount of our debt payments and adversely affect our ability to makedistributions to our stockholders.***

*** ***

We have borrowed money that bears interest atvariable rates.  To date, we haveeffectively converted our variable rate debt into fixed rate debt through theuse of swap agreements.  If these swapagreements cease to be effective, we will be exposed to increases in costs in arising interest rate environment. Increased payments will reduce the funds available for other needs,including, among other things, distributions to our stockholders because cashotherwise available for distribution will be required to pay increased interestcosts.  In addition, if rising interestrates cause us to need additional capital to repay indebtedness, we may beforced to sell one or more of our properties or investments in real estate attimes which may not permit us to realize the return on the investments we wouldhave otherwise realized.

 

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

*** ***

From time to time we may use derivativefinancial instruments to hedge exposures to changes in exchange rates andinterest rates on loans secured by our assets and investments in collateralizedmortgage-backed securities.  Derivative instruments include interest rateswap contracts, interest rate cap or floor contracts, futures or forwardcontracts, options or repurchase agreements.  Our actual hedging decisionsare determined in light of the facts and circumstances existing at the time ofthe hedge and may differ from time to time. There is no assurance that our hedging activities will have a positiveimpact on our results of operations or financial condition. We might be subjectto costs, such as transaction fees or breakage costs, if we terminate thesearrangements.

 

To the extent that we use derivativefinancial instruments to hedge against exchange rate and interest ratefluctuations, we are exposed to credit risk, basis risk and legalenforceability risks.  In this context, creditrisk is the failure of the counterparty to perform under the terms of thederivative contract.  If the fair valueof a derivative contract is positive, the counterparty owes us, which createscredit risk for us.  Basis risk occurswhen the index upon which the contract is based is more or less variable thanthe index upon which the hedged asset or liability is based, thereby making thehedge less effective.  Finally, legalenforceability risks encompass general contractual risks including the risk thatthe counterparty will breach the terms of, or fail to perform its obligationsunder, the derivative contract, particularly in light of current marketconditions.  Further, the REIT provisionsof the Code may limit our ability to hedge the risks inherent to ouroperations.  We may be unable to managethese risks effectively.

 

***We may enter into derivative contracts that could expose us tocontingent liabilities in the future.***

 

Our derivative financial instruments mayrequire us to fund cash payments upon the early termination of a derivativeagreement caused by an event of default or other early termination event. Theamount due would be equal to the unrealized loss of the open swap positionswith the respective counterparty and could also include other fees and charges.In addition, some of these derivative arrangements may require that we maintainspecified percentages of cash collateral with the counterparty to fundpotential liabilities under the derivative contract. We may have to make cashpayments in 

 

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order to maintain therequired percentage of collateral with the counterparty. These economic losseswould be reflected in our results of operations, and our ability to fund theseobligations would depend on the liquidity of our respective assets and accessto capital at the time. Our due diligence may not reveal all of an entity’sliabilities and may not reveal other weaknesses in the entity’s business.

 

***Our financial condition could be adverselyaffected by financial covenants under our credit facility.***

 

Ourcredit facility agreement contains certain financial and operating covenants,including, among other things, leverage ratios, certain coverage ratios, aswell as limitations on our ability to incur secured indebtedness. The creditfacility agreement also contains customary default provisions including thefailure to timely pay debt service issued thereunder and the failure to complywith our financial and operating covenants. These covenants could limit ourability to obtain additional funds needed to address liquidity needs or pursuegrowth opportunities or transactions that would provide substantial return toour stockholders. In addition, a breach of these covenants could cause adefault and accelerate payment of advances under the credit facility agreement,which could have a material adverse effect on our financial condition.

 

**Violating thecovenants contained in our credit facility agreement would likely result in usincurring higher finance costs and fees and/or an acceleration of the maturitydate of advances under the credit facility agreement all of which would have amaterial adverse effect on our results of operations and financial condition.**

** **

***If we lose or are unable to obtain key personnel,our ability to implement our investment strategies could be delayed orhindered.***

*** ***

***Our ability toachieve our investment objectives depends, to a significant degree, upon thecontinued contributions of our***executive officers and other key personnelof Behringer Advisors and HPT Management and their affiliates. We do not haveemployment agreements with our executive officers.  Although several of our executive officershave entered 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.  We believe that our future success depends,in large part, on the ability of Behringer Advisors and HPT Management andtheir 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 HPT Management and theiraffiliates will be successful in attracting and retaining skilled personnel.Further, we have established, and intend in the future to establish, strategicrelationships with firms that have special expertise in certain services or asto assets both nationally and in certain geographic regions. Maintaining theserelationships is important for us to effectively compete for assets. We cannotassure you that we will be successful in attracting and retaining thesestrategic relationships. If we lose or are unable to obtain the services of ourexecutive officers and other key personnel of Behringer Advisors and HPTManagement and their affiliates, or do not establish or maintain the necessarystrategic relationships, our ability to implement our investment strategy couldbe delayed or hindered.

*** ***

***A limit on the number of shares a person may own maydiscourage a takeover.***

*** ***

Our charter, with certain exceptions,authorizes our directors to take such actions as are necessary and desirable topreserve our qualification as a REIT. Unless exempted by our board of directors, no person or group may ownmore than 9.8% of our outstanding common or preferred stock, in value or numberof shares, whichever is more restrictive. This restriction may have the effect of delaying, deferring orpreventing a change in control of us, including an extraordinary transaction(such as a merger, tender offer or sale of all or substantially all of ourassets) that might otherwise provide stockholders with the opportunity toreceive a control premium for their shares.

 

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

*** ***

Under Maryland law, “business combinations”between a Maryland corporation and an interested stockholder or an affiliate ofan interested stockholder are prohibited for five years after the most recentdate on which the interested stockholder becomes an interestedstockholder.  These business combinations include a merger, consolidation,share exchange or, in circumstances specified in the statute, an asset transferor issuance or reclassification of equity securities.  An interestedstockholder is defined as:

 

·                                          any person who beneficially owns 10% or moreof the voting power of the then outstanding voting stock of the corporation; or

 

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·                                          an affiliate or associate of the corporationwho, at any time within the two-year period prior to the date in question, wasthe beneficial owner of 10% or more of the voting power of the then outstandingvoting stock of the corporation.

 

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

 

After the expiration of the five-year perioddescribed above, any business combination between the Maryland corporation andan interested stockholder generally must be recommended by the board ofdirectors of the corporation and approved by the affirmative vote of at least:

 

·                                          80% of the votes entitled to be cast byholders of the then outstanding shares of voting stock of the corporation; and

 

·                                          two-thirds of the votes entitled to be castby holders of voting stock of the corporation other than shares held by theinterested stockholder with whom or with whose affiliate the businesscombination is to be effected or held by an affiliate or associate of theinterested stockholder.

 

These super-majority voting requirements donot apply if the corporation’s common stockholders receive a minimum price, asdefined under Maryland law, for their shares in the form of cash or other considerationin the same form as previously paid by the interested stockholder for itsshares.  Maryland law also permitsvarious exemptions from these provisions, including business combinations thatare exempted by the board of directors before the time that the interestedstockholder becomes an interested stockholder. The business combination statute may discourage others from trying toacquire control of us and increase the difficulty of consummating any offer.

 

***Maryland law also limits the ability of athird-party to buy a large stake in us and exercise voting power in electingdirectors.***

*** ***

Maryland law also contains a second statutethat may have an anti-takeover effect. This statute, known as the Control Share Acquisition Act, provides thatpersons or entities owning “control shares” of a Maryland corporation acquiredin a “control share acquisition” have no voting rights with respect to thoseshares except to the extent approved by a vote of two-thirds of thecorporation’s disinterested stockholders. Shares of stock owned by the acquirer, by officers or by employees whoare directors of the corporation, are not considered disinterested for thesepurposes.  “Control Shares” are shares ofstock that, taken together with all other shares of stock the acquirerpreviously acquired, would entitle the acquirer to exercise voting power inelecting directors within one of the following ranges of voting power:

 

·                                          one-tenth or more but less than one-third ofall voting power;

 

·                                          one-third or more but less than a majority ofall voting power; or

 

·                                          a majority or more of all voting power.

 

Control Shares do not include shares of stockthe acquiring person is entitled to vote as a result of having previouslyobtained stockholder approval.  A“control share acquisition” means the acquisition of Control Shares, subject tocertain exceptions.  The Control ShareAcquisition Act does not apply to (1) shares acquired in a merger,consolidation or share exchange if the corporation is a party to thetransaction or (2) acquisitions approved or exempted by our charter orbylaws.  Our bylaws exempt anyacquisition by any person of shares of our common stock from the Control ShareAcquisition Act.

 

***Your investment return may be reduced if we arerequired to register as an investment company under the Investment Company Act.***

*** ***

We are not registered, and do not intend toregister, as an investment company under the Investment Company Act of 1940, asamended, based on exclusions that we believe are available to us.  If wewere 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;

 

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·                                          restrictions on specified investments;

 

·                                          prohibitions on transactions with affiliates;and

 

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

 

In order to be excluded from regulation underthe Investment Company Act, we must engage primarily in the business ofacquiring and owning real estate assets or real estate-related assets. We relyon exemptions or exclusions provided by the Investment Company Act for thedirect ownership, or the functional equivalent thereof, of certain qualifyingreal estate assets or by engaging in business through one or moremajority-owned subsidiaries, as well as other exemptions or exclusions.  The position of the SEC staff generallyrequires us to maintain at least 55% of our assets directly in qualifying realestate interests in order for us to maintain our exemption.  Mortgaged-backed securities may or may notconstitute qualifying real estate assets, depending on the characteristics ofthe mortgage-backed securities, including the rights that we have with respectto the underlying loans.

 

To 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.

 

If we were required to register as aninvestment company but failed to do so, we would be prohibited from engaging inour business, and criminal and civil actions could be brought against us. In addition, our contracts would be unenforceable unless a court requiredenforcement, and a court could appoint a receiver to take control of us andliquidate our business.

 

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

*** ***

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

 

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

*** ***

Many of our acquisitions of TIC interestswere structured to qualify for like-kind exchange treatment under Section 1031of the Code and we, through our affiliates, may enter into Section 1031TIC transactions in the future.  Thesetransactions, referred to herein as “Section 1031 TIC Transactions,” arestructured as the acquisition of real estate owned in co-tenancy arrangementswith parties seeking to defer taxes under Section 1031 of the Code,including single member limited liability companies or similar entities(referred to as “Behringer Harvard Exchange Entities”).  We may provide accommodation in support of orotherwise 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 inthat property to 1031 participants, we will purchase, at the Behringer HarvardExchange Entity’s cost, any co-tenancy interests remaining unsold; (2) wewill guarantee certain bridge loans associated with the purchase of theproperty in which TIC interests are to be sold; or (3) we will providesecurity for the guarantee of such bridge loans.

 

Although our participation in Section 1031TIC Transactions has certain benefits to our business, including enabling us toinvest capital more readily and over a more diversified portfolio, there aresignificant tax and securities disclosure risks associated with the relatedofferings of co-tenancy interests to 1031 participants.  Changes in tax laws may negatively impact thetax benefits of like-kind exchanges or cause these transactions not to achievetheir intended purpose.  Furthermore, theInternal Revenue Service, or “IRS,” may determine that the sale of TICinterests is a “prohibited transaction” under the Code, which would cause allof the gain, if any, we realize from the sale to be taxed with none of the gainavailable for distribution to our stockholders. The IRS also may audit the purchasers of TIC interests and successfully 

 

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challenge the qualificationof the transaction as a like-kind exchange. In certain Section 1031 TIC Transactions, we could receive fees inconnection with our provision of accommodation in support of the transactionand, as such, even though we do not sponsor these Section 1031 TICTransactions, we may be named in or otherwise required to defend against anylawsuits brought by 1031 participants because of our affiliation with sponsorsof these transactions.  We also may benamed in or otherwise required to defend against any lawsuits brought by stockholdersor 1031 participants in connection with Section 1031 TIC Transactions inwhich we directly sell TIC interests.  Inaddition, as a seller of TIC interests, we would be required to comply withapplicable federal and state securities laws and to provide fair and adequatedisclosure to 1031 participants relating to the respective Section 1031TIC Transaction.  Any alleged failure byus to comply with these requirements could expose us to risks of litigation andcould require us to expend funds defending claims brought against us.

 

***We have acquired, and may continue to acquire,certain properties in the form of TIC or other co-tenancy arrangements.  Therefore, we are subject to risks associatedwith co-tenancy arrangements that otherwise may not be present innon-co-tenancy real estate investments.***

*** ***

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

 

·                                          the risk that a co-tenant may at any timehave economic or business interests or goals that are or that becomeinconsistent with our business interests or goals;

 

·                                          the risk that a co-tenant may be in aposition to take action contrary to our instructions or requests or contrary toour policies or objectives;

 

·                                          the possibility that an individual co-tenantmight become 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 nothave adequate liquid assets to make cash advances that may be required in orderto fund operations, maintenance and other expenses related to the property,which could result in the loss of a current or prospective tenants and mayotherwise adversely affect the operation and maintenance of the property, andcould cause a default under the mortgage loan financing documents applicable tothe property and may result in late charges, penalties and interest, and maylead to the exercise of foreclosure and other remedies by the lender;

 

·                                          the risk that a co-tenant could breachagreements related to the property, which may cause a default under, or resultin personal liability for, the applicable mortgage loan financing documents,violate applicable securities law and otherwise adversely affect the propertyand the co-tenancy arrangement; or

 

·                                          the risk that a default by any co-tenantwould constitute a default under the applicable mortgage loan financingdocuments that could result in a foreclosure and the loss of all or asubstantial portion of the investment made by the co-tenants.

 

**General Risks Related toInvestments in Real Estate**

** **

***Our operating results are affected by economic andregulatory changes that may have an adverse impact on the real estate market ingeneral.***

*** ***

Our operating results are subject to risksgenerally incident to the ownership of real estate, including:

 

·                                          changes in general economic or localconditions;

 

·                                          changes in supply of, or demand for, similaror competing properties in an area;

 

·                                          ability to collect rent from tenants;

 

·                                          increasing vacancy rates or inability to rentspace on favorable terms;

 

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

 

·              the illiquidity of real estate investmentsgenerally;

 

·              changes in tax, real estate, environmentaland zoning laws; and

 

·              periods of high interest rates and tightmoney supply.

 

We may be limited in ourability to vary our portfolio in response to changes in economic, market orother conditions, including by restrictions on transfer imposed by ourlenders.  Additionally, the return on ourreal estate assets also may be affected by a continued or exacerbated generaleconomic slowdown experienced by the local economies where our properties arelocated, including:

 

·              poor economic conditions may result indefaults by tenants of our properties;

 

·              job transfers and layoffs may cause tenantsvacancies to increase; and

 

·              increasing concessions, reduced rental ratesor capital improvements may be required to maintain occupancy levels.

 

For these and other reasons,we cannot assure you that we will be profitable or that we will realize growthin the value of our investments.

 

***The geographic concentration of our portfolio may make usparticularly susceptible to adverse economic developments in the real estatemarkets of those areas.***

 

In addition togeneral, regional and national economic conditions, our operating results areimpacted by the economic conditions of the specific markets in which we haveconcentrations of properties. As of December 31, 2009, approximately 46%of our net operating income, which represents property revenues less propertyrelated expenses, was derived from properties located in the metropolitan areasof Chicago, Philadelphia and Houston. Any adverse economic or real estatedevelopments in these markets, such as business layoffs or downsizing, industryslowdowns, relocations of businesses, changing demographics and other factors,or any decrease in demand for office space resulting from the local businessclimate, could adversely affect our property revenues.

 

***We may be unable to secure funds for future tenantimprovements.***

*** ***

We may be required to expendsubstantial funds to improve or refurbish leasable space either to maintainexisting tenants or to attract new tenants. Although we have established reserves for capital improvements, thesereserves may not be sufficient which would require us to seek funds from othersources.  We cannot assure you thatsufficient financing will be available or, if available, will be available onterms acceptable to us, if at all. Moreover, certain reserves required by lenders may be designated forspecific uses and may not be available to use for tenant improvements.  Additional borrowing for capital improvementswill increase our interest expense. Failure to make these improvements could have a material adverse effecton the value of the impacted properties and the revenues generated by thoseproperties.

 

***We may be unable to sell a property on acceptableterms and conditions, if at all.***

*** ***

We intend to hold ourreal properties and other investments until our board decides that a sale orother disposition is consistent with our investment objectives or until itappears that these objectives will not be met.  Otherwise, BehringerAdvisors, subject to approval of our board, may exercise its discretion as towhether and when to sell a property, and we will have no obligation to sellproperties at any particular time, except upon our liquidation if we do notcause the shares to be listed for trading on a national securities exchange by2017, unless a majority of the board of directors, including a majority of theindependent directors, approve otherwise.  We may not be able to sell aproperty or properties even if Behringer Advisors believes doing so would be inour best interest.  Real estateinvestments generally, and in particular large office properties like thosethat we own, often cannot be sold quickly. As a result of current economic conditions, potential purchasers may beunable to obtain financing on acceptable terms, if at all, thereby delaying ourability to sell our real estate investments. In addition, the capitalizationrates at which properties may be sold have generally risen since ouracquisition of the properties, thereby reducing our potential proceeds fromsale.  Consequently, we may not be ableto alter our portfolio promptly in response to changes in economic or otherconditions. In addition, the Code limits our ability to sell properties that wehave held for fewer than two years without resulting in adverse consequences toour stockholders. 

 

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Furthermore, propertiesthat we have owned for a significant period of time or that we acquired inexchange for partnership interests in our operating partnership may have a lowtax basis.  If we were to dispose of anyof these properties in a taxable transaction, we may be required underprovisions of the Code applicable to REITs to distribute a significant amountof the taxable gain, if any, to our stockholders and this could, in turn,impact our cash flow. In some cases, tax protection agreements with thirdparties may prevent us from selling certain properties in a taxable transactionwithout incurring substantial costs. In addition, purchase options and rightsof first refusal held by tenants or partners in joint ventures may also limitour ability to sell certain properties. All of these factors reduce our abilityto respond to changes in the performance of our investments.

 

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

*** ***

***The currenteconomic conditions may cause the tenants in any properties we own toexperience financial difficulties, including bankruptcy, insolvency or ageneral downturn in their business.  Wecannot assure you that any tenant that files for bankruptcy protection willcontinue to pay us rent.  A bankruptcyfiling by, or relating to, one of our tenants or a lease guarantor would barefforts by us to collect pre-bankruptcy debts from that tenant or leaseguarantor, or its property, unless we receive an order permitting us to do sofrom the bankruptcy court.  In addition,we cannot evict a tenant solely because of bankruptcy.  The bankruptcy of a tenant or lease guarantorcould delay our efforts to collect past due balances under the relevant leases,and could ultimately preclude collection of these sums.  If a lease is assumed by the tenant inbankruptcy, all pre-bankruptcy balances due under the lease must be paid to usin full.  If, however, a lease isrejected by a tenant in bankruptcy, we would have only a general, unsecuredclaim for damages.  An unsecured claimwould only be paid to the extent that funds are available and only in the samepercentage as is paid to all other holders of general, unsecured claims.  Restrictions under the bankruptcy lawsfurther limit the amount of any other claims that we can make if a lease isrejected.  As a result, it is likely thatwe would recover substantially less than the full value of the remaining rentduring the term.***

*** ***

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

*** ***

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

 

***We may suffer from delays inselecting, acquiring and developing suitable properties.***

*** ***

***Even if we are able to access sufficient capital, we maysuffer from delays in deploying capital into properties or other real estateassets or in realizing a return on the capital we invest.  Delays may occur, for example, as a result ofcompetition in the relevant market, regulatory requirements such as thoseimposed by the SEC which require us to provide audited financial statements forcertain acquisitions and our reliance on our advisor, Behringer Advisors, andits affiliates to identify investment opportunities given that the employees ofthese entities are simultaneously seeking to locate suitable investments forother programs sponsored by our sponsor. In addition, as a result of recent disruptions in the U.S. creditmarkets, negotiations regarding the value and price of investment opportunitiesare unusually challenging, which may delay, and potentially prevent, theclosing of an acquisition.  Further, ourinvestments may not yield immediate returns. For example, properties acquired prior to the start of construction ordevelopment or during the early stages of construction or development typicallydo not generate income for some period of time. Further, pending investing in real estate assets, we may invest capitalin short-term, highly-liquid investments. These short-term investments typically yield less than investments incommercial real estate and our distribution rate.***

*** ***

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

*** ***

***To effectively compete for the acquisition of properties and otherinvestments,***our advisor and board of directors may be required to make decisions or postsubstantial non-refundable deposits prior to completing our analysis and due 

 

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*** ***

***diligenceon property acquisitions.  In thesecases, the information available to***ouradvisor andboard of directors at the time of making any particular investment decision,including the decision to pay any non-refundable deposit and the decision toconsummate any particular acquisition, may be limited, and ouradvisor andboard of directors may not have access to detailed information regarding anyparticular investment property, such as physical characteristics, environmentalmatters, zoning regulations or other local conditions affecting the investmentproperty.  Therefore, there is noassurance that our advisor and board of directors will have knowledge of all circumstances thatmay adversely affect an investment.  Inaddition, our advisor and board of directors expect to rely upon independent consultants inconnection with evaluating proposed investment properties, and no assurance canbe given as to the accuracy or completeness of the information provided bythese independent consultants.

*** ***

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

*** ***

We may, from time to time, develop andconstruct new 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 compel performance.  Performance also may be affected or delayedby conditions beyond the builder’s control. Delays in completion of construction also could give tenants the rightto terminate preconstruction leases for space at a newly developed project.  We may incur additional risks when we makeperiodic progress payments or other advances to builders prior to completion ofconstruction.  These and other suchfactors can result in increased costs of a project or loss of ourinvestment.  In addition, we are subjectto normal lease-up risks relating to newly constructed projects, such as ThreeEldridge Place, or re-developed projects. Furthermore, we must rely upon projections of rental income and expensesand estimates of the fair market value of property upon completion of constructionwhen agreeing upon a price to be paid for the property at the time ofacquisition of the property.  If ourprojections are inaccurate, we may pay too much for a property, and our returnon our investment could suffer.

 

We may also invest in unimproved realproperty.  Returns from development ofunimproved properties also are subject to additional risks and uncertaintiessuch as those associated with re-zoning.

 

***We could lose our earnestmoney deposit.***

*** ***

We may enter into contracts to acquire real property, under which weare obligated to pay a substantial earnest money deposit.  As a result of customary closing conditionsin these agreements, including completion of due diligence investigations, wemay be unable to complete an acquisition, or we may choose not to close on anacquisition. If we choose not to close on an acquisition, we could lose ourearnest money.

 

Alternatively, we may enter into agreements with real estatedevelopers, including Behringer Development Company LP, an affiliate ofBehringer Advisors, where, at the time of contracting and paying our earnestmoney deposit, the developer has not yet acquired title to the subjectproperty.  The developer may only have acontract to acquire land, a development agreement to develop a building on theland and an agreement with one or more tenants to lease all or part of theproperty upon its completion.  In theevent that the developer is unable to acquire title to the property or completethe development, and we do not close on the purchase of the property, there isno assurance that the developer will refund our earnest money deposit, whichmay not be secured by any assets.

 

***A concentration of our investments in any oneproperty class may leave our profitability vulnerable to a downturn in thatsector.***

*** ***

Substantially all of ourinvestments are focused on institutional quality office properties.  As aresult, we are subject to risks inherent in investing in a single type ofproperty.  The impact of a downturn in demand for institutional qualityoffice properties is likely more pronounced than if we had more fullydiversified our investments.

 

***Acquiring or attempting to acquire multipleproperties in a single transaction may adversely affect our operations.***

*** ***

From time to time, we have acquired, and maycontinue to acquire, multiple properties in a single transaction. Portfolio acquisitions are more complex and expensive than single propertyacquisitions, and subject to a greater risk of not closing.  Portfolioacquisitions also may result in us owning investments in geographicallydispersed markets, placing additional demands on our ability to manage theproperties in the portfolio.  In addition, a seller may require that agroup of properties be purchased as a package even though we may not want topurchase one or more properties in the portfolio.  In these situations, ifwe are unable to identify another person or entity to acquire the unwantedproperties, we may be 

 

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required to operate orattempt to dispose of these properties.  Acquiring multiple properties ina single transaction likely requires us to accumulate a large amount ofcash.  The returns that we earn on thisexcess cash are typically less than the ultimate returns generated by the realproperty and therefore, accumulating such cash could reduce the funds availableto pay distributions to our stockholders.

 

***Our operating results will be negatively affected ifour investments, including investments in TIC interests sponsored by oursponsor, do not meet projected distribution levels.***

*** ***

Affiliates of Behringer Advisors have formedand organized a number of TIC real estate projects.  Some of these projects have not met thedistribution levels or the leasing and operational thresholds projected byBehringer Harvard Holdings and its affiliates. Specifically, several TIC investment programs have not benefited fromexpected leasing improvements.  BehringerHarvard Holdings has provided support for some of these programs in the form ofmaster leases and other payments.  Ifprojections related to our investments are inaccurate, we may pay too much foran investment and our return on our investment could suffer.

 

***Some of our properties are concentrated inregions that are particularly susceptible to natural disasters.***

 

A number of ourproperties are located in geographical areas, such as Florida, Louisiana andTexas, that are regularly impacted by severe storms, hurricanes, andflooding.   In addition, according tosome experts, global climate change could result in heightened hurricaneactivity in the Gulf of Mexico, thus further impacting these geographicalareas.  Natural disasters in these areasmay cause damage to our properties beyond the scope of our insurance coverage,thus requiring us to make substantial expenditures to repair these propertiesand resulting in a loss of revenues from these properties.  Further, several of these properties arelocated near the coast and are exposed to more severe weather than ourproperties located inland.  Elements suchas salt water and humidity in these areas can increase or accelerate wear onthe properties’ weatherproofing and mechanical, electrical and other systems, andcause mold issues over time. As a result, we may incur additional operatingcosts and expenditures for capital improvements at these properties.

 

***The cost of complying with environmental and othergovernmental laws and regulations may adversely affect us.***

*** ***

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

 

Environmental laws and regulations also mayimpose restrictions on the manner in which properties may be used or businessesmay be operated, and these restrictions may require substantial expenditures byus.  Environmental laws and regulationsprovide for sanctions in the event of noncompliance and may be enforced bygovernmental agencies or, in certain circumstances, by private parties.  Third parties may seek recovery from ownersof real properties for personal injury or property damage associated withexposure to released hazardous substances. Compliance with new or more stringent laws or regulations or stricterinterpretations of existing laws may require material expenditures by us.   For example, various federal, regional andstate laws and regulations have been implemented or are under consideration tomitigate the effects of climate change caused by greenhouse gas emissions.  Among other things, “green” building codesmay seek to reduce emissions through the imposition of standards for design,construction materials, water and energy usage and efficiency, and wastemanagement.  We are not aware of any suchexisting requirements that we believe will have a material impact on ourcurrent operations.  However, futurerequirements could increase the costs of maintaining or improving our existingproperties or developing new properties.

 

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

*** ***

Our real properties are generally subject tothe Americans with Disabilities Act of 1990, as amended, or similar laws offoreign jurisdiction.  Under this Act,all places of public accommodation are required to comply with federalrequirements related to access and use by disabled persons.  The Act has separate compliance requirementsfor “public accommodations” and “commercial facilities” that generally requirethat buildings and services be made accessible and 

 

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available to people withdisabilities.  The Act’s requirementscould require removal of access barriers and could result in the imposition ofinjunctive 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 sell properties by providing financing topurchasers, we will bear the risk of default by the purchaser.***

*** ***

We may, from time to time, sell a property orother asset by providing financing to the purchaser.  There are no limits on our ability to acceptpurchase money obligations secured by a mortgage as payment for the purchaseprice.  The terms of payment to us willbe affected by 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, or reinvestmentin other properties, will be delayed until the promissory notes or otherproperty 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.

 

**Risks Related toConflicts of Interest**

** **

***We are subject to conflictsof interest arising out of our relationships with our advisor and itsaffiliates, including the material conflicts discussed below.***

 

***Because anumber of Behringer Harvard real estate programs use investment strategies thatare similar to ours, Behringer Advisors and its and our executive officers faceconflicts of interest relating to the purchase and leasing of properties andother investments, and these conflicts may not be resolved in our favor.***

*** ***

Affiliates of Behringer Advisors are currently sponsoring or haverecently sponsored six public real estate programs with substantially the sameinvestment objectives and strategies as ours. There may be periods during which all of these programs are seeking to investin similar properties and other real estate-related investments.  As a result, we may be seeking to buyproperties and other real estate-related investments at the same time as theseother Behringer Harvard-sponsored programs that are managed by officers andemployees of our advisor and itsaffiliates.  Our executive officers andthe executive officers of our advisor are also the executive officers of otherBehringer Harvard-sponsored REITs and their advisors, the general partners ofBehringer Harvard-sponsored partnerships or the advisors or fiduciaries ofother Behringer Harvard-sponsored programs. Behringer Advisors may choose a property that provides lower returns tous than a property purchased by another Behringer Harvard-sponsored program.  In the event these conflicts arise, we cannotassure you that our best interests will be met when officers and employeesacting on behalf of our advisor and on behalf of advisors and managers of otherBehringer Harvard-sponsored programs decide whether to allocate any particularproperty to us or to another Behringer Harvard-sponsored program or affiliate,which may have an investment strategy that is similar to ours.  In addition, we may acquire properties ingeographic areas where other Behringer Harvard-sponsored programs ownproperties.  If one of the otherBehringer Harvard-sponsored programs attracts a tenant that we are competingfor, we could suffer a loss of revenue due to delays in locating anothersuitable tenant.  Similar conflicts ofinterest may occur if our advisor determines to make or purchase mortgage,bridge or mezzanine loans or participations in mortgage, bridge or mezzanineloans on our behalf, since other Behringer Harvard-sponsored programs may becompeting with us for these investments.

 

***Our advisor and its affiliates, including all of ourexecutive officers and some of our directors, face conflicts of interest causedby their compensation arrangements with us, which could result in actions thatare not in the long-term best interests of our stockholders.***

*** ***

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

 

Thesefees could influence our advisor’s advice to us as well as the judgment ofaffiliates of our advisor performing services for us. Among other matters,these compensation arrangements could affect their judgment with respect to:

 

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

 

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

 

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

 

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

 

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

 

·              determiningthe compensation paid to employees for services provided to us, which could beinfluenced in part by whether or not the advisor is reimbursed by us for therelated salaries and benefits;

 

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

 

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

 

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

 

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

 

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

 

***Because our ability to replace our property manageris restricted, we may be unable to terminate the property management agreementat the desired time, which may adversely affect our operations and thedistributions we are able to pay to our stockholders.***

*** ***

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

 

***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 may enter into joint ventures, TICinvestments or other co-ownership arrangements with other BehringerHarvard-sponsored programs to acquire, develop or improve properties as well asto acquire other real estate-related 

 

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investments.  The executive officers of Behringer Advisorsare also the executive officers of other Behringer Harvard-sponsored REITs andtheir advisors, the general partners of other Behringer Harvard-sponsoredpartnerships or the advisors or fiduciaries of other BehringerHarvard-sponsored programs.  These executiveofficers face conflicts of interest in determining which BehringerHarvard-sponsored program should enter into any particular joint venture, TICor co-ownership arrangement.  Thesepersons may also have a conflict in structuring the terms of the relationshipbetween our interests and the interests of the Behringer Harvard-sponsoredco-venturer, co-tenant or partner as well as conflicts of interest in managingthe joint venture.

 

In the event that we enter into a jointventure, TIC investment or other co-ownership arrangements with anotherBehringer Harvard-sponsored program or joint venture, Behringer Advisors andits affiliates may have a conflict of interest in determining when, andwhether, to buy or sell a particular real estate property.  Our goals and objectives also may divergefrom those of our joint venture partner which could lead to deadlocks anddelays in decisions to sell a property or result in the premature sale of aproperty.  In the event that aco-venturer has a right of first refusal to buy out the other co-venturer, it maybe unable to finance the buy-out at that time. If our interest is subject to a buy/sell right, we may not havesufficient cash, available borrowing capacity or other capital resources toallow us to purchase an interest of a co-venturer subject to the buy/sellright, in which case we may be forced to sell our interest as the result of theexercise of the right when we would otherwise prefer to keep our interest.  Furthermore, we may not be able to sell ourinterest in a joint venture if we desire to exit the venture for any reason orif our interest is likewise subject to a right of first refusal of ourco-venturer or partner, our ability to sell such interest may be adverselyimpacted by this right.

 

***Our officers face conflicts of interest related tothe positions they hold with other entities affiliated with Behringer Advisors,which could diminish the value of the services they provide to us.***

*** ***

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

 

***The percentage of our shares that you own will be dilutedupon conversion of the convertible stock.***

*** ***

Behringer Advisors purchased 1,000 shares ofour non-participating, non-voting, convertible stock for an aggregate purchaseprice of $1,000.  Under limited circumstances, these shares may beconverted into shares of our common stock, reducing the percentage of ourcommon stock owned by stockholders prior to conversion.  The terms of the convertible stock providethat, generally, holders of convertible stock will receive shares of commonstock with an aggregate value equal to 15% of the amount by which (1) ourenterprise value, including the total amount of distributions paid to ourstockholders, exceeds (2) the sum of the aggregate capital invested by ourstockholders plus a 9% cumulative, non-compounded, annual return on suchcapital.  The shares of convertible stock will be converted into shares ofcommon 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 expires andis not renewed or is terminated, other than due to a termination because of amaterial breach by our advisor, and at the time of, or subsequent to,termination, the holders of our common stock have received aggregatedistributions equal to the sum of the capital invested by stockholders and a 9%cumulative, non-compounded, annual return on the capital contributions throughthe date of conversion.

 

Behringer Advisors can influence whether weterminate the advisory management agreement or allow it to expire withoutrenewal, or whether our common stock is listed for trading on a nationalsecurities exchange.  Accordingly, 

 

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Behringer Advisors caninfluence both the conversion of the convertible stock issued to it and theresulting dilution of other stockholders’ interests.

 

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

*** ***

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

 

Our advisory management agreement alsorequires us to pay a performance-based termination fee to our advisor (reducedby the value of shares of common stock issued or issuable upon conversion ofour convertible stock) in the event that the advisory management agreementexpires and is not renewed or is terminated, other than because of a materialbreach by the advisor; the holders of the common stock have receiveddistributions equal to the sum of the capital invested by such stockholders anda 9% cumulative, non-compounded, annual return; or the shares of common stockare listed for trading on a national securities exchange.  To avoid payingthis fee, our independent directors may decide against terminating the advisorymanagement agreement 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 of Behringer HarvardHoldings to provide advisory and property management services, if BehringerHarvard Holdings is unable to meet its obligations we may be required to findalternative providers of these services, which could disrupt our business.***

*** ***

Behringer HarvardHoldings, through one or more of its subsidiaries, owns and controls ouradvisor and our property manager.  Theseentities represent a substantial part of Behringer Harvard Holdings’business.  Although we believe thatBehringer Harvard Holdings currently has adequate working capital, from bothfunds on hand and borrowing capacity, to meet its obligations, its continuedviability may be affected by its ability to continue to successfully sponsorand operate real estate programs.  In theevent that Behringer Harvard Holdings would be unable to meet its obligationsas they become due, we might be required to find alternative service providers,which could materially disrupt our business. Further, given the non-compete agreements in place with BehringerHarvard Holdings’ employees and the non-solicitation agreements we have withour advisor and property manager, it would be difficult for us to utilize anycurrent employees that provide services to us.

 

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

** **

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

*** ***

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

 

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·              fluctuations in value due to changes ininterest rates;

 

·              interest rate caps on adjustablemortgage-backed securities;

 

·              increases in levels of prepayments;

 

·              fluctuations in the market value ofmortgage-backed securities;

 

·              increases in borrower defaults;

 

·              decreases in the value of property underlyingmortgage-backed securities; and

 

·              conflicts between the debt structure used toacquire a mortgage and the debt structure of the mortgages.

 

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

 

***Recent market conditions and the risk of continuedmarket deterioration may reduce the value of any real estate-related securitiesin which we may invest.***

*** ***

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

 

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

 

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

 

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

 

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

*** ***

We may pay acquisition fees to third parties,including investment bankers and brokers, in connection with identifying,reviewing, evaluating and investing in real estate-related securities.  In addition, we may reimburse these thirdparties for 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-related preferred equitysecurities involve a greater risk of loss than traditional debt financing.***

*** ***

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

 

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

*** ***

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

 

***We expect that a portion ofany real estate-related securities investments we make will be illiquid, and wemay not be able to adjust our portfolio in response to changes in economic andother conditions.***

*** ***

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

 

***Interest rate and relatedrisks may cause the value of our real estate-related securities investments tobe reduced.***

*** ***

Interest rate risk is the risk thatprevailing market interest rates change relative to the current yield on fixedincome securities such as preferred and debt securities, and to a lesser extentdistribution paying common stock.  Generally, when market interest ratesrise, the market value of these securities declines, and vice versa.  Inaddition, when interest rates fall, issuers are more likely to repurchase theirexisting preferred and debt securities to take advantage of the lower cost offinancing.  As repurchases occur, principal is returned to the holders of thesecurities sooner than expected, thereby lowering the effective yield on theinvestment.  On the other hand, when interest rates rise, issuers are morelikely to maintain their existing preferred and debt securities.  As aresult, repurchases decrease, thereby extending the average maturity of thesecurities.  We intend to manage interest rate risk by purchasingpreferred and debt securities with maturities and repurchase provisions thatare designed to match our investment objectives.  Failure to manage theserisks could have a material adverse effect on our business, results ofoperations, financial condition and ability to pay distributions.

 

***We may acquire realestate-related securities through tender offers, which may require us to spendsignificant amounts of time and money that otherwise could be allocated to ouroperations.***

*** ***

We may acquire real estate-related securitiesthrough tender offers, negotiated or otherwise, in which we solicit a targetcompany’s stockholders to purchase their securities.  The acquisition ofthese securities could require us to spend significant amounts of money thatotherwise could be allocated to our operations.  Additionally, in order toacquire the securities, the employees of our advisor likely will need to devotea substantial portion of their time to pursuing the tender offer — time thatotherwise could be allocated to managing our business.

 

**Risks Associatedwith Mortgage Lending**

** **

***Our mortgage, bridge ormezzanine loans may be impacted by unfavorable real estate market conditions,which could decrease the value of those loans.***

*** ***

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

 

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

 

We mayinvest in mezzanine loans that take the form of subordinated loans secured bysecond mortgages on the underlying real property or loans secured by a pledge of the ownership interests of eitherthe entity owning the real property or the entity that owns the interest in theentity owning the real property.  Thesetypes of investments involve a higher degree of risk than loans secured byfirst mortgages on income producing real property because the investment maybecome unsecured as a result of foreclosure by the senior lender.  If borrowers of these loans are real estatedevelopers, our 

 

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investmentsmay involve additional risks, including dependence for repayment on successfulcompletion and operation of the project, difficulties in estimatingconstruction or rehabilitation costs and loan terms that often require littleor no amortization.  In the event of abankruptcy of the entity providing the pledge of its ownership interests assecurity, we may not have full recourse to the assets of the entity, or theassets of the entity may not be sufficient to satisfy 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 allof our investment.

 

***Our mortgage, bridge ormezzanine loans will be subject to interest rate fluctuations, which couldreduce our returns as compared to market interest rates and reduce the value ofthe loans if we sell the loans.***

*** ***

If we invest in fixed-rate, long-termmortgage, bridge or mezzanine loans and interest rates rise, the mortgage,bridge or mezzanine loans could yield a return lower than then-current marketrates.  If interest rates decrease, wewill be adversely affected to the extent that mortgage, bridge or mezzanineloans are prepaid, because we may not be able to make new loans at thepreviously higher interest rate.  If weinvest in variable-rate loans and interest rates decrease, our revenues willalso decrease.  Finally, if we invest invariable-rate loans and interest rates increase, the value of the loans we ownat such time would increase.  For thesereasons, if we invest in mortgage, bridge or mezzanine loans, our returns onthose loans and the value of your investment will be subject to fluctuation ininterest rates.

 

***We may experience delays inliquidating defaulted mortgage, mezzanine or bridge loans, which could delayour ability to pay cash distributions to our stockholders.***

*** ***

If there are defaults under our mortgage,bridge or mezzanine loans, we may not be able to repossess and sell quickly anyproperties serving such loans.  Theresulting time delay could reduce the value of our investment in the defaultedmortgage, bridge or mezzanine loans.  Anaction to foreclose on a property securing a mortgage loan is regulated bystate statutes and regulations and is subject to many of the delays andexpenses of any lawsuits brought in connection with the foreclosure if thedefendant raises defenses or counterclaims. In the event of default by a mortgagor, these restrictions, among otherthings, may impede our ability to foreclose on or sell the mortgaged propertyor to obtain proceeds sufficient to repay all amounts due to us on the mortgageloan.

 

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

*** ***

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

 

***Foreclosures createadditional ownership risks that could adversely impact our returns on mortgageinvestments.***

*** ***

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

 

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

*** ***

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

 

**Federal Income TaxRisks**

** **

***Failure to qualify as a REITwould adversely affect our operations and our ability to make distributions.***

*** ***

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

 

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interpretations or courtdecisions could significantly change the tax laws with respect to qualifying asa REIT or the federal income tax consequences of qualifying.

 

Ourqualification as a REIT depends upon our ability to meet, through investments,actual operating results, distributions and satisfaction of specificstockholder rules, the various tests imposed by the Code.  We cannot assure you that we will satisfy theREIT requirements in the future because qualification as a REIT involves theapplication of highly technical and complex provisions of the Internal RevenueCode as to which there are only limited judicial and administrativeinterpretations and involves the determination of facts and circumstances notentirely within our control.  Inaddition, we currently hold certain of our properties through a subsidiary thathas elected to be taxed as a REIT and we may in the future determine that it isin our best interests to hold one or more of our other properties through oneor more subsidiaries that elect to be taxed as REITs. If any of thesesubsidiaries fails to qualify as a REIT for federal income tax purposes, thenwe may also fail to qualify as a REIT for federal income tax purposes.

 

If we fail to qualify as a REIT for anytaxable year, then unless certain relief provisions apply, we will face serioustax consequences that will substantially reduce the funds available for paymentof distributions for each of the years involved because:

 

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

 

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

 

·                                          we would become subject to additional stateincome tax provisions and owe greater amounts of state income tax on ourtaxable income;

 

·                                          we would be disqualified from being taxed asa REIT for the four years following the year during which we failed to qualify,unless entitled to relief under certain statutory provisions;

 

·                                          alldistributions would be subject to tax as ordinary income to the extent of ourcurrent and accumulated earnings and profits; and

 

·                                          we may be required to borrow additional fundsduring unfavorable market conditions or sell some of our assets in order to paycorporate tax obligations.

 

Inaddition, if we fail to qualify as a REIT and the relief provisions do notapply, we will no longer be required to pay distributions.  If we fail to qualify as a REIT but areeligible for certain relief provisions, then we may retain our status as a REITbut may be required to pay a penalty tax, which could be substantial.

 

***Our investment strategy maycause us to incur penalty taxes, lose our REIT status, or own and sellproperties through taxable REIT subsidiaries, each of which would diminish thereturn to our stockholders.***

*** ***

It is possible that one or more sales of ourproperties may be “prohibited transactions” under provisions of the Code.  If we are deemed to have engaged in a“prohibited transaction” (i.e., we sell a property held by us primarily forsale in the ordinary course of our trade or business) all profit that we derivefrom such sale would be subject to a 100% penalty tax.  The Code sets forth a safe harbor for REITsthat wish to sell property without risking the imposition of the 100% penaltytax.  Two principal requirementrequirements of the safe harbor include: (a) that the REIT must hold theapplicable property for not less than two years prior to its sale; and (b) thatthe number of such sales are limited.

 

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

 

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If we acquire a propertythat we anticipate will not fall within the safe harbor from the 100% penaltytax upon disposition, then we may acquire such property through a TRS in orderto avoid the possibility that the sale of such property will be a prohibitedtransaction and subject to the 100% penalty tax.  If we already own such a property directly orindirectly through an entity other than a TRS, we may contribute the propertyto a TRS if there is another, non-tax related business purpose for thecontribution of such property to the TRS. Following the transfer of theproperty to a TRS, the TRS will operate the property and may sell such propertyand distribute the proceeds from such sale to us, net of costs and taxes, andwe may distribute the net proceeds distributed to us by the TRS to ourstockholders.  Though a sale of theproperty by a TRS likely would eliminate the danger of the application of the100% penalty tax, the TRS itself would be subject to a tax at the federallevel, and very likely at the state and local levels as well, on the gainrealized by it from the sale of the property as well as on the income earnedwhile the property is operated by the TRS. This tax obligation would diminish the amount of the proceeds from thesale of such property that would be distributable to our stockholders. As aresult, the amount available for distribution to our stockholders would besubstantially less than if the REIT had not operated and sold such propertythrough the TRS and such transaction was not successfully characterized as aprohibited transaction.  The maximumfederal corporate income tax rate currently is 35%. Federal, state and localcorporate income tax rates may be increased in the future, and any such increasewould reduce the amount of the net proceeds available for distribution by us toour stockholders from the sale of property through a TRS after the effectivedate of any increase in such tax rates.

 

As a REIT, the value of the non-mortgagesecurities we hold in TRSs may not exceed 25% (20% for our 2008 taxable yearand before) of the value of all of our assets at the end of any calendarquarter.  If the IRS were to determinethat the value of our interests in TRSs exceeded this limit at the end of anycalendar quarter, then we would fail to qualify as a REIT.  If we determine it to be in our bestinterests to own a substantial number of our properties through one or moreTRSs, then it is possible that the IRS may conclude that the value of ourinterests in our TRSs exceeds 25% (20% for our 2008 taxable year and before) ofthe value of our total assets at the end of any calendar quarter and thereforecause us to fail to qualify as a REIT. Additionally, as a REIT, no more than 25% of our gross income with respectto any year may, in general, be from sources other than real estate-relatedassets.  Distributions paid to us from aTRS are typically considered to be non-real estate income.  Therefore, we may fail to qualify as a REITif distributions from TRSs, when aggregated with all other non-real estateincome with respect to any one year, are more than 25% of our gross income withrespect to such year.  We will use allreasonable efforts to structure our activities in a manner intended to satisfythe requirements for our continued qualification as a REIT.  As stated above, our failure to qualify as aREIT would adversely affect us, including our ability to pay distributions toyou and the return on your investment.

 

***Certain fees paid to us mayaffect our REIT status.***

*** ***

Income received in the nature of rentalsubsidies or rent guarantees, in some cases, may not qualify as rental incomeand could be characterized by the IRS as non-qualifying income for purposes ofsatisfying the “income tests” required for REIT qualification.  In addition, in connection with any Section 1031TIC Transactions, we or one of the affiliates of our advisor typically entersinto a number of contractual arrangements with Behringer Harvard ExchangeEntities that guarantee or effectively guarantee the sale of the co-tenancyinterests being offered by any Behringer Harvard Exchange Entity.  In consideration for entering into theseagreements, we are paid fees that could be characterized by the IRS asnon-qualifying income.  If any of ourincome were, in fact, treated as non-qualifying, and if the aggregate of suchnon-qualifying income in any taxable year ever exceeded 5% of our grossrevenues for such year (or the 5% of any of our REIT subsidiaries), we couldlose our REIT status for that taxable year and the four taxable years followingthe year of losing our REIT status.  Inaddition, if income from services we perform for our tenants are determined tobe impermissible by the IRS and if that amount exceeds 1% of the property’sgross revenues, then all gross revenues from that property will be deemednon-qualifying income for purposes of the 5% amount mentioned above.  For example, a property with $9.0 million ofgross revenue that has $90,000 or more of impermissible tenant services wouldrender all $9.0 million of gross revenue as non-qualifying income and thuscould then cause us to lose our REIT status. We use commercially reasonable efforts to structure our activities in amanner intended to satisfy the requirements for our continued qualification asa REIT.  Recharacterization of the Section 1031TIC Transactions may result in taxation of income from a prohibitedtransaction, which would diminish distributions to our stockholders.  In the event that the IRS were torecharacterize the Section 1031 TIC Transactions such that we, rather thanthe Behringer Harvard Exchange Entity, would be treated as the bona fide owner,for tax purposes, of properties acquired and resold by the Behringer HarvardExchange Entity in connection with the Section 1031 TIC Transactions, feespaid to us by the Behringer Harvard Exchange Entity would be deemed income froma prohibited transaction, in which event the fee income paid to us inconnection with the Section 1031 TIC Transactions would be subject to the100% penalty tax.

 

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***Certain equity participationin mortgage, bridge, and mezzanine loans may result in taxable income and gainsfrom these properties, which could adversely impact our REIT status.***

*** ***

If we participate under a loan in anyappreciation of the properties securing the loan or its cash flow and the IRScharacterizes this participation as “equity,” we might have to recognizeincome, gains and other items from the property for federal income taxpurposes.  This could affect our abilityto qualify as a REIT.

 

***Stockholders may havecurrent tax liability on distributions you elect to reinvest in our commonstock.***

*** ***

Stockholders that participate in our distributionreinvestment plan will be deemed to have received, and for income tax purposeswill be taxed on, the amount reinvested in shares of our common stock to theextent the amount reinvested was not a tax-free return of capital.   In addition, these stockholders 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 a tax-exempt entity,these stockholders may have to use funds from other sources to pay their taxliability on the value of the shares of common stock received.

 

***If our operating partnershipfails to maintain its status as a partnership, its income may be subject to taxat corporate rates.***

*** ***

We intend to maintain the status of theoperating partnership as a partnership for federal income tax purposes.  However, if the IRS were to successfullychallenge the status of the operating partnership as an entity taxable as apartnership, the operating partnership would be taxable as a corporation,reducing the amount of distributions that the operating partnership could maketo us.  This could also result in ourlosing REIT status, which, in addition to the consequences stated above, wouldsubject us to a corporate level tax on our own income substantially reducingthe cash available to make distributions to our stockholders.  In addition, if any of the partnerships orlimited liability companies through which the operating partnership owns its properties,in whole or in part, loses its characterization as a partnership for federalincome tax purposes, the entity would be subject to tax as a corporation,thereby reducing distributions to the operating partnership.  Recharacterization of an underlying propertyowner also could threaten our ability to maintain REIT status.

 

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

 

Even ifwe maintain our status as a REIT, we may yet become subject to federal incometaxes and related state taxes.  Forexample:

 

·                                          We aresubject to tax on any undistributed income. We will be subject to a 4% nondeductible excise tax on the amount, ifany, by which distributions we pay in any calendar year plus amounts retainedfor which federal income tax was paid are less than the sum of 85% of ourordinary income, 95% of our capital gain net income and 100% of ourundistributed income from prior years.

 

·                                          If wehave net income from the sale of foreclosure property that we hold primarilyfor sale to customers in the ordinary course of business or othernon-qualifying income from foreclosure property, we must pay a tax on thatincome at the highest corporate income tax rate.

 

·                                          If wesell a property, other than foreclosure property, that we hold primarily forsale to customers in the ordinary course of business, our gain would be subjectto the 100% “prohibited transaction” tax.

 

·                                          We willbe subject to a 100% penalty tax on certain amounts if the economicarrangements of our tenants, our taxable REIT subsidiaries, and us are notcomparable to similar arrangements among unrelated parties.

 

·                                          If statelaws change so as to begin taxing REITs or non-exchange traded REITs.

 

***Legislative or regulatoryaction could adversely affect stockholders.***

*** ***

In recent years, numerous legislative,judicial and administrative changes have been made in the federal income taxlaws applicable to investments similar to an investment in shares of our commonstock.  Additional changes to the taxlaws are likely to continue to occur, and we cannot assure you that any ofthese changes will not adversely affect the taxation of a stockholder.  Any such changes could have an adverse effecton an investment in our shares or on the market 

 

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value or the resalepotential of our assets.  You are urgedto consult with your own tax advisor with respect to the impact of recentlegislation on your investment in our shares and the status of legislative,regulatory or administrative developments and proposals and their potentialeffect on an investment in our shares.

 

Congress passed major federal tax legislationin 2003, with modifications to that legislation in 2005.  One of the changes effected by thatlegislation generally reduced the tax rate individuals pay on distributionspaid by corporations to individuals to a maximum of 15% prior to 2011.  REIT distributions generally do not qualifyfor this reduced rate.  The tax changesdid not, however, reduce the corporate income tax rates.  Therefore, the maximum corporate income taxrate of 35% has not been affected. However, as a REIT, we generally would not be subject to federal orstate corporate income taxes on that portion of our ordinary income or capitalgain that we distribute currently to our stockholders, and we thus expect toavoid the “double taxation” that other corporations are typically subject to.

 

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

 

We have 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 or causesuch transactions not to achieve their intended purpose.  Any changes intax laws that result in Section 1031 Transactions no longer beingavailable may have a negative impact on our investment strategy.

 

***We face possible state and local taxaudits.***

 

Becausewe are organized and qualify as a REIT, we are generally not subject to federalincome taxes, but are subject to certain state and local taxes. In the normalcourse of business, certain entities through which we own real estate eitherhave undergone, or are currently undergoing, tax audits. Although we believethat we have substantial arguments in favor of our positions in the ongoingaudits, in some instances there is no controlling precedent or interpretiveguidance on the specific point at issue. Collectively, tax deficiency noticesreceived to date from the jurisdictions conducting the ongoing audits have notbeen material. However, there can be no assurance that future audits will notoccur with increased frequency or that the ultimate result of such audits willnot have a material adverse effect on our results of operations.

 

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

 

None.

 

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**Item 2.****                                                        ****Properties.**

 

****General****

 

As of December 31, 2009, we owned interests in 73office properties located in 23 states and the District of Columbia.  The properties include 72 operatingproperties with office space that is currently approximately 86% leased totenants and one property, the initial development of which was completed in November 2009but is currently unleased and not yet operational.  In the aggregate, these properties representapproximately 25.7 million rentable square feet.

 

As of December 31, 2009, all of our properties,except the Wanamaker Building, St. Louis Place and Alamo Plaza properties wereconsolidated with and into the accounts of our operating partnership.  Substantially all of our properties areencumbered by property debt.  Thefollowing table presents certain additional information about our properties asof December 31, 2009:

 
| ** **                         | ** ** | ** **         | ** ** | ** **         | ** ** | **Approximate**     | ** ** | ** **      | ** ** | **Our**       | ** ** | ** **          |
|------------------------------------|------------|--------------------|------------|--------------------|------------|---------------------|------------|-----------------|------------|---------------|------------|---------------------|
| ** **                         | ** ** | ** **         | ** ** | **Date**           | ** ** | **Rentable**        | ** ** | **Approximate** | ** ** | **Ownership** | ** ** | **Ownership**       |
| **Property Name**                  | ** ** | **Location**       | ** ** | **Acquired**       | ** ** | **Square  Footage** | ** ** | **% Leased**    | ** ** | **Interest**  | ** ** | **Type**            |
| 10 &  120 South Riverside |       | Chicago, IL        |       | 11/01/07           |       | 1,411,000           |       | 92              | %          | 100.00        | %          | fee title           |
| 222  South Riverside Plaza         |       | Chicago, IL        |       | 06/02/06           |       | 1,184,000           |       | 97              | %          | 100.00        | %          | fee title           |
| One  Financial Place               |       | Chicago, IL        |       | 11/01/07           |       | 1,041,000           |       | 86              | %          | 100.00        | %          | fee title           |
| 200  South Wacker                  |       | Chicago, IL        |       | 11/01/07           |       | 755,000             |       | 81              | %          | 100.00        | %          | fee title           |
| Wanamaker  Building                |       | Philadelphia, PA   |       | 12/12/07           |       | 1,390,000           |       | 97              | %          | 60.00         | %          | joint venture       |
| United  Plaza                      |       | Philadelphia, PA   |       | 12/12/07           |       | 617,000             |       | 97              | %          | 100.00        | %          | fee title           |
| Three  Parkway                     |       | Philadelphia, PA   |       | 10/30/06           |       | 561,000             |       | 91              | %          | 100.00        | %          | fee title           |
| 1650  Arch Street                  |       | Philadelphia, PA   |       | 12/12/07           |       | 553,000             |       | 70              | %          | 90.00         | %          | joint venture       |
| The  Terrace Office Park           |       | Austin, TX         |       | 06/21/06           |       | 619,000             |       | 98              | %          | 100.00        | %          | fee title           |
| Burnett  Plaza                     |       | Ft Worth, TX       |       | 02/10/06           |       | 1,025,000           |       | 75              | %          | 100.00        | %          | fee title           |
| Centreport  Office Center          |       | Ft Worth, TX       |       | 06/14/07           |       | 133,000             |       | 100             | %          | 100.00        | %          | fee title           |
| One  City Centre                   |       | Houston, TX        |       | 06/19/08           |       | 609,000             |       | 80              | %          | 100.00        | %          | fee title           |
| Loop  Central                      |       | Houston, TX        |       | 12/12/07           |       | 575,000             |       | 98              | %          | 100.00        | %          | fee title           |
| One &  Two Eldridge Place |       | Houston, TX        |       | 12/13/06           |       | 519,000             |       | 97              | %          | 100.00        | %          | fee title           |
| 1300  Main (Travis Tower)          |       | Houston, TX        |       | 10/1/04-9/30/08    |       | 507,000             |       | 55              | %          | 100.00        | %          | fee title           |
| One  BriarLake Plaza               |       | Houston, TX        |       | 09/25/08           |       | 502,000             |       | 94              | %          | 100.00        | %          | fee title           |
| Three  Eldridge Place (1)          |       | Houston, TX        |       | 11/17/09           |       | 303,000             |       | N/A             |       | 100.00        | %          | fee title           |
| AMEC  Paragon I & II      |       | Houston, TX        |       | 03/14/06           |       | 227,000             |       | 100             | %          | 100.00        | %          | fee title           |
| Westway  One                       |       | Houston, TX        |       | 01/15/08           |       | 144,000             |       | 100             | %          | 100.00        | %          | fee title           |
| 17655  Waterview                   |       | Richardson, TX     |       | 07/20/05           |       | 230,000             |       | 100             | %          | 100.00        | %          | fee title           |
| Grandview  II                      |       | Birmingham, AL     |       | 10/20/06           |       | 149,000             |       | 70              | %          | 100.00        | %          | fee title           |
| Buena  Vista Plaza                 |       | Burbank, CA        |       | 07/28/05           |       | 115,000             |       | 100             | %          | 100.00        | %          | fee title           |
| Downtown  Plaza                    |       | Long Beach, CA     |       | 06/14/05           |       | 100,000             |       | 92              | %          | 100.00        | %          | fee title           |
| 4440  El Camino Real               |       | Los Altos, CA      |       | 11/02/06           |       | 97,000              |       | 100             | %          | 100.00        | %          | fee title           |
| Gateway  23                        |       | Diamond Bar, CA    |       | 07/20/05           |       | 72,000              |       | 100             | %          | 100.00        | %          | fee title           |
| Gateway  22                        |       | Diamond Bar, CA    |       | 07/20/05           |       | 55,000              |       | 100             | %          | 100.00        | %          | fee title           |
| Gateway  12                        |       | Diamond Bar, CA    |       | 07/20/05           |       | 41,000              |       | 100             | %          | 100.00        | %          | fee title           |
| Alamo  Plaza                       |       | Denver, CO         |       | 02/24/05           |       | 191,000             |       | 94              | %          | 33.93         | %          | TIC interest        |
| 1325  G Street                     |       | Washington, D.C.   |       | 11/15/05           |       | 307,000             |       | 97              | %          | 100.00        | %          | fee title           |
| Colorado  Building                 |       | Washington, D.C.   |       | 8/10/2004-12/31/08 |       | 128,000             |       | 86              | %          | 100.00        | %          | fee title           |
| City  Center                       |       | St. Petersburg, FL |       | 12/12/07           |       | 242,000             |       | 76              | %          | 100.00        | %          | fee title           |
| 5104  Eisenhower Boulevard         |       | Tampa, FL          |       | 12/12/07           |       | 130,000             |       | 100             | %          | 100.00        | %          | fee title           |
| Paces  West                        |       | Atlanta, GA        |       | 04/19/06           |       | 646,000             |       | 82              | %          | 100.00        | %          | fee title           |
| Resurgens  Plaza                   |       | Atlanta, GA        |       | 11/30/06           |       | 400,000             |       | 94              | %          | 100.00        | %          | leasehold  interest |
| Ashford  Perimeter                 |       | Atlanta, GA        |       | 01/06/05           |       | 288,000             |       | 40              | %          | 100.00        | %          | fee title           |
| Epic  Center                       |       | Wichita, KS        |       | 12/12/07           |       | 289,000             |       | 84              | %          | 100.00        | %          | fee title           |
| Two  Brittany Place                |       | Wichita, KS        |       | 12/12/07           |       | 58,000              |       | 87              | %          | 100.00        | %          | fee title           |
| One  Brittany Place                |       | Wichita, KS        |       | 12/12/07           |       | 57,000              |       | 87              | %          | 100.00        | %          | fee title           |

 

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| ** **                         | ** ** | ** **         | ** ** | ** **          | ** ** | **Approximate**     | ** ** | ** **      | ** ** | **Our**       | ** ** | ** **          |
|------------------------------------|------------|--------------------|------------|---------------------|------------|---------------------|------------|-----------------|------------|---------------|------------|---------------------|
| ** **                         | ** ** | ** **         | ** ** | **Date**            | ** ** | **Rentable**        | ** ** | **Approximate** | ** ** | **Ownership** | ** ** | **Ownership**       |
| **Property Name**                  | ** ** | **Location**       | ** ** | **Acquired**        | ** ** | **Square  Footage** | ** ** | **% Leased**    | ** ** | **Interest**  | ** ** | **Type**            |
| Forum  Office Park                 |       | Louisville, KY     |       | 12/12/07            |       | 328,000             |       | 74              | %          | 100.00        | %          | fee title           |
| Hurstbourne  Place                 |       | Louisville, KY     |       | 12/12/07            |       | 235,000             |       | 66              | %          | 100.00        | %          | fee title           |
| One  Oxmoor Place                  |       | Louisville, KY     |       | 12/12/07            |       | 135,000             |       | 97              | %          | 100.00        | %          | fee title           |
| Executive  Park                    |       | Louisville, KY     |       | 12/12/07            |       | 109,000             |       | 69              | %          | 100.00        | %          | leasehold  interest |
| Hurstbourne  Park                  |       | Louisville, KY     |       | 12/12/07            |       | 104,000             |       | 91              | %          | 100.00        | %          | fee title           |
| Hurstbourne  Plaza                 |       | Louisville, KY     |       | 12/12/07            |       | 94,000              |       | 55              | %          | 100.00        | %          | fee title           |
| Steeplechase  Place                |       | Louisville, KY     |       | 12/12/07            |       | 77,000              |       | 88              | %          | 100.00        | %          | fee title           |
| Lakeview                           |       | Louisville, KY     |       | 12/12/07            |       | 76,000              |       | 93              | %          | 100.00        | %          | fee title           |
| Hunnington                         |       | Louisville, KY     |       | 12/12/07            |       | 62,000              |       | 60              | %          | 100.00        | %          | fee title           |
| Energy  Centre                     |       | New Orleans, LA    |       | 12/12/07            |       | 757,000             |       | 87              | %          | 87.86         | %          | joint venture       |
| 5 &  15 Wayside           |       | Burlington, MA     |       | 12/08/06            |       | 270,000             |       | 100             | %          | 100.00        | %          | fee title           |
| One &  Two Chestnut Place |       | Worcester, MA      |       | 12/12/07            |       | 218,000             |       | 96              | %          | 100.00        | %          | fee title           |
| 250  W. Pratt                      |       | Baltimore, MD      |       | 12/17/04-12/31/06   |       | 368,000             |       | 79              | %          | 100.00        | %          | fee title           |
| 500  E. Pratt                      |       | Baltimore, MD      |       | 12/12/07            |       | 280,000             |       | 99              | %          | 100.00        | %          | leasehold  interest |
| 801  Thompson                      |       | Rockville, MD      |       | 12/12/07            |       | 51,000              |       | 100             | %          | 100.00        | %          | fee title           |
| Lawson  Commons                    |       | St. Paul, MN       |       | 06/10/05            |       | 436,000             |       | 99              | %          | 100.00        | %          | fee title           |
| One  Financial Plaza               |       | Minneapolis, MN    |       | 08/02/05            |       | 394,000             |       | 57              | %          | 100.00        | %          | fee title           |
| Minnesota  Center                  |       | Bloomington, MN    |       | 10/15/2003-12/31/08 |       | 276,000             |       | 62              | %          | 100.00        | %          | fee title           |
| St.  Louis Place                   |       | St. Louis, MO      |       | 06/30/04            |       | 337,000             |       | 90              | %          | 35.71         | %          | TIC interest        |
| Bank  of America Plaza-Charlotte   |       | Charlotte, NC      |       | 10/26/06            |       | 891,000             |       | 95              | %          | 100.00        | %          | fee title           |
| City  Hall Plaza                   |       | Manchester, NH     |       | 12/12/07            |       | 210,000             |       | 79              | %          | 100.00        | %          | fee title           |
| Woodcrest  Corporate Center        |       | Cherry Hill, NJ    |       | 01/11/06            |       | 333,000             |       | 82              | %          | 100.00        | %          | fee title           |
| Tice  Building                     |       | Woodcliff Lake, NJ |       | 12/12/07            |       | 120,000             |       | 32              | %          | 100.00        | %          | fee title           |
| 600 &  619 Alexander      |       | Princeton, NJ      |       | 06/28/06            |       | 97,000              |       | 77              | %          | 100.00        | %          | fee title           |
| 111  Woodcrest                     |       | Cherry Hill, NJ    |       | 11/20/07            |       | 53,000              |       | 74              | %          | 100.00        | %          | fee title           |
| Bank  of America Plaza-Las Vegas   |       | Las Vegas, NV      |       | 12/12/07            |       | 255,000             |       | 83              | %          | 100.00        | %          | fee title           |
| One  Edgewater Plaza               |       | Staten Island, NY  |       | 12/12/07            |       | 252,000             |       | 75              | %          | 100.00        | %          | fee title           |
| 222  Bloomingdale Road             |       | White Plains, NY   |       | 12/12/07            |       | 140,000             |       | 78              | %          | 100.00        | %          | leasehold  interest |
| Fifth  Third Center-Cleveland      |       | Cleveland, OH      |       | 11/16/06            |       | 508,000             |       | 84              | %          | 100.00        | %          | fee title           |
| KeyBank  Center                    |       | Cleveland, OH      |       | 12/12/07            |       | 478,000             |       | 66              | %          | 100.00        | %          | fee title           |
| Fifth  Third Center-Columbus       |       | Columbus, OH       |       | 12/12/07            |       | 331,000             |       | 80              | %          | 100.00        | %          | fee title           |
| Southwest  Center                  |       | Tigard, OR         |       | 07/20/05            |       | 89,000              |       | 87              | %          | 100.00        | %          | fee title           |
| Plaza  at MetroCenter              |       | Nashville, TN      |       | 12/12/07            |       | 361,000             |       | 100             | %          | 100.00        | %          | fee title           |
| Crescent  Center                   |       | Memphis, TN        |       | 12/12/07            |       | 336,000             |       | 87              | %          | 100.00        | %          | fee title           |
| Riverview  Tower                   |       | Knoxville, TN      |       | 10/05/05            |       | 334,000             |       | 86              | %          | 100.00        | %          | fee title           |
|                               |       |               |       |                |       | 25,665,000          |       |            |       |          |       |                |

 

----

(1) ThreeEldridge Place completed initial development in November 2009 and iscurrently unleased and not yet operational as of December 31, 2009.

 

Thefollowing information applies to all of our operating 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.

 

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**LeaseExpirations**

 

Thefollowing table sets forth a 10-year schedule of the lease expirations forleases in place at our operating properties (including our unconsolidatedproperties) as of December 31, 2009 (square footage and dollar amounts inthousands):

 
| ** **         | ** ** | ** **    | ** ** | **Rentable**        | ** ** | ** **        | ** ** | ** **      | ** ** |
|--------------------|------------|---------------|------------|---------------------|------------|-------------------|------------|-----------------|------------|
| ** **         | ** ** | **Number**    | ** ** | **Square Feet**     | ** ** | **Current**       | ** ** | **Percentage**  | ** ** |
| **Year  of Lease** | ** ** | **of Leases** | ** ** | **Subject to**      | ** ** | **Annualized**    | ** ** | **of Total**    | ** ** |
| **Expiration**     | ** ** | **Expiring**  | ** ** | **Expiring Leases** | ** ** | **Base Rent (1)** | ** ** | **Square Feet** | ** ** |
| 2010               |       | 242           |       | 2,248               |       | $                 | 47,106     |            | 9          | % |
| 2011               |       | 227           |       | 2,922               |       | $                 | 66,587     |            | 12         | % |
| 2012               |       | 190           |       | 2,302               |       | $                 | 48,368     |            | 9          | % |
| 2013               |       | 166           |       | 2,664               |       | $                 | 62,654     |            | 11         | % |
| 2014               |       | 143           |       | 2,415               |       | $                 | 50,487     |            | 10         | % |
| 2015               |       | 92            |       | 2,320               |       | $                 | 52,658     |            | 9          | % |
| 2016               |       | 50            |       | 1,116               |       | $                 | 25,992     |            | 4          | % |
| 2017               |       | 39            |       | 912                 |       | $                 | 23,190     |            | 4          | % |
| 2018               |       | 38            |       | 1,313               |       | $                 | 30,362     |            | 5          | % |
| 2019               |       | 20            |       | 1,569               |       | $                 | 35,583     |            | 6          | % |

 

----

(1)         Represents thecash rental rate of base rents, excluding tenant reimbursements, in the finalmonth prior to the expiration multiplied by 12, without consideration of tenantcontraction or termination rights. Tenant reimbursements generally include payment of real estate taxes,operating expenses and common area maintenance and utility charges.

 

**Item 3.****                                                        ****Legal Proceedings.**

 

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

 

**Item 4.****                                                        ****Reserved.**

 

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**PART II**

 

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

 

**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.  Unless and until our shares are listed on anational securities exchange, it is not expected that a public market for theshares will develop.

 

**Holders**

 

As of March 1, 2010,we had approximately 293,038,022 shares of common stock outstanding held by atotal of approximately 67,000 stockholders.

 

**Distributions**

 

We made an electionto qualify as a REIT for federal income tax purposes commencing with ourtaxable year ended December 31, 2004. As a REIT, we must distribute at least 90% of our REIT taxable income toour stockholders annually.  In 2009 and2008, approximately $0.2 million and $0.3 million of distributions,respectively, were declared and paid to unaffiliated holders of Behringer OPlimited partnership units which are recorded as a reduction to noncontrollinginterest.  All other distributions wererecorded to stockholders equity.  We haveand may continue to pay all or a portion of our distributions from the proceedsof our final offering or from borrowings. For tax purposes, 100% of the amounts distributed by us in both 2009 and2008 represented a return of capital. None of the distributions in 2009 or 2008 were distributions from thetaxable earnings of real estate operations.

 

For the first threemonths of 2009, the distribution rate was equal to a daily amount of $0.0017808per share of common stock which is equivalent to an annual distribution rate of6.5% assuming the share was purchased for $10.00.  Effective April 2009, the declareddistributions rate was reduced to a monthly amount of $0.0271 per share ofcommon stock, which is equivalent to an annual distribution rate of 3.25%assuming the share was purchased for $10.00. For further discussion regarding our ability to sustain the currentlevel of our distributions, see “Risk Factors” and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations — Liquidity andCapital Resources — Distributions.”

 

Thefollowing table shows the distributions declared and paid for both our commonstock and the Behringer OP limited partnership units for the fiscal years endedDecember 31, 2009 and 2008 (in thousands):

 
| ** **  | ** ** | **Distributions** | ** ** |
|-------------|------------|-------------------|------------|
| ** **  | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
| **2009**    | ** ** | ** **        | ** ** | ** ** | ** ** |
| 1st Quarter |       | $                 | 46,603     |   | $ | 46,418 |   |
| 2nd Quarter |       | 23,777            |       | 31,953 |   |
| 3rd Quarter |       | 23,783            |       | 23,769 |   |
| 4th Quarter |       | 23,809            |       | 23,804 |   |
| Total       |       | $                 | 117,972    |   | $ | 125,944 |   |
|        |       |              |       |   |   |
| **2008**    |       |              |       |   |   |
| 1st Quarter |       | $                 | 33,168     |   | $ | 32,617 |   |
| 2nd Quarter |       | 35,280            |       | 34,839 |   |
| 3rd Quarter |       | 39,590            |       | 37,846 |   |
| 4th Quarter |       | 45,994            |       | 43,773 |   |
| Total       |       | $                 | 154,032    |   | $ | 149,075 |   |

 

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**Securities Authorized forIssuance under Equity Compensation Plans**

 

The following tableprovides information regarding our equity compensation plans as of December 31,2009:

 
| **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     |       | 74,500                                                                                             |       | $                                                                                  | 9.29       |                                                                                                | 11,914,500 | * |
| Equity  compensation plans not approved by security holders |       | N/A                                                                                                |       | N/A                                                                                |       | N/A                                                                                                 |       |
| Total                                                       |       | 74,500                                                                                             |       | $                                                                                  | 9.29       |                                                                                                | 11,914,500 | * |

 

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

 

**Share Redemption Program**

 

Our board ofdirectors has authorized a share redemption program for stockholders who haveheld their shares for more than one year. In March 2009, our board of directors voted to accept all redemptionrequests submitted from stockholders whose requests were made on circumstancesof death, disability or confinement to a long-term care facility (referred toherein as “exceptional redemptions”) and to suspend until further notice anyother redemptions.  Further, in November 2009,our board of directors elected until further notice to set a funding limit of$10.0 million for exceptional redemptions considered during 2010 proportionalto each redemption period.

 

Under the amendedand restated share redemption program, the per share redemption price willequal:

 

·                  in the case of redemptions other than exceptionalredemptions, 90% of the most recently disclosed estimated value per share (the“valuation”) as determined in accordance with our valuation policy (the“valuation policy”), as such valuation policy is amended from time to time;provided, however, that the purchase price per share may not exceed: (1) priorto the first valuation conducted by our board, or a committee thereof (the“initial board valuation”), under the valuation policy, 90% of the originalshare price (as defined herein) less the aggregate amount of net sale proceedsper share, if any, distributed to stockholders prior to the redemption date asa result of the sale of one or more of our properties (the “saledistributions”); or (2) on or after the initial board valuation, theoriginal share price less any sale distributions; and

 

·                  in the case of exceptional redemptions, (1) priorto the initial board valuation, the original share price less any saledistributions; or (2) on or after the initial board valuation, the mostrecently disclosed valuation, provided, however, that the purchase price pershare may not exceed the original share price less any sale distributions.

 

“Original share price” means the average price pershare the original purchaser or purchasers of shares paid to us for all of hisor her shares (as adjusted for any stock dividends, combinations, splits,recapitalizations and the like with respect to our common stock, withoutattributing any purchase price to the shares issued pursuant to the 10% stockdividend made on October 1, 2005, to holders of shares of record on September 30,2005).

 

Notwithstanding the redemption prices set forth above,our board of directors may determine, whether pursuant to formula or processesapproved or set by our board, the redemption price of the shares, which maydiffer between exceptional and other redemptions; provided, however, that wemust provide at least 30 days’ notice to stockholders before applying this newprice determined by the board.

 

We will not redeem,during any twelve-month period, more than 5% of the weighted average number ofshares outstanding during the twelve-month period immediately prior to the dateof redemption. Further, our board may, from time to time, in its solediscretion, limit the funds that we use to redeem shares; provided that in noevent may the funds used for redemption during any period exceed the proceedsfrom our DRP during the period consisting of the preceding four fiscal quartersfor which financial statements are available, less any redemptions during thesame period.  Our board reserves theright in its sole discretion at any time and from time to time to (1) waivethe one-year holding period applicable to requests for exceptional redemptionsor other exigent circumstances such as bankruptcy, a mandatory distributionrequirement under a stockholder’s IRA or with respect to shares purchased underor through our DRP, (2) reject any request for redemption, 

 

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(3) change thepurchase price for redemptions, (4) limit the funds to be used forredemptions or otherwise change the limitations on redemption or (5) amend,suspend (in whole or in part) or terminate the program.  Our board maintains its right to redeemadditional shares, subject to the limits set forth in our share redemptionprogram, if it deems it to be in the best interest of the Company and itsstockholders.  The information set forthabove with respect to the redemption program does not purport to be complete inscope and is qualified in its entirety by the full text of the Fourth Amendedand Restated Share Redemption Program.

 

During the quarter ended December 31,2009, 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 2009  |       | —              |       | $              | —     |                         | —     |                      | (1)        |   |
| November 2009 |       | 1,016,253           |       | $              | 9.75       |                         | 1,016,253  |                      | (1)        |   |
| December 2009 |       | —              |       | $              | —     |                         | —     |                      | (1)        |   |

 

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

 

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**Item 6.****                                                          ****Selected Financial Data.**

 

Thefollowing data should be read in conjunction with our audited consolidatedfinancial statements and the notes thereto and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” appearing elsewherein this Annual Report on Form 10-K. The selected historical consolidatedfinancial data presented below has been derived from our audited consolidatedfinancial statements (in thousands, except number of properties and per shareamounts).

 
| **As of December 31,** | ** ** | **2009**  | ** ** | **2008**  | ** ** | **2007**  | ** ** | **2006** | ** ** | **2005** | ** ** |
|---------------------------------------|------------|-----------|------------|-----------|------------|-----------|------------|----------|------------|----------|------------|
|                                  |       |      |       |      |       |      |       |     |       |     |       |
| Total  assets                         |       | $         | 4,680,640  |      | $          | 5,408,600 |       | $        | 5,172,127  |     | $          | 2,694,972 |   | $ | 900,582 |   |
|                                  |       |      |       |      |       |      |       |     |       |     |       |
| Notes  payable                        |       | $         | 2,973,617  |      | $          | 3,066,529 |       | $        | 3,198,143  |     | $          | 1,609,702 |   | $ | 353,555 |   |
| Other  liabilities                    |       | 279,714   |       | 397,529   |       | 450,338   |       | 167,756  |       | 26,224   |       |
| Stockholders’  equity            |       | 1,418,139 |       | 1,926,608 |       | 1,505,597 |       | 914,442  |       | 517,428  |       |
| Noncontrolling  interest (1)          |       | 9,170     |       | 17,934    |       | 18,049    |       | 3,072    |       | 3,375    |       |
| Total  liabilities and equity         |       | $         | 4,680,640  |      | $          | 5,408,600 |       | $        | 5,172,127  |     | $          | 2,694,972 |   | $ | 900,582 |   |

 
| **Year Ended December 31,**                         | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|
|                                                               |       |     |       |     |       |     |       |     |       |     |       |
| Rental  revenue                                                    |       | $        | 598,056    |     | $          | 600,624  |       | $        | 304,484    |     | $          | 155,511 |   | $ | 25,900 |   |
|                                                               |       |     |       |     |       |     |       |     |       |     |       |
| Net  loss from continuing operations                               |       | (421,322 | )          | (179,732 | )          | (43,648  | )          | (22,324  | )          | (6,224   | )          |
| Net  income (loss) from discontinued operations                    |       | (17,765  | )          | 13,827   |       | 1,989    |       | (108     | )          | 502      |       |
| Gain  on sale of assets                                            |       | —   |       | 5,253    |       | 44       |       | —   |       | —   |       |
| Net  loss                                                          |       | (439,087 | )          | (160,652 | )          | (41,615  | )          | (22,432  | )          | (5,722   | )          |
| Noncontrolling  interest in continuing operations                  |       | 5,915    |       | 259      |       | (7       | )          | —   |       | —   |       |
| Noncontrolling  interest in discontinued operations                |       | 2,540    |       | (28      | )          | (9       | )          | —   |       | —   |       |
| Net  loss attributable to common stockholders                      |       | $        | (430,632   | )        | $          | (160,421 | )          | $        | (41,631    | )        | $          | (22,432 | ) | $ | (5,722 | ) |
|                                                               |       |     |       |     |       |     |       |     |       |     |       |
| Cash  provided by operating activities                             |       | $        | 63,010     |     | $          | 68,484   |       | $        | 63,794     |     | $          | 49,178 |   | $ | 9,040 |   |
| Cash  provided by (used in) investing activities                   |       | $        | 22,131     |     | $          | (212,471 | )          | $        | (1,046,372 | )        | $          | (1,577,775 | ) | $ | (588,637 | ) |
| Cash  (used in) provided by financing activities                   |       | $        | (243,016   | )        | $          | 386,498  |       | $        | 952,577    |     | $          | 1,524,803 |   | $ | 682,272 |   |
|                                                               |       |     |       |     |       |     |       |     |       |     |       |
| Basic  and diluted net income (loss) per share: (2)                |       |     |       |     |       |     |       |     |       |     |       |
| Continuing  operations                                             |       | $        | (1.42      | )        | $          | (0.73    | )          | $        | (0.25      | )        | $          | (0.25 | ) | $ | (0.16 | ) |
| Discontinued  operations                                           |       | (0.05    | )          | 0.06     |       | 0.01     |       | —   |       | 0.01     |       |
| Basic  and diluted loss per share                                  |       | $        | (1.47      | )        | $          | (0.67    | )          | $        | (0.24      | )        | $          | (0.25 | ) | $ | (0.15 | ) |
|                                                               |       |     |       |     |       |     |       |     |       |     |       |
| Distributions  declared to common shareholders’ per share (2) |       | $        | 0.40       |     | $          | 0.64     |       | $        | 0.67       |     | $          | 0.70 |   | $ | 0.67 |   |
|                                                               |       |     |       |     |       |     |       |     |       |     |       |
| Number  of properties                                              |       | 73       | (3)        | 74       |       | 75       | (4)        | 36       |       | 21       |       |
| Total  rentable square feet                                        |       | 25,665   |       | 25,570   |       | 25,218   |       | 12,257   |       | 4,737    |       |

 

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| (1)    | Noncontrolling interest reflects the noncontrolling  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 income (loss) per share and  distributions declared per share for each period presented reflects the  effect of the 10% stock dividend issued October 1, 2005.         |
|   |                                                                                                                                                                                          |
| (3)    | At  December 31, 2009, we owned 72 operating properties and one recently  developed non-operating property.                                                                              |
|   |                                                                                                                                                                                          |
| (4)    | Of  the 75 properties owned at December 31, 2007, 34 were acquired in  December 2007.                                                                                               |

 

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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 thesefinancial statements requires our management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities.  On a regular basis, we evaluate theseestimates, including investment impairment. These estimates are based on management’s historical industry experienceand on various other assumptions that are believed to be reasonable under thecircumstances.  Actual results may differfrom these estimates.  Below is adiscussion of the accounting policies that we consider to be critical in that theymay require complex judgment in their application or require estimates aboutmatters that are inherently uncertain.

 

***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 based on applicable GAAP 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, then the entities are evaluated forconsolidation based on legal form, economic substance, and the extent to whichwe have control and/or substantive participating rights under the respectiveownership agreement.

 

There are judgments andestimates involved in determining if an entity in which we have made aninvestment is a VIE and, if so, whether we are the primary beneficiary.  The entity is evaluated to determine if it isa VIE by, among other things, calculating the percentage of equity at riskcompared to the total equity of the entity. Determining expected future losses involves assumptions of variouspossibilities of the results of future operations of the entity, assigning aprobability to each possibility, and using a discount rate to determine the netpresent value of those future losses.  Achange in the judgments, assumptions, and estimates outlined above could resultin consolidating an entity that should not be consolidated or accounting for aninvestment using the equity method that should in fact be consolidated, theeffects of which could be material to our financial statements.

 

***RealEstate***

 

Upon theacquisition of real estate properties, we recognize the assets acquired, theliabilities assumed, and any noncontrolling interest as of the acquisitiondate, measured at their fair values.  Theacquisition date is the date on which we obtain control of the real estate property.  These assets acquired and liabilities assumedmay consist of land, inclusive of associated rights, buildings, assumed debt,identified intangible assets and asset retirement obligations.  Identified intangible assets generallyconsist of the above-market and below-market leases, in-place leases, in-placetenant improvements, in-place leasing commissions and tenantrelationships.  Goodwill is recognized asof the acquisition date and measured as the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree overthe fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain isrecognized in current earnings when the aggregate fair value of the considerationtransferred and any noncontrolling interests in the acquiree is less than thefair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in theperiod incurred.

 

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

 

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 isdepreciated over the estimated useful life of 25 years using the straight-linemethod.

 

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 at the date ofthe assumption.  Any difference betweenthe fair value and stated value of the assumed debt is recorded as a discount orpremium and amortized over the remaining life of the loan using the effectiveinterest method.

 

We determine the value ofabove-market and below-market leases for acquired properties based on thepresent value (using an interest rate that reflects the risks associated withthe leases acquired) of the difference between (1) the 

 

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contractual amounts to bepaid pursuant to the in-place leases and (2) management’s estimate ofcurrent market lease rates for the corresponding in-place leases, measured overa period equal to (a) the remaining non-cancelable lease term forabove-market leases, or (b) the remaining non-cancelable lease term plusany fixed rate renewal options for below-market leases.  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 leases, in-place tenant improvements, in-place leasing commissions andtenant relationships based on our evaluation of the specific characteristics ofeach tenant’s lease and our overall relationship with that respectivetenant.  The aggregate value for tenantimprovements and leasing commissions is based on estimates of these costsincurred at inception of the acquired leases, amortized through the date of acquisition.  The aggregate value of in-place leasesacquired and tenant relationships is determined by applying a fair valuemodel.  The estimates of fair value ofin-place leases includes an estimate of carrying costs during the expectedlease-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 toexecute similar leases including leasing commissions, legal fees and tenantimprovements as well as an estimate of the likelihood of renewal as determinedby management on a tenant-by-tenant basis.

 

We amortize the value ofin-place leases, in-place tenant improvements and in-place leasing commissionsto expense over the initial term of the respective leases.  The tenant relationship values are amortizedto expense over the initial term and any anticipated renewal periods, but in noevent does the amortization period for intangible assets exceed the remainingdepreciable life of the building.  Shoulda tenant terminate its lease, the unamortized portion of the acquired leaseintangibles 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 periodrequired to lease the property up to its occupancy at acquisition if it werevacant.  Some of these assumptions andestimates are obtained from independent third party appraisals.  However, management is responsible for thesource and use of these estimates.  Achange in these estimates and assumptions could result in the 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 and/or rentalrevenue.  These variances could bematerial to our financial statements.

 

***Impairmentof Real Estate Related Assets***

 

For our consolidated realestate assets, we monitor events and changes in circumstances that may indicatethat carrying 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 cash flows, we recognize animpairment loss to adjust the carrying amount of the asset to its estimatedfair value.

 

For our unconsolidatedreal estate assets, including those we own through an investment in a jointventure, TIC interest or other similar investment structure, at each reportingdate we compare the estimated fair value of our investment to the carryingamount.  An impairment charge is recordedto the extent the fair value of our investment is less than the carrying amountand the decline in value is determined to be other than a temporary decline.

 

In evaluating ourinvestments for impairment, management makes several estimates and assumptions,including, but not limited to, the projected date of disposition of our realestate assets, the estimated future cash flows of our real estate assets duringour ownership and the projected sales price of each of our real estateassets.  A change in these estimates andassumptions could result in understating or overstating the carrying amount ofour investments which could be material to our financial statements.

 

As a result of ourevaluation, we recorded non-cash impairment losses of approximately $259.1million for the year ended December 31, 2009, including approximately$17.8 million related to our real estate assets included in discontinuedoperations.  If our assumptions regardingthe cash flows expected to result from the use and eventual disposition of ourproperties decrease or our expected hold periods decrease, we may incur futureimpairment charges on our real estate related assets.  In addition, we may incur impairment charges onassets classified as held for sale in the future if the carrying amount of theasset upon classification as held for sale exceeds the estimated fair value,less costs to sell.

 

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**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 dispositions of investments onour behalf.  Substantially all of ourbusiness is conducted through our operating partnership, Behringer OP.

 

At December 31, 2009we owned interest in 72 operating office properties with approximately 25.4million rentable square feet.  At December 31,2008, we owned interests in 74 operating office properties with approximately25.6 million rentable square feet. During 2009, we sold two properties located in Miramar, Florida.  During 2008, we purchased three propertieslocated in Houston, Texas and we acquired the remaining third-party TICinterests in the 1300 Main (formerly known as Travis Tower), Minnesota Centerand the Colorado Building properties and as a result, consolidated the 1300Main property effective September 30, 2008 and the Minnesota Center andthe Colorado Building properties effective December 31, 2008.  During 2008, we disposed of our 9100 MineralCircle property located in Englewood, Colorado, our 11 Stanwix Street propertylocated in Pittsburg, Pennsylvania and our 2383 Utah property located in ElSegundo, California.  Enclave on theLake, a property located in Houston, Texas in which we held a 36.31% TICinterest that was accounted for using the equity method of accounting, was alsosold during the year ended December 31, 2008.

 

As an owner of realestate, the majority of our income and cash flow is derived from rental revenuereceived pursuant to tenant leases for space at our properties; and thus, ourearnings are negatively impacted by a deterioration of our rental revenue.  One or more factors could result in adeterioration of rental revenue, including (1) our failure to renew orexecute new leases as current leases expire, (2) our failure to renew orexecute new leases with rental terms at or above the terms of in-place leases, (3) tenantconcessions and (4) tenant defaults.

 

As we have previouslydescribed, adverse economic conditions and dislocations in the credit marketsare impacting our business, results of operations and financial condition.  During 2009, we experienced an increase inthe number of existing or potential new tenants seeking rental concessions,including reduced rental rates or other financial incentives for remaining orbecoming a tenant.  Also, a number oftenants have suffered, or appear to be suffering, financial difficulties intheir business, including, in some cases tenants that have filed, or arecontemplating filing, bankruptcy or insolvency proceedings.  This challenging environment is alsoevidenced by an increase in our allowance for doubtful accounts which wasapproximately $5.2 million at December 31, 2009 compared to approximately$1.7 million as of December 31, 2008.

 

During the yearended December 31, 2009, we had approximately 3.7 million square feet ofexpiring leases.  We executed renewals, expansions and new leases totalingapproximately 2.6 million square feet with an average net rent that wasapproximately $0.58 per square foot, or 4%, lower than expiring rent. During the year ended December 31, 2009, we renewed 61% of expiring leasesand 48% of expiring square feet.  Ourportfolio occupancy declined from 90% at December 31, 2008 to 86% at December 31,2009.  We have approximately 784,000square feet of scheduled lease expirations in the first quarter of 2010, withan additional 1.4 million square feet of scheduled lease expirations in theremainder of 2010 and approximately 2.9 million square feet of scheduled leaseexpirations in 2011.  Given the amount ofscheduled lease expirations in the first quarter of 2010, we expect occupancylevels and property net operating income to decline on a comparative andabsolute basis.

 

During the yearended December 31, 2009, we renewed approximately 1.8 million square feetwith leasing costs of approximately $12.00 per square foot with an average termof approximately 4.6 years; executed leases for approximately 232,000 squarefeet of expansion space with leasing costs of approximately $36.34 per squarefoot with an average term of approximately 8.1 years; and entered into newleases totaling approximately 557,000 square feet with leasing costs ofapproximately $38.50 per square foot with an average term of approximately 6.9years.

 

Substantially allof our assets are currently subject to mortgages; generally for debt incurredin connection with their acquisition or which were in place uponacquisition.  Current economicconditions, as well as few unmortgaged assets, negatively impact our ability tofinance capital needs through borrowings. Current market conditions also make it more difficult to refinancematuring debt.  In general, in thecurrent market, lenders have increased the amount of equity required to supporteither new or existing borrowings.  Inaddition, capitalization rates (or cap rates) for office properties haveincreased.  Cap rates and property pricesmove inversely so that an increase in cap rates should, without an increase inproperty net operating income, result in a decrease in property value.  Although positive for new propertyacquisitions, the overall impact will likely be negative for us because, webelieve, it will further strain our ability to finance our business usingexisting assets and to refinance debt on our existing assets because ourproperties may be viewed as less valuable thus requiring us to use more equityto refinance or borrow new monies.

 

The reduction in propertynet operating income, as well as the increased costs of retaining andattracting new tenants, coupled with increases in vacancy rates and cap ratesmay also cause us to reconsider our long-term strategy for certain of ourproperties, especially those where the principal balance of the debtencumbering the property appears to exceed the value of the asset under currentmarket conditions.  For example, ouradvisor and board of directors may decide to redeploy our capital to moreeffective uses by reducing the amount of monies we fund as capital expendituresor have us 

 

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cease making debt servicepayments on certain properties as well as by negotiating agreements withlenders conveying the deed to these properties to the lenders.  Reductions in our property net operatingincome will also further impact our ability to maintain the level ofdistributions currently being paid to our stockholders.  We may be required to further reduce or ceasethe distributions we pay to our stockholders.

 

We undergo continuousevaluations of property level performance, credit market conditions andfinancing options.     As a result of ourevaluation, we recorded non-cash impairment losses of approximately $259.1million for the year ended December 31, 2009, including approximately$17.8 million related to our real estate assets included in discontinuedoperations.  We may be required, in thefuture, to further reduce the carrying value of some of our assets by takingfurther impairment charges.

 

Continued declines in thevalue of our assets will likely negatively impact the estimated value of our sharesultimately determined by our board.  Weexpect our board to determine, no later than June 2010, an estimated pershare value that is not based solely on the offering price of shares in ourmost recently completed primary offering. The performance issues described above will likely result in anestimated value that is lower than the $10.00 per share price at which we soldshares in our last primary offering.  Inaddition, the price of shares offered through our DRP will not be adjusteduntil a new estimated value is announced. Thus, the current offering price of shares under the DRP will likelysignificantly exceed the price at which we will offer shares under the DRPfollowing the estimation of value of our shares.  The proceeds that we receive from participantschoosing to reinvest distributions in additional shares has historically beenan important source of capital for us. To the extent that a material number ofparticipants in this program choose to terminate or reduce their level ofparticipation, our capital will be further constrained.

 

### **Results of Operations**

### ** **

***Year ended December 31, 2009as compared to year ended December 31, 2008***

 

**Continuing Operations**

 

*RentalRevenue.*  Rentalrevenue for the year ended December 31, 2009 was approximately $598.1million as compared to approximately $600.6 million for the year ended December 31,2008 and was generated by our consolidated real estate properties.  As a result of properties acquired orconsolidated during 2008, rental revenue increased by approximately $35.2million in 2009 as compared to 2008. Comparing 2009 to 2008, our other properties experienced a decline inrental revenue primarily attributable to decreases in lease termination fees ofapproximately $19.3 million, a decrease in straight-line rental revenue ofapproximately $9.9 million, decrease in expense reimbursements from tenants ofapproximately $5.2 million, a decrease in rental income recognized from the netamortization of above/below-market rents of approximately $2.4 million and variousother decreases in 2009 as compared to 2008 totaling approximately $0.9million.

 

*PropertyOperating Expenses.* Property operating expenses from ourconsolidated real estate properties for the year ended December 31, 2009were approximately $184.3 million as compared to approximately $167.1 millionfor the year ended December 31, 2008. Approximately $13.0 million of the $17.2 million increase over the prioryear was attributable to properties acquired or consolidated during 2008.  Our other properties experienced an increaseof approximately $4.2 million primarily attributable to an increase in bad debtexpense of approximately $4.7 million, offset by various decreases totalingapproximately $0.5 million.

 

*InterestExpense. *Interestexpense for the year ended December 31, 2009 was approximately $187.1million as compared to approximately $189.8 million for the year ended December 31,2008 and was comprised of interest expense, amortization of deferred financingfees and interest rate mark-to-market adjustments related to our notes payableassociated with our consolidated real estate properties, TIC interestinvestments, our credit facility and our interest rate swap agreements.  The $2.7 million decrease from prior year isprimarily a result of our reduced notes payable, the reduced outstandingbalance under our credit facility and the redemption of previously outstandingdebentures.

 

*RealEstate Taxes. *Realestate taxes for the year ended December 31, 2009 were approximately $84.6million as compared to approximately $78.3 million for the year ended December 31,2008 and were comprised of real estate taxes from our consolidated real estateproperties.  Real estate taxes increasedapproximately $5.6 million over the prior year as a result of properties acquiredor consolidated during 2008.  Our otherproperties experienced a year over year increase of approximately $0.7 million.

 

*PropertyManagement Fees. *Propertymanagement fees for the year ended December 31, 2009 were approximately$17.5 million as compared to approximately $17.4 million for the year ended December 31,2008 and were comprised of property management fees related to both ourconsolidated and unconsolidated real estate properties.  Property management fees increasedapproximately $0.6 million over the prior year as a result of propertiesacquired during 2008.  Our otherproperties experienced a year over year decrease of approximately $0.5 million.

 

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*AssetManagement Fees.*  Assetmanagement fees for the year ended December 31, 2009 were approximately$21.9 million as compared to approximately $27.8 million for the year ended December 31,2008 and were comprised of asset management fees associated with both ourconsolidated and unconsolidated real estate properties.  The $5.9 million decrease from the prior yearwas primarily attributable to a $7.5 million waiver of asset management feesfor the year ended December 31, 2009, partially offset by an increase inasset management fees due to properties acquired during 2008.

 

*AssetImpairment Losses*.  As a result of adverse economic conditionsand dislocations in the credit markets that have and continue to negativelyimpact the commercial real estate market as a whole, and likewise our portfolioof real estate assets, we evaluated our real estate assets for impairmentduring the years ended 2009 and 2008.  Asa result of our evaluation, we recorded non-cash impairment losses ofapproximately $259.1 million, including approximately $17.8 million related toour real estate assets included in discontinued operations, for the year ended December 31,2009 as compared to approximately $21.1 million for the year ended December 31,2008.

 

*Generaland Administrative Expense.*  General andadministrative expense for the year ended December 31, 2009 wasapproximately $11.1 million as compared to approximately $7.3 million for the yearended December 31, 2008 and was comprised of corporate general andadministrative expenses including directors’ and officers’ insurance premiums,audit and tax fees, legal fees, other administrative expenses and reimbursementof certain expenses of our advisor.  The$3.8 million increase is primarily due to increases in reimbursements ofadministrative expenses to our advisor and increased cost and expenses that wepaid directly that our advisor had previously paid on our behalf.

 

*Depreciationand Amortization Expense. *Depreciationand amortization expense for the year ended December 31, 2009 wasapproximately $272.2 million as compared to approximately $275.3 million forthe year ended December 31, 2008 and was comprised of depreciation andamortization expense from each of our consolidated real estate properties.  Depreciation and amortization expenseincreased approximately $17.2 million over prior year as a result of propertiesacquired or consolidated in 2008.  Thisincrease was offset by a decrease at our other properties of approximately$20.3 million, primarily resulting from an acceleration of amortization oflease intangibles during the year ended December 31, 2008 related to earlylease terminations at our Burnett Plaza property.

 

*InterestIncome*.  Interest income for the year ended December 31,2009 was approximately $3.3 million as compared to approximately $7.0 millionfor the year ended December 31, 2008 and was comprised of interest incomeassociated with funds on deposit at banks and our notes receivable.  The $3.7 million decrease from the prior yearis primarily due to lower cash balances and lower interest rates.

 

*Gain(loss) on Early Extinguishment of Debt.*  Loss on earlyextinguishment of debt for the year ended December 31, 2009 was approximately$4.5 million and was comprised of approximately $3.2 million attributable tothe write-off of deferred financing fees related to paying off the term loanunder our credit facility and approximately $1.3 million related to premiumspaid to debentureholders to redeem outstanding debentures for cash.  Gain on early extinguishment of debt for theyear ended December 31, 2008 was approximately $1.3 million and wasrelated to the early extinguishment, at a discount, of approximately $19.2million in debt in October 2008. The debt was originally scheduled to mature in July 2009.

 

*Loss onContract Termination. *Loss on contract termination for the yearended December 31, 2008 was approximately $5.0 million.  In September 2008, we entered into acontract to purchase a building located in Washington D.C. and paid anon-refundable deposit of $5.0 million related to this contract.  We terminated this contract in December 2008.  We did not have any loss on contracttermination in the year ended December 31, 2009.

 

*Equity inEarnings of Investments*. Equity in earnings of investments for the year ended December 31,2009 was approximately $0.3 million as compared to $1.3 million for the yearended December 31, 2008 and was comprised of our share of equity in theearnings of unconsolidated investments. The $1.0 million decrease from prior year is primarily due to ouracquisition and consolidation of the remaining third-party TIC interests in the1300 Main, Minnesota Center and Colorado Building properties during late 2008.

 

*Gain onSale of Assets. *Therewas no gain on sale of assets recognized during the year ended December 31,2009. * *Gainon sale of assets for the year ended December 31, 2008 was approximately$5.3 million and was comprised of approximately $5.1 million from the sale ofour TIC investment in Enclave on the Lake and approximately $0.2 million fromthe sale of a land easement at our Ashford Perimeter property.

 

**Discontinued Operations**

 

*Income(loss) from Discontinued Operations*.  Loss from discontinued operations for theyear ended December 31, 2009 was approximately $17.8 million as comparedto approximately $2.3 million for the year ended December 31, 2008.  Loss from discontinued operations iscomprised of the results of operations from our Royal Caribbean Center andDeVry University properties disposed of in December 2009, our 9100 MineralCircle property disposed of in February 2008, our 11 Stanwix Streetproperty disposed of in June 2008 and our 2383 Utah property disposed ofin August 2008.  The loss 

 

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from discontinued operations for the year ended December 31,2009 includes asset impairment losses of approximately $17.8 million.

 

*Gain onSale of Discontinued Operations.*  There was no gain on sale of discontinuedoperations recognized during the year ended December 31, 2009.  For the year ended December 31, 2008, werecognized a gain of approximately $16.1 million from the sales of our 9100Mineral Circle and 2383 Utah properties.

 

***Year ended December 31, 2008as compared to year ended December 31, 2007***

 

**Continuing Operations**

 

*RentalRevenue.* Rental revenue for the year ended December 31,2008 was approximately $600.6 million as compared to approximately $304.5million for the year ended December 31, 2007 and was generated by ourconsolidated real estate properties. Approximately $268.0 million of the $296.1 million increase over theprior year was attributable to properties acquired in 2007 and 2008.  Our other properties experienced an increasein rental revenue primarily attributable to increases in lease termination feesin 2008 as compared to 2007 of approximately $23.7 million, an increase in rentalincome recognized from the net amortization of above/below-market rents ofapproximately $3.2 million and various other increases of approximately $6.7million.  These increases were partiallyoffset by a decrease in straight-line rental revenue in 2008 as compared to2007 of approximately $5.5 million.

 

*PropertyOperating Expenses.* Property operating expenses for the yearended December 31, 2008 were approximately $167.1 million as compared toapproximately $74.1 million for the year ended December 31, 2007 and werecomprised of property operating expenses from our consolidated real estateproperties.  Approximately $90.2 millionof the $93.0 million increase over the prior year was attributable toproperties acquired in 2007 and 2008.

 

*InterestExpense. *Interestexpense for the year ended December 31, 2008 was approximately $189.8million as compared to approximately $99.2 million for the year ended December 31,2007 and was comprised of interest expense and amortization of deferredfinancing fees and interest rate mark-to-market adjustments related to ournotes payable associated with our consolidated real estate properties, TICinterest investments and our credit facility.   The $90.6 million increase is primarily due to the full year impact ofour borrowings.  As of September 30,2007, before our significant fourth quarter 2007 acquisition activity, we hadnotes payable of approximately $1.6 billion as compared to notes payable ofapproximately $3.1 billion at December 31, 2008.

 

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

 

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

 

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

 

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

 

*AssetImpairment losses.*  As a result of adverse economic conditionsand dislocations in the credit markets that have and continue to negativelyimpact the commercial real estate market as a whole, and likewise our portfolioof real estate assets, we evaluated our real estate assets for impairmentduring the years ended 2008 and 2007.  Asa result of our evaluation, we recorded non-cash impairment losses ofapproximately $21.1 million for the year ended December 31, 2008.  We did not have any asset impairment lossesfor the year ended December 31, 2007.

 

*Generaland Administrative Expense.* General and administrative expense for the year endedDecember 31, 2008 was approximately $7.3 million as compared toapproximately $3.0 million for the year ended December 31, 2007 and wascomprised of corporate general and administrative expenses including directors’and officers’ insurance premiums, audit and tax fees, legal fees, otheradministrative expenses and reimbursement of certain expenses of ouradvisor.  The $4.3 

 

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million increase isprimarily due to increases in reimbursements of administrative expenses to ouradvisor and increased cost and expenses that we paid directly that our advisorhad previously paid on our behalf.

 

*Depreciationand Amortization Expense.*Depreciation and amortizationexpense for the year ended December 31, 2008 was approximately $275.3million as compared to approximately $137.4 million for the year ended December 31,2007 and was comprised of depreciation and amortization expense from each ofour consolidated real estate properties. Approximately $126.8 million of the $137.9 million increase over theprior year was attributable to properties acquired in 2007 and 2008. Weexperienced increases at our other properties of approximately $11.1 million,primarily resulting from an acceleration of amortization of lease intangiblesduring the year ended December 31, 2008 related to early leaseterminations at our Burnett Plaza property. Depreciation and amortization for the year ended December 31, 2008also included approximately $7.7 million in write offs of lease intangiblesrelated to early lease terminations at our Burnett Plaza property.

 

*InterestIncome*. Interest income for the year ended December 31,2008 was approximately $7.0 million as compared to approximately $25.5 millionfor the year ended December 31, 2007 and was comprised of interest incomeassociated with funds on deposit at banks and our notes receivable.  The $18.5 million decrease from the prioryear is primarily due to lower cash balances and lower interest rates.   As of September 30, 2007, before oursignificant fourth quarter 2007 acquisition activity, we had combined cash andrestricted cash balances of approximately $774.9 million as compared tocombined cash and restricted cash balances of approximately $539.0 million at December 31,2008.

 

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

 

*Equity inEarnings of Investments*. Equity in earnings of investments for the year ended December 31,2008 was approximately $1.3 million as compared to $5.1 million for the yearended December 31, 2007 and was comprised of our share of equity in theearnings of unconsolidated investments.  The$3.8 million decrease from prior year is primarily due to net losses at the1300 Main property and the Wanamaker Building.

 

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

 

**Discontinued Operations**

 

*Income(loss) from Discontinued Operations.*Income (loss) fromdiscontinued operations for the year ended December 31, 2008 was a loss ofapproximately $2.3 million as compared to income of approximately $2.0 millionfor the year ended December 31, 2007. Income (loss) from discontinued operations is comprised of the resultsof operations from our Royal Caribbean Center and DeVry University propertiesdisposed of in December 2009, our 9100 Mineral Circle property disposed ofin February 2008, our 11 Stanwix Street property disposed of in June 2008and our 2383 Utah property disposed of in August 2008.  The income from discontinued operations forthe year ended December 31, 2007 includes approximately $3.9 million oflease termination fees received from a tenant at our 9100 Mineral Circleproperty.

 

*Gain onSale of Discontinued Operations.*  We recognized a gain of approximately $16.1million during the year ended December 31, 2008 from the sales of our 9100Mineral Circle and 2383 Utah properties. The sale of our 9100 Mineral Circle property resulted in a gain ofapproximately $6.9 million and the sale of our 2383 Utah property resulted in again of approximately $9.2 million. There was no gain on sale of discontinued operations for the year ended December 31,2007.

 

**Cash Flow Analysis**

 

*Year ended December 31, 2009 as compared toyear ended December 31, 2008*

 

Cash flows provided byoperating activities totaled approximately $63.0 million for the year ended December 31,2009 compared to $68.5 million for the year ended December 31, 2008.  The change in cash flows provided byoperating activities is attributable to (1) the factors discussed in ouranalysis of results of operations for the year ended December 31, 2009compared to December 31, 2008, including results of our consolidated realestate property operations, interest expense, asset management fees, andgeneral and administrative expense; and (2) the timing of receipt ofrevenues and payment of expenses which is evidenced by net cash outflows inworking capital assets and liabilities of approximately $20.8 million in 2009compared to approximately $37.2 million in 2008.

 

Cashflows provided by investing activities for the year ended December 31, 2009were approximately $22.1 million and were primarily comprised of cash used tofund capital expenditures for operating real estate of approximately 

 

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$68.5 million and capital expenditures for real estatedevelopment of approximately $43.4 million, partially offset by approximately$75.1 million from the decrease in restricted cash, primarily related to theredemption of debentures, also partially offset by approximately $16.0 millionin insurance proceeds received and approximately $41.7 million in proceeds fromthe sale of our Royal Caribbean Center and DeVry University properties.  During the year ended December 31, 2008,cash flows used in investing activities were approximately $212.5 million andwere primarily comprised of cash used for the purchases of real estate ofapproximately $233.6 million, cash used to fund capital expenditures foroperating real estate of approximately $56.1 million and capital expendituresfor real estate development of approximately $12.2 million, partially offset byapproximately $46.9 million in proceeds from sales of assets and discontinuedoperations and approximately $34.2 million from the decrease in restrictedcash.

 

Cashflows used in financing activities for the year ended December 31, 2009were approximately $243.0 million and were comprised primarily of payments onnotes payable, net of proceeds, of approximately $92.7 million, purchase ofdebentures for cash of approximately $52.9 million, payment of distributions ofapproximately $60.2 million and redemptions of common stock of approximately$31.6 million.  We have and may continueto pay all or a portion of our distributions from sources other than cash flowfrom operating activities, such as offering proceeds, cash advanced to us by,or reimbursements for expenses or waiver of fees from, our advisor and proceedsfrom loans including those secured by our assets and proceeds from the sale ofreal estate assets.  For a detaileddiscussion of how we funded distributions, see “Liquidity and Capital Resources— Distributions” below.  During the yearended December 31, 2008, cash flows provided by financing activities wereapproximately $386.5 million and were comprised primarily of funds receivedfrom the issuance of stock, net of redemptions and offering costs, ofapproximately $665.2 million, partially offset by payments on notes payable,net of proceeds, of approximately $168.9 million, payment of distributions ofapproximately $70.5 million and conversion of debentures of approximately $26.3million.

 

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

 

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

 

Cashflows used in investing activities for the year ended December 31, 2008were approximately $212.5 million and were primarily comprised of cash used forthe purchases of real estate of approximately $233.6 million, cash used to fundcapital expenditures for operating real estate of approximately $56.1 millionand capital expenditures for real estate development of approximately $12.2million, partially offset by approximately $46.9 million in proceeds from salesof assets and discontinued operations and approximately $34.2 million from thedecrease in restricted cash.  During theyear ended December 31, 2007, cash flows used by investing activities wereapproximately $1.0 billion and were primarily comprised of purchases of realestate of approximately $895.7 million, increases in restricted cash ofapproximately $126.7 million and cash used to fund capital expenditures foroperating real estate of approximately $20.6 million.  During the year ended December 31, 2008,we purchased three properties and increased ownership in three of our TICproperties.  During the year ended December 31,2007, we purchased interests in 39 properties.

 

Cashflows provided by financing activities for the year ended December 31,2008 were approximately $386.5 million and were comprised primarily of fundsreceived from the issuance of stock, net of redemptions and offering costs, ofapproximately $665.2 million, partially offset by payments on notes payable,net of proceeds, of approximately $168.9 million, payments of distributions ofapproximately $70.5 million and conversion of debentures of approximately $26.3million.  During the year ended December 31,2007, cash flows provided by financing activities were approximately $952.6million and were comprised primarily of funds received from the issuance ofstock, net of redemptions and offering costs, of approximately $692.9 millionand borrowings, net of payments, of approximately $337.9 million, partiallyoffset by distributions of approximately $55.3 million.

 

**Funds from Operations andModified Funds from Operations**

 

Funds fromoperations (“FFO”) is a non-GAAP financial measure that is widely recognized asa measure of REIT operating performance. We use FFO, defined by the National Association of Real EstateInvestment Trusts as net income (loss), computed in accordance with GAAP,excluding extraordinary items, as defined by GAAP, and gains (or losses) fromsales of property, plus depreciation and amortization on real estate assets,and after adjustments for unconsolidated partnerships, joint ventures andsubsidiaries, as one measure to evaluate our operating performance.  In addition to FFO, we use modified fundsfrom operations (“Modified Funds from Operations” or “MFFO”), which excludesfrom FFO impairment charges, adjustments to fair value for derivatives notqualifying for hedge accounting and acquisition-related costs, to furtherevaluate our operating performance. Historical cost accounting for real estate assets in accordance withGAAP implicitly assumes that the value of real estate diminishes predictablyover time.  Since real estate values have

 

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historically risen orfallen with market conditions, many stockholders and industry analysts haveconsidered the presentation of operating results for real estate companies thatuse historical cost accounting alone to be insufficient.  As a result, our management believes that theuse of FFO and MFFO, together with the required GAAP presentations, provide amore complete understanding of our performance.

 

We believe thatFFO is helpful to stockholders and our management as a measure of operatingperformance because it excludes depreciation and amortization, gains and lossesfrom property dispositions, and extraordinary items, and as a result, whencompared year over year, reflects the impact on operations from trends in occupancyrates, rental rates, operating costs, general and administrative expenses, andinterest costs, which is not immediately apparent from net income.  We believe that MFFO is helpful tostockholders and our management as a measure of operating performance becauseit excludes charges that management considers more reflective of investingactivities or non-operating valuation changes. By providing FFO and MFFO, we present information that assistsstockholders in aligning their analysis with management’s analysis of long-termoperating activities.  We believefluctuations in MFFO are indicative of changes in operating activities andprovide comparability in evaluating our performance over time and as comparedto other real estate companies that may not be affected by impairments or havederivatives or acquisition activities.  As explainedbelow, management’s evaluation of our operating performance excludes the itemsconsidered in the calculation of MFFO based on the following economicconsiderations:

 

·                 Impairment charges.  An impairment charge represents a downwardadjustment to the carrying amount of a long-lived asset to reflect the currentvaluation of the asset even when the asset is intended to be held long-term.  Such adjustment, when properly recognizedunder GAAP, may lag the underlying consequences related to rental rates,occupancy and other operating performance trends.  The valuation is also based, in part, on theimpact of current market fluctuations and estimates of future capital requirementsand long-term operating performance that may not be directly attributable tocurrent operating performance.  BecauseMFFO excludes impairment charges, management believes MFFO provides usefulsupplemental information by focusing on the changes in our operatingfundamentals rather than on one-time market valuations.

 

·                 Adjustments tofair value for derivatives not qualifying for hedge accounting.  Management uses derivatives to manage ourinterest rate exposure.  We do not intendto speculate in these interest rate derivatives and accordinglyperiod-to-period changes in derivative valuations are not primary factors inmanagement’s decision-making process.  Webelieve by excluding the gains or losses from these derivatives, MFFO providesuseful supplemental information on the realized economic impact of the hedgesindependent of short-term market fluctuations.

 

·                 Acquisition-relatedcosts.  In evaluating investments inreal estate, including both business combinations and investments accounted forunder the equity method of accounting, management’s investment models andanalysis differentiates costs to acquire the investment from the operationsderived from the investment.  Prior to2009, acquisition costs for these types of investments were capitalized;however beginning in 2009 acquisition costs related to business combinationsare expensed.  We believe by excludingexpensed acquisition costs, MFFO provides useful supplemental information thatis comparable for each type of our real estate investments and is consistentwith management’s analysis of the investing and operating performance of ourproperties.

 

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Thefollowing section presents our calculation of FFO and MFFO for the years ended December 31,2009, 2008 and 2007 and provides additional information related to our FFO andMFFO (in thousands, expect per share amounts):

 
| ** **                                                                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                          |       |     |       |     |       |     |       |
| Net  loss                                                                     |       | $        | (439,087   | )        | $          | (160,652 | )          | $ | (41,615 | ) |
| Net  (income) loss attributable to noncontrolling interest                    |       | 8,455    |       | 231      |       | (16      | )          |
|                                                                          |       |     |       |     |       |     |       |
| Adjustments:                                                                  |       |     |       |     |       |     |       |
| Real  estate depreciation and amortization from consolidated properties (1)   |       | 275,045  |       | 280,620  |       | 141,462  |       |
| Real  estate depreciation and amortization from unconsolidated properties (2) |       | 7,116    |       | 15,006   |       | 9,071    |       |
| Gain  on sale of depreciable real estate (3)                                  |       | —   |       | (21,204  | )          | —   |       |
| Noncontrolling  interest share of above adjustments(4)                        |       | (2,116   | )          | (2,149   | )          | (379     | )          |
| Funds  from operations (FFO)                                                  |       | $        | (150,587   | )        | $          | 111,852  |       | $ | 108,523 |   |
|                                                                          |       |     |       |     |       |     |       |
| Impairment  charges (5)                                                       |       | 259,063  |       | 21,114   |       | —   |       |
| Fair  value adjustments to derivatives                                        |       | 196      |       | —   |       | —   |       |
| Acqusition-related  costs                                                     |       | —   |       | —   |       | —   |       |
| Noncontrolling  interest share of above adjustments(6)                        |       | (7,072   | )          | (33      | )          | —   |       |
| Modified  funds from operations (MFFO)                                        |       | $        | 101,600    |     | $          | 132,933  |       | $ | 108,523 |   |
|                                                                          |       |     |       |     |       |     |       |
| Weighted  average shares                                                      |       | 291,739  |       | 240,188  |       | 171,544  |       |
|                                                                          |       |     |       |     |       |     |       |
| MFFO  per share                                                               |       | $        | 0.35       |     | $          | 0.55     |       | $ | 0.63 |   |

 

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(1)         Reflects the depreciation and amortization of continuing operations, aswell as discontinued operations.

 

(2)         This represents our share of depreciation and amortization expense ofthe properties which we account for under the equity method of accounting.  The depreciation and amortization expense ofour unconsolidated interests are reflected in our equity in earnings ofinvestments.

 

(3)         Reflects the gain on sale of 9100 Mineral Circle (sold in February 2008),Enclave on the Lake (sold in July 2008) and 2383 Utah (sold in August 2008.)

 

(4)         Reflects an adjustment for the noncontrolling third-party partners’proportionate share of the real estate depreciation and amortization, anadjustment for the limited partnership unit holders’ proportionate share of thereal estate depreciation and amortization and gain on sale of 9100 MineralCircle, Enclave on the Lake and 2383 Utah.

 

(5)         Reflects the asset impairment losses of continuing operations, as wellas discontinued operations.

 

(6)         Reflects an adjustment for the noncontrolling third-party partners’proportionate share of asset impairment losses and an adjustment for thelimited partnership unit holders’ proportionate share of the asset impairmentlosses and fair value adjustments to derivatives.

 

*Non-cash Items Included in Net Loss:*

 

Providedbelow is additional information related to selected non-cash items included innet loss above, which may be helpful in assessing our operating results.  The amounts presented below include itemsrelated to our consolidated properties as well as items that are reflected inour equity in earnings of investments and discontinued operations.

 

·                 Straight-line rental revenue ofapproximately $19.5 million, $28.5 million and $22.5 million was recognized asa net increase to rental revenue for the years ended December 31, 2009,2008 and 2007, respectively;

 

·                 Amortization of above- andbelow-market lease intangible assets and liabilities was recognized as a netincrease to rental revenues of approximately $13.0 million, $13.8 million and$9.9 million for the years ended December 31, 2009, 2008 and 2007,respectively;

 

·                 Amortization of lease incentives ofapproximately $1.5 million, $1.7 million and $1.3 million was recognized as adecrease to rental revenues for the years ended December 31, 2009, 2008and 2007, respectively; and

 

·                 Amortization of deferred financingcosts and interest rate mark-to-market adjustments of approximately $8.6million, $9.1 million and $2.2 million was recognized as interest expense forthe years ended December 31, 2009, 2008 and 2007, respectively.

 

We believe FFO and MFFOare helpful to stockholders and our management as measures of operatingperformance.  FFO and MFFO are notindicative of our cash available to fund distributions since (1) certainamounts included in these measures are non-cash and (2) other uses ofcash, such as capital expenditures at our properties and principal payments ofdebt, are not deducted when calculating FFO and MFFO.  FFO or MFFO should not be considered as

 

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an alternative to netincome (loss), or an indication of our liquidity, and each should be reviewedin connection with other GAAP measurements. Our FFO and MFFO as presented may not be comparable to presentations byother REITs.

 

**Liquidity and Capital Resources**

 

***General***

 

Ourbusiness requires continued access to adequate capital to fund our liquidityneeds.  Our principal demands for fundson a short-term and long-term basis have been and will continue to be foroperating expenses, general and administrative expenses, payment of principaland interest on our outstanding indebtedness, capital improvements to ourproperties, including commitments for future tenant improvements, assetmanagement fees and payment of distributions. Until the economic picture becomes clearer, our foremost priorities forthe near term are preserving and generating cash sufficient to fund ourliquidity needs.  Given the deteriorationand uncertainty in the economy and financial markets, as well as propertyspecific issues, such as vacancies and lease terminations, management believesthat access to any outside source of cash will be challenging and is planningaccordingly.

 

As of December 31,2009, we had cash and cash equivalents of $179.6 million.  We have deposits in certain financialinstitutions in excess of federally insured levels.  We have diversified our cash and cashequivalents with numerous banking institutions in an attempt to minimizeexposure to any one of these institutions. We regularly monitor the financial stability of these financialinstitutions, and we believe that we have placed our deposits with creditworthyfinancial institutions.

 

At currentoperating levels, we anticipate that revenue from our properties, cash and cashequivalents and restricted cash will continue to provide adequate capital tofund our short-term liquidity requirements. Based on our current principal demand for funds we anticipate ourshort-term liquidity requirements to be approximately $632.9 million over thenext twelve months.  However, we willlikely need to generate additional liquidity for long-term liquidityrequirements.  Our expected actual and potential liquiditysources are, among others: cash and cash equivalents and restrictedcash; revenue from our properties; asset dispositions; contribution of existingassets to joint ventures; proceeds from additional secured or unsecured debtfinancings and refinancings; reduction or elimination of the amount ofdistributions paid; decreases in the amount of nonessential capital expenditures;and proceeds from public or private issuances of debt or equitysecurities.  We also intend to utilizeretained capital as a result of the partial suspension and funding limit of theshare redemption program and the reduction in our distribution rate, whichoccurred earlier in 2009.

 

One of our liquiditystrategies is to dispose of certain properties, which we expect will help us (1) generatecash through the potential disposition of identified properties in non-coremarkets or non-strategic properties that we believe have equity value above themortgage debt and (2) preserve cash through the potential disposition ofproperties with negative cash flow or other potential near-term cash outlayrequirements (including debt maturities). For example, in December 2009, we sold our Royal Caribbean Centerproperty, consisting of approximately 129,000 square feet, and our DeVryUniversity property, consisting of approximately 94,000 square feet, to anunaffiliated third party for a combined contract sales price of approximately$43.0 million. These properties are both located in Miramar, Florida, which wedo not consider a core market for our portfolio.  Prior to the sale, we owned an 86%controlling interest in each of these properties, and the sale generatedproceeds of approximately $41.7 million of which approximately $26.8 millionwas used to repay the related mortgage debt. Currently, we intend to sell at least four other properties in non-coremarkets and two other non-strategic properties during 2010.

 

However, there canbe no assurance that future dispositions will occur, or, if they occur, thatthey will help us to achieve these objectives. In addition, we may seek to raise capital by contributing one or more ofour existing assets to a joint venture with a third party.  Investments in joint ventures may, undercertain circumstances, involve risks not present when a third party is notinvolved.  Our ability to successfullyidentify, negotiate and complete joint venture transactions on acceptable termsor at all is highly uncertain in the current economic environment.

 

Although we haveminimal debt maturing in 2010, assuming we extend our credit facility for oneyear as permitted, we continually evaluate our debt maturities.  Part of our overall strategy includesactively addressing our debt maturities in 2011 and considering alternativecourses of action if the capital markets continue to be volatile.  Based on our current assessment, we believethere will be refinancing alternatives available, but these alternatives maymaterially impact our expected financial results and liquidity due to higherinterest rates and additional equity requirements.  However, if refinancing alternatives are notavailable and we have insufficient liquidity to repay the maturing debt, therelated lenders could foreclose on certain of our properties.

 

Although wecurrently have no plans for the public or private issuance of debt or equitysecurities, we may explore this liquidity source in 2010.  Due to market conditions and our leverage andliquidity positions, it may be extremely difficult to raise cash through theissuance of securities on favorable terms or at all.

 

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***Notes Payable***

 

At December 31,2009, we had notes payable of approximately $3.0 billion in principal amountconsisting of $2.8 billion of loans secured by mortgages on our properties and$150.0 million of borrowings under the revolving loans outstanding under ourcredit facility.  At December 31,2009, the stated annual interest rates on our notes payable ranged from 5.02%to 8.33%, with an effective weighted average interest rate of approximately5.80%.  As of December 31, 2009, allof our $3.0 billion in debt is fixed rate debt, including the $150.0 million inrevolving loans which bear interest at a variable rate, but which areeffectively fixed through use of interest rate swap agreements.

 

The recent turbulent financialmarkets have created a severe lack of credit and a rising cost of any availabledebt.  We have limited risks related tonear-term maturities.  At December 31, 2009, our notes payable hadmaturity dates that range from October 2010 to May 2017.  Approximately $209.2 million, orapproximately 7%, of our December 31, 2009 outstanding debt matures in2010, $150.0 million of which represents the revolving loans under our creditfacility which mature in December 2010 and we intend to extend for oneyear, pursuant to the terms of the credit facility.  Approximately $542.3 million, orapproximately 18%, of our December 31, 2009 outstanding debt matures in2011.

 

If debt financing is notavailable on acceptable terms and conditions, we may not be able to refinancematuring debt or obtain financing for investments.  Domestic and international financial marketshave been experiencing and continue to experience unusual volatility anduncertainty.  If this volatility anduncertainty persists, our ability to borrow monies, on acceptable terms andconditions, to finance the purchase of, or other activities related to, realestate assets will be significantly impacted. If we are unable to borrow monies on acceptable terms and conditions, wemay find it difficult, costly or impossible to refinance indebtedness uponmaturity.  If interest rates are higherwhen the properties are refinanced, our cash flow from operating activitieswill be reduced.  In addition, in thecurrent market, lenders have increased the amount of equity required to supporteither new or existing borrowings.

 

Our loan agreementsgenerally require us to comply with certain reporting and financialcovenants.  On December 31, 2009, werestructured the loan secured by Ashford Perimeter, as discussed below under“—Troubled Debt Restructuring,” which was in default prior to the transaction,and as of December 31, 2009, we were in default or had events of defaulton four non-recourse property loans with a combined outstanding balance ofapproximately $129.4 million secured by 1650 Arch Street, 222 BloomingdaleRoad, Executive Park and the Western Office portfolio, which consists of the17655 Waterview, Gateway 12, Gateway 22, Gateway 23 and Southwest Centerproperties.  Of this $129.4 million,subsequent to December 31, 2009, we completed a discounted purchase,through a wholly-owned subsidiary, of the approximately $42.8 million noteassociated with the 1650 Arch Street property, resulting in a gain on theextinguishment of debt of approximately $9.6 million.  The approximately $42.8 million note payableremains a liability of the borrower, a limited partnership in which we own a90% controlling interest, and the debt remains in default.  However, for consolidation purposes the debtis fully eliminated.  For the otherproperties with loans in default or that have experienced events of default asof December 31, 2009, we are in discussions with each of the lenders toeither restructure the debt in a way that is supported by the underlying assetvalues of the properties collateralizing the debt, similar to the AshfordPerimeter transaction, or to purchase or payoff the debt at a discount, similarto the 1650 Arch Street transaction.  Wecan provide no assurance that we will be able to restructure the debt or to purchaseor payoff the debt at a discount, which could result in foreclosure or atransfer of ownership of the properties to the lenders.  For example, subsequent to December 31,2009, pursuant to a deed in lieu of foreclosure, we transferred ownership of KeyBankCenter to the lender associated with the property.   Further, we believe at least six otherproperties and potentially others have property loans that need to be modifiedduring 2010 in order to support the underlying asset value.  At December 31, 2009, we believe we werein compliance with each of the debt covenants under each of our other loanagreements.

 

***Credit Facility***

 

On December 11, 2007, we, through our operatingpartner, Behringer OP, entered into a secured credit agreement (the “CreditAgreement”) providing for up to $500.0 million of secured borrowings withKeyBanc Capital Markets and Wachovia Securities as co-lead arrangers andKeyBank National Association as administrative agent (referred to herein as“Lender” and as the “Agent,” in their respective roles), and other lendinginstitutions that are parties to the credit facility (collectively, the“Lenders”).  This credit facility allowed Behringer OP to borrow up to$300.0 million of revolving loans and up to $200.0 million in a secured termloan.  As of December 31, 2008, there was $200.0 million outstandingunder the term loan and none outstanding under any revolving loans.

 

On June 9, 2009,Behringer OP entered into a first amendment (the “Modification”) to the CreditAgreement.  Among other things, theModification (1) reduced the total amount of secured borrowings availableunder the credit facility to $193.0 million, available as revolving loans(subject to increase to $300.0 million upon Lender approval and payment ofcertain activation fees to the Agent and Lenders), (2) provided for therepayment and retirement of the $200.0 million term loan contained in theoriginal credit facility, (3) reduced the ratio of EBITDA to fixed chargesthat Behringer OP is required to maintain, (4) allowed Behringer OP to usethe acquisition cost of certain properties in calculating “gross asset value”(as defined in the Credit Agreement), (5) allowed Behringer OP to incur upto 10% of gross asset value in additional recourse

 

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indebtedness notpreviously permitted under the loan covenants, (6) eliminatedcross-defaults to non-recourse indebtedness, (7) reduced the required minimumconsolidated tangible net worth to $1.2 billion, (8) expanded the scope ofpermitted investments to include, subject to stated limits, mezzanine mortgagereceivables and securities of publicly-traded REITs, and (9) provided forborrowings to be supported by additional collateral owned by certain of oursubsidiaries, each of which has guaranteed the credit facility and granted afirst mortgage or deed of trust on its real property (the “Collateral PoolProperties”) as security for the credit facility.  The Collateral PoolProperties consist of our One BriarLake Plaza, Westway One and Three EldridgePlace properties in Houston, Texas; our 5 & 15 Wayside property inBurlington, Massachusetts; our 5104 Eisenhower Boulevard property in Tampa, Florida;and our Centreport Office Center property in Ft. Worth, Texas.** **In addition, the Collateral PoolProperties must always have a borrowing base value of $200.0 million, and mustinclude at least four separate properties. As of December 31, 2009, the CollateralPool Properties had a value, as defined in the Modification, of approximately$304.7 million.  The credit facility willcontinue to be secured by a perfected first priority lien and security interestin collateral that includes Behringer OP’s interests in certain subsidiariesthat directly own our properties, as well as any distributions from BehringerOP’s subsidiaries, and to be guaranteed by Behringer Harvard REIT I, Inc.and our material subsidiaries to the extent permitted under other debt obligations.

 

The credit facilitymatures on December 11, 2010. It may be extended one additional yearupon payment of an extension fee in an amount equal to fifteen basis points onthe total amount of the credit facility in effect on the original maturity date. Availability under the Modification is limited, during the initial term, to thelesser of (a) 60% of the aggregate appraised value of the Collateral PoolProperties (during the initial term), or 57.5% of that aggregate appraisedvalue (during the extension term), or (b) the amount of debt that theCollateral Pool Properties could support under a debt service coverage test,determined in the manner provided in the Modification, based on a debt servicecoverage ratio of 1.30 during the initial term or 1.40 during the extensionterm (the “Borrowing Base Availability”).  Until our Three Eldridge Placeproperty becomes stabilized, its contribution to the borrowing base will beequal to Behringer OP’s cash incurred costs, subject to a limit of 25% of theaggregate borrowing base value of all Collateral Pool Properties.

 

Pursuant to theModification, loans under the credit facility bear interest at an annual ratethat is equal to either (1) 0.5% per annum over the “base rate”(calculated as the greater of (i) the Agent’s “prime rate” or (ii) 0.5%above the Federal Funds Effective Rate) or (2) LIBOR plus 2.75%, thelatter of which was applicable following the closing of the Modification andequaled 3.02%.  Previously, the interest rate applicable to loans under thecredit facility could vary based on Behringer OP’s ratio of consolidated totalindebtedness to gross asset value and prior to the closing was LIBOR plus1.80%, which equaled 2.12%.  Behringer OP has the right to prepay theoutstanding amount of the loans, in whole or in part, at any time withoutpenalty, provided that any partial payment is in a minimum amount of $1.0million.  Certain mandatory prepayments may be required in the event of acasualty or condemnation of a Collateral Pool Property, or if the outstandingbalance of the loans exceeds the Borrowing Base Availability.

 

As of December 31,2009 there was approximately $150.0 million outstanding under the revolvingloans and we had approximately $32.6 million of additional borrowings availableunder the revolving loans.  As of December 31,2009, as a result of the interest rate swap agreements, the revolving loanseffectively bore interest at a fixed rate of approximately 6.74%.

 

***Troubled Debt Restructuring***

 

On December 31, 2009, we completed a restructureof the loan secured by our Ashford Perimeter property, located in Atlanta,Georgia.  The balance prior to therestructure of approximately $34.3 million was bifurcated into two tranches,with the second tranche subordinate to the return of and return on additionalcontributions provided by us for debt service on the first tranche, operatingshortfalls, anticipated re-leasing costs and capital improvements at theproperty.  In addition,, the loanmaturity date was extended from February 1, 2012 to February 1, 2016.As part of the restructure, loan reserves of approximately $2.8 million wereapplied to the outstanding balance.

 

The loan restructure is considered a “troubled debtrestructuring” as defined by GAAP. The anticipated future cash flows, includingindeterminable future cash payments, may exceed the current carrying value;therefore no change is made to the carrying amount and no gain or loss wasrecognized at December 31, 2009.

 

***ShareRedemption Program***

 

In March 2009, ourboard of directors suspended, until further notice, redemptions under our shareredemption program, other than those submitted in respect of a stockholder’sdeath, disability or confinement to a long-term care facility subject to thelimits set forth in our share redemption program.  In November 2009, our board of directorselected until further notice to set a funding limit of $10.0 million forexceptional redemptions considered during 2010 proportional to each redemptionperiod. For the year ended December 31, 2009, we redeemed approximately3.3 million shares for approximately $31.6 million.  Our board maintains its right to redeemadditional shares, subject to the limits set forth in our share redemptionprogram, if it deems it to be in the best interest of the Company and itsstockholders.

 

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***Distributions***

 

Distributions areauthorized at the discretion of our board of directors based on its analysis ofnumerous factors, including but not limited to our performance over the previous period, expectations of performanceover future periods, forthcoming cash needs, earnings, cash flow,anticipated cash flow, capital expenditure requirements, cash on hand andgeneral financial condition and other factors that our board deemsrelevant.  The board’s decisions are also influenced, in substantial part,and by the requirements necessary to maintain our REIT status.  In light of the pervasive and fundamentaldisruptions in the global financial and real estate markets, we cannot provideassurance that we will be able to achieveexpected cash flows necessary to continue to pay distributions at anyparticular level, or at all.  Ourboard may determine to reduce our current distribution rate or cease payingdistributions in order to conserve cash.

 

If cash flow fromoperating activities are not sufficient to fully fund the payment ofdistributions and required capital expenditures, the level of our distributionsmay not be sustainable, and some or all of our distributions will be paid fromother sources.  We have and may continueto pay all or a portion of our distributions from sources other than cash flowfrom operating activities, such as offering proceeds, cash advanced to us by,or reimbursements for expenses or waiver of fees from, our advisor and proceedsfrom loans including those secured by our assets and proceeds from the sale ofreal estate assets.   From time to time,our advisor and its affiliates may agree to waive or defer all, or a portion,of the acquisition, asset management or other fees or incentives due them,enter into lease agreements for unleased space, pay general administrativeexpenses or otherwise supplement investor returns in order to increase theamount of cash that we have available to pay distributions to our stockholders.

 

The total distributionspaid to common stockholders for the years ended December 31, 2009 and 2008were approximately $125.8 million and $148.8 million, respectively.  Of the distributions paid to commonstockholders for the years ended December 31, 2009 and 2008, approximately$65.9 million and $79.8 million, respectively, were reinvested in shares of ourcommon stock pursuant to our DRP.  Wethus used net cash of approximately $59.9 million and $69.0 million to fund thedistributions for these periods.  For the yearsended December 31, 2009 and 2008, distributions declared and recorded as areduction to noncontrolling interest in connection with the Behringer OPlimited partnership units were approximately $0.2 million and $0.3 million,respectively.  For the years ended December 31,2009 and 2008, cash flow provided by operating activities was approximately$63.0 million and $68.5 million, respectively. For the years ended December 31, 2009 and 2008, cash flow providedby operating activities exceeded net cash distributions paid to commonstockholders by approximately $3.1 million and $0.5 million, respectively.

 

The following are thedistributions paid and declared to our common stockholders during the yearsended December 31, 2009 and 2008 (amounts in thousands, except per shareamounts):

 
| ** **  | ** ** | ** **             | ** ** | **Total**         | ** ** | **Declared**     | ** ** |
|-------------|------------|------------------------|------------|-------------------|------------|------------------|------------|
| ** **  | ** ** | **Distributions Paid** | ** ** | **Distributions** | ** ** | **Distribution** | ** ** |
| ** **  | ** ** | **Cash**               | ** ** | **DRP**           | ** ** | **Total**        | ** ** | **Declared** | ** ** | **Per Share (1)** | ** ** |
| 2009        |       |                   |       |              |       |             |       |   |   |   |   |
| 1st Quarter |       | $                      | 21,038     |              | $          | 25,311           |       | $ | 46,349 |   | $ | 46,533 |   | $ | 0.160 |   |
| 2nd Quarter |       | 15,033                 |       | 16,873            |       | 31,906           |       | 23,742 |   | 0.081 |   |
| 3rd Quarter |       | 11,692                 |       | 12,041            |       | 23,733           |       | 23,748 |   | 0.081 |   |
| 4th Quarter |       | 12,093                 |       | 11,676            |       | 23,769           |       | 23,774 |   | 0.081 |   |
| Total       |       | $                      | 59,856     |              | $          | 65,901           |       | $ | 125,757 |   | $ | 117,797 |   | $ | 0.403 |   |
|        |       |                   |       |              |       |             |       |   |   |   |   |
| 2008        |       |                   |       |              |       |             |       |   |   |   |   |
| 1st Quarter |       | $                      | 15,451     |              | $          | 17,098           |       | $ | 32,549 |   | $ | 33,100 |   | $ | 0.157 |   |
| 2nd Quarter |       | 16,335                 |       | 18,436            |       | 34,771           |       | 35,212 |   | 0.157 |   |
| 3rd Quarter |       | 17,410                 |       | 20,367            |       | 37,777           |       | 39,521 |   | 0.160 |   |
| 4th Quarter |       | 19,803                 |       | 23,899            |       | 43,702           |       | 45,923 |   | 0.164 |   |
| Total       |       | $                      | 68,999     |              | $          | 79,800           |       | $ | 148,799 |   | $ | 153,756 |   | $ | 0.638 |   |

 

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(1)         Distributionsdeclared per share assumes the share was issued and outstanding as of therecord date and is based on a declared monthly distribution rate for April throughDecember of 2009 of $0.0271 and a declared daily distribution rate for thefirst quarter of 2009 of $0.0017808 and a declared daily distribution rate for January throughAugust 2008 of $0.0017260 and for September through December 2008of $0.0017808.

 

Operating performancecannot be accurately predicted due to numerous factors including our ability toinvest capital at favorable yields, the financial performance of ourinvestments in the current uncertain real estate environment,

 

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and the types and mix ofinvestments in our portfolio. As a result, future total distributions paid anddeclared may continue to exceed cash flows from operating activities.

 

**Contractual Obligations**

 

Our primary contractualobligations relate to our notes payable. In addition, we have certain properties that are subject to long-termground leases where a third party owns and has leased the underlying land tous.  Excluded from the table below arecommitments of approximately $24.6 million for tenant improvements and leasingcommissions which are generally due in 12 to 36 months.  The following table summarizes our primarycontractual obligations as of December 31, 2009 (in thousands):

 
| ** **                   | ** ** | **Total** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **Thereafter** | ** ** |
|------------------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Notes  payable principal (1) |       | $         | 2,974,906  |     | $          | 223,607  |       | $        | 562,547    |     | $          | 93,542   |       | $              | 73,656     |   | $ | 94,003 |   | $ | 1,927,551 |   |
| Interest  expense            |       | 805,818   |       | 171,747  |       | 145,988  |       | 121,232  |       | 116,572  |       | 111,593  |       | 138,686        |       |
| Ground  leases               |       | 29,871    |       | 887      |       | 887      |       | 887      |       | 887      |       | 887      |       | 25,436         |       |
| Total                        |       | $         | 3,810,595  |     | $          | 396,241  |       | $        | 709,422    |     | $          | 215,661  |       | $              | 191,115    |   | $ | 206,483 |   | $ | 2,091,673 |   |

 

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(1)                        Excludesunamortized net discounts of approximately $1.3 million.

 

**OtherBehringer Harvard Programs**

 

As discussed elsewhereherein, the current economic crisis which began with the collapse ofresidential subprime credit markets and continued through an overall crisis in,and freeze of, the credit markets toward the end of 2008, followed byunemployment and economic declines unprecedented in the last 70 years, has hadseverely negative effects across substantially all commercial real estate. Asthe industry has been affected, other Behringer Harvard-sponsored investmentprograms that substantially completed their primary equity offerings at orprior to the end of 2008 have been adversely affected by the disruptions to theeconomy generally and the real estate market. These economic conditions have adversely affected the financialcondition of many of these programs’ tenants and lease guarantors, resulting intenant defaults or bankruptcies. Further, lowered asset values, as a result of declining occupancies,reduced rental rates, and greater tenant concessions and leasing costs, havereduced investor returns in these investment programs because these factors notonly reduce current return to investors but also negatively impact the abilityof these investment programs to refinance or sell their assets and to realizegains thereon.  In response to theseeconomic stresses, these investment programs have altered their overallstrategies from acquisition and growth to focusing on capital conservation,debt extensions and restructurings, reduction of operating expenses, andmanagement of lease renewals, re-tenanting, declining occupancies and rentalrates and increases in tenant concessions and leasing costs.  Identified and described in detail below arecertain consequences of the current economic environment affecting certaincharacteristics of these other investment programs.

 

*Distributionsand Redemptions.*** **Behringer Harvard Mid-Term Value Enhancement Fund I LPhas paid, and continues to pay, monthly distributions at a 6% annualized rate(all distribution rate calculations herein assume a per unit or share purchaseprice of $10.00 reduced for capital distributions arising from sales ofassets).  While portfolio liquidation hasbeen delayed because of current economic challenges, Behringer Harvard Mid-TermValue Enhancement Fund I is atthe stage where it is operating with a view to providecapital returns to its investors through the sale of its assets, and it hasentered into a contract to sell one of the five buildings currently included inits portfolio.  If that sale is consummated,the general partners currently anticipate distributing the net proceeds of thesale to the limited partners and would also consider reducing the normaldistribution to reflect the reduction of income resulting from the dispositionof this asset and resulting higher operating costs relative to revenues.

 

Behringer HarvardOpportunity REIT I, Inc. has maintained its 3% annualized rate, but movedfrom monthly to quarterly distributions. The regular distribution of Behringer Harvard Short-Term OpportunityFund I LP was discontinued beginning with the third quarter of 2009.  Behringer Harvard Opportunity REIT I andBehringer Harvard Mid-Term Value Enhancement Fund I have each indicated thattheir focus in the current environment is on capital preservation and that theymay reduce their distribution rates or cease paying distributions.

 

In March 2009,to conserve capital, Behringer Harvard Opportunity REIT I suspended its shareredemption program except for redemptions requested by shareholders by reasonof death, disability, or confinement to long-term care.  Behringer Harvard Opportunity REIT I mayfurther limit or suspend redemptions.  Inconnection with their announcements of their intention to enter their portfolioliquidation phase in December 2006, Behringer Harvard Mid-Term ValueEnhancement Fund I and Behringer Harvard Short-Term Opportunity Fund Iterminated their redemption programs (as well as their distributionreinvestment plans).

 

The recession hasalso negatively impacted the operating performance of Behringer HarvardOpportunity REIT I.  Cash flow fromoperating activities has been insufficient to fund both the net cash requiredto fund

 

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distributions and thecapital requirements of its properties. As a result, a portion of the net cash required for distributions andcapital expenditures of this REIT was funded from its cash on hand, includingproceeds from its offerings and/or borrowings.

 

*EstimatedValuations.*** **Both Behringer Harvard Mid-Term Value Enhancement Iand Behringer Harvard Short-Term Opportunity Fund I announced estimatedvaluations as of December 31, 2009 of $7.09 and $6.45 per unit,respectively, of their limited partner units. Behringer Harvard Opportunity REIT I announced estimated valuations ofits common stock of $8.17 per share as of June 30, 2009 and $8.03 as of December 31,2009.  Each of these units and shareswere originally sold in their best efforts public offerings for a grossoffering price of $10.00.

 

As with any valuationmethodology, the methodologies used by the Behringer Harvard-sponsoredinvestment programs utilize a number of estimates and assumptions.  Parties using different assumptions andestimates could derive a different estimated value and these differences couldbe significant.  The estimated values pershare or unit were adopted pursuant to the specific valuation policies of theseinvestment programs and do not represent the fair value of the shares or unitscalculated in accordance with GAAP or the price at which such shares or unitswould trade on a national securities exchange. The valuation policies and the announcements of estimated values forthese programs should be reviewed for additional information and limitations.

 

*Waiver ofFees and Expenses*.  Behringer Harvard Holdings and its affiliateshave from time to time waived fees and expenses due from their sponsoredinvestment programs.  In 2009, BehringerHarvard Holdings entities waived asset management fees and reimbursement ofoperating expenses of approximately $31,000 and $301,000, respectively, owed byBehringer Harvard Short-Term Opportunity Fund I, asset management fees andreimbursement of operating expenses of approximately $70,000 and $187,000,respectively, owed by Behringer Harvard Strategic Opportunity Fund I LP (aprivately offered program), and asset management fees and reimbursement ofoperating expenses of approximately $172,000 and $161,000, respectively, owedby Behringer Harvard Strategic Opportunity Fund II LP (also a privately offeredprogram).  In addition, Behringer HarvardHoldings entities waived property management oversight fees of approximately$161,000 owed by Behringer Harvard Strategic Opportunity Fund II LP.  There is no assurance that Behringer HarvardHoldings or its affiliated entities will waive or defer fees or expenses duefrom its sponsored investment programs in the future.

 

*Impairments. *Under GAAP, Behringer Harvard-sponsored investmentprograms consider the applicability of any financial statement impairments ofthe assets that they own.  As a result ofadverse economic conditions beginning in 2008 and continuing through 2009,Behringer Harvard Opportunity REIT I has taken impairments of approximately$19.4 million during the fiscal year ended December 31, 2008 and expectsto take impairments in excess of $10.0 million during the fiscal year endedDecember 31,2009.  In addition, BehringerHarvard Opportunity REIT I has made mezzanine loans to develop two multifamilycommunities, which it has determined meet the criteria of “variable interestentities” under GAAP.  Therefore,Behringer Harvard Opportunity REIT I consolidates these entities, including therelated real estate assets and third party construction financing, on itsfinancial statements.  As of December 31,2009, the outstanding principal balance of these mezzanine loans wasapproximately $22.7 million plus accrued interest, which was eliminated uponconsolidation.  As of December 31,2009, Behringer Harvard Opportunity REIT I believes that all of the amounts dueunder the mezzanine loans may not be collectible and, to the extent that itwould in the future deconsolidate the investments, it would recognize animpairment of the mezzanine loans.  Also,for the years ended December 31, 2007 and 2008 Behringer HarvardShort-Term Opportunity Fund I recognized inventory valuation adjustments ofapproximately $2.4 million and $16.8 million, respectively, and expects torecognize inventory valuation adjustments of approximately $0.5 million for thefiscal year ended December 31, 2009. 

 

*Financings. *The recent turbulent financial markets and disruptionin the banking system, as well as the nationwide economic downturn, havecreated a severe lack of credit, rising costs of any debt that is available andreluctance by lenders to lend as large a percentage of debt to equity than inprior periods.  These market disruptionshave adversely affected all of the Behringer Harvard investment programs thatsubstantially completed their equity offerings at or prior to the end of 2008(except Behringer Harvard Mid-Term Value Enhancement Fund I which incurredno debt).  These investment programs haveexperienced property loan maturities that have not been refinanced or that havebeen refinanced at reduced values requiring additional collateral or equityand/or at higher interest rates or loan defaults related to certain of theirassets.  These programs are working withtheir lenders to replace, extend, or restructure debt arrangements as theymature or to purchase or pay off the debt at discounted amounts.  To date, these investment programs have hadsuccess in these activities.  Theseinvestment programs each intend to continue with their efforts to manage theirdebt arrangements topreserve value for their investors but there is no assurances that theywill be able retain all of their assets as mortgage loans mature.

 

*Sponsor Activities. *Behringer Harvard Holding entities have also extendedloans to Behringer Harvard Short-Term Opportunity Fund I, Behringer HarvardStrategic Opportunity Fund I and Behringer Harvard Strategic Opportunity FundII.  The outstanding principal balance ofthese loans as of December 31, 2009 was approximately $13.9 million (netof the loan forgiveness described below), $10.8 million and $13.2 million,respectively.  On December 31, 2007and 2009, Behringer Harvard Holdings forgave approximately $7.5 million and$15.0 million, respectively, of principal loans and all interest thereon owedby Behringer Harvard Short-Term Opportunity Fund I, which was accounted for asa capital contribution by its

 

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general partners. Behringer Harvard Holdings has also leased vacant space at certain of theTIC Programs discussed below.  There isno assurance that Behringer Harvard Holdings or its affiliated entities will engagein such activities with respect to its sponsored investment programs in thefuture.

 

*Co-InvestorArrangements. *Behringer Harvard Holdings sponsoredprivate offerings from 2003 through 2005 for eight single asset co-investmentarrangements structured as tenant-in-common programs (“TIC Programs”).  Behringer Harvard Strategic Opportunity FundI sponsored one TIC Program.  As of December 31,2009, we had acquired all TIC interests where we had been the largest TIC ownerin four TIC Programs and remained the largest tenant-in-common investor in twoTIC Programs.  Behringer HarvardStrategic Opportunity Fund I owns a tenant-in-common interest in the one TICProgram it sponsored, and the remaining TIC Program is owned bytenant-in-common investors with a small interest owned by Behringer HarvardHoldings.  The remaining TIC Program soldits property in 2008.

 

Investors in five of theTIC Programs received a positive total return on their investment includinginvestors in one TIC Program who received a total return above what wasprojected in its private placement offering memorandum.  In general, the recession has adverselyaffected the operating performance of the remaining four TIC Programs.  One of the TIC Programs is underperformingrelative to projections substantially due to representations made by the sellerand its agents related to its operating expenses and revenues that BehringerHarvard Holdings believes to be false. Behringer Harvard Holdings is currently engaged in a lawsuit where ithas received settlements for the TIC investors while it remains in dispute withthe former on-site property manager.  Thetenant-in-common investors have received substantial settlement considerationand are no longer party to this suit.

 

Several BehringerHarvard-sponsored investment programs have made portfolio investments underco-investment arrangements, generally as partnerships.  Certain of these co-investors have threatenedclaims against these investment programs and their sponsor where currenteconomic conditions have resulted in these investments underperforming expectations.  Other than as to Behringer HarvardOpportunity REIT I that has been sued by a co-investor in one suchcircumstance, none of these threats have resulted in lawsuits.  While there is not believed to be any meritin this lawsuit or any of the threats, the defense and any settlement of theseclaims may negatively impact returns to the investors in these investmentprograms.

 

**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 December 2007,the Financial Accounting Standards Board (“FASB”) issued authoritative guidanceon business combinations.  This guidance makes certain modifications toprevious standards, including a broader definition of a business, recognitionrequirements for contractual and certain noncontractual contingencies, gainrecognition resulting from a bargain purchase and the requirement thatacquisition-related costs be expensed as incurred. The acquisition of a realestate property has been determined to meet the definition of a businesscombination as defined in this guidance. Weadopted thisguidance on January 1, 2009 and expect that it will have a material effecton our accounting for future acquisitions of properties, if any, primarily asacquisition costs will no longer be capitalized, but will be expensed.

 

In December 2007,the FASB issued authoritative guidance on noncontrolling interests.  Thisguidance clarifies that a noncontrolling interest in a subsidiary, which issometimes referred to as minority interest, is an ownership interest in the consolidatedentity that should be reported as equity in the consolidated financialstatements.  Among other requirements, this guidance requires consolidatednet income to be reported, on the face of the consolidated income statement, atamounts that include the amounts attributable to both the parent and thenoncontrolling interest.  Our adoption of this guidance on January 1,2009 increased our total equity by approximately $17.9 million for the yearended December 31, 2008.  Net income(loss) no longer includes an allocation of income or losses to noncontrollinginterests.  Income available to commonstockholders was not affected.

 

In March 2008, theFASB issued authoritative guidance on disclosures about derivative instrumentsand hedging activities.  This guidance requires entities to providegreater transparency about how and why the entity uses derivative instruments,how the instruments and related hedged items are accounted for, and how theinstruments and related hedged items affect the financial position, results ofoperations, and cash flows of the entity.   We adopted this guidanceon January 1, 2009, and have included the required disclosures in theaccompanying notes to our financial statements in this Annual Report on Form 10-K.

 

In April 2009, theFASB issued additional authoritative guidance for estimating fair value whenthe volume and level of activity for the asset or liability have significantlydecreased.   We adopted this guidance on April 1, 2009, and itdid not have a material effect on our consolidated financial statements.

 

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In April 2009, theFASB issued authoritative guidance requiring an entity to provide disclosuresabout fair value of financial instruments in interim financialinformation.  We adopted this guidance onApril 1, 2009 and have included the required disclosures in theaccompanying notes to our interim financial statements issued subsequent to ouradoption of the guidance.

 

In May 2009, theFASB issued authoritative guidance for subsequent events.  This guidance establishes general standardsof accounting for and disclosure of events that occur after the balance sheetdate but before financial statements are issued or are available to beissued.  We adopted this guidance on April 1,2009 and have included the required disclosures in the accompanying notes toour financial statements in this Annual Report on Form 10-K.

 

In June 2009, theFASB issued authoritative guidance on the consolidation of a VIE.  The new guidance requires revised evaluationsof whether entities represent variable interest entities, ongoing assessmentsof control over such entities, and additional disclosures for variableinterests. This guidance is effective for interim and annual periods beginningafter November 15, 2009 with early adoption prohibited.  The adoption of this new guidance will nothave a material impact on our financial statements.

 

**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 QualitativeDisclosures About Market Risk.**

 

We are exposed tointerest rate changes primarily as a result of our 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 what webelieve are the lowest margins available and in some cases, the ability toconvert variable rates to fixed rates. With regard to variable rate financing,we will assess interest rate cash flow risk by continually identifying andmonitoring changes in interest rate exposures that may adversely impactexpected future cash flows and by evaluating hedging opportunities.  We have entered into derivative financialinstruments to mitigate our interest rate risk on certain financial instrumentsand effectively fix the interest rate portion of our variable rate debt.

 

Of our approximately $3.0billion in notes payable at December 31, 2009, approximately $150.0million represented debt bearing interest at variable rates, but which hasinterest rate swap agreements hedging against rises in interest costs.  As a result of the interest rate swapagreements, the $150.0 million variable rate debt effectively bears interest atfixed rates.  A 100 basis point decreasein interest rates would result in a net decrease in the fair value of ourinterest rate swaps of approximately $0.8 million.  A 100 basis point increase in interest rateswould result in a net increase in the fair value of our interest rate swaps ofapproximately $1.4 million.

 

We do not have anyforeign operations and thus are not exposed to foreign currency fluctuations.

 

**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.

 

**Item 9A(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, 2009, 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, 2009, 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 isresponsible for establishing and maintaining adequate internal control overfinancial reporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)).  Our management, includingour Chief Executive Officer and Chief Financial Officer, evaluated as of December 31,2009, the effectiveness of our internal control over financial reporting usingthe framework in *Internal Control — Integrated Framework*issuedby the Committee of Sponsoring Organizations of the Treadway Commission.  Based on that evaluation, our management,including our Chief Executive Officer and Chief Financial Officer, concludedthat our internal controls, as of December 31, 2009, were effective inproviding reasonable assurance regarding 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 on Form 10-K.

 

*Changesin Internal Control over Financial Reporting*

 

There has been nochange in internal control over financial reporting that occurred during thequarter ended December 31, 2009 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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

 

***Annual Meeting of Stockholders***

 

TheCompany held its Annual Meeting of Stockholders on October 29, 2009.  At the meeting, stockholders elected fivedirectors.

 

Theaffirmative vote of the holders of a majority of the outstanding shares ofcommon stock represented at the meeting was required to elect each director,and all nominees standing for election were elected.  Results of the voting in connection with theelection of directors were as follows:

 
| ** **           | ** ** | ** **  | ** ** | **Withheld**  | ** ** |
|----------------------|------------|-------------|------------|---------------|------------|
| **Nominee**          | ** ** | **For**     | ** ** | **Authority** | ** ** |
| Robert  M. Behringer |       | 141,574,088 |       | 5,541,078     |       |
| Robert  S. Aisner    |       | 141,431,179 |       | 5,683,987     |       |
| Charles  G. Dannis   |       | 141,586,496 |       | 5,528,670     |       |
| Steven  W. Partridge |       | 141,549,748 |       | 5,565,418     |       |
| G.  Ronald Witten    |       | 141,477,431 |       | 5,637,736     |       |

 

Noother matters were submitted to a vote of security holders at the meeting.

 

***Distributions***

 

On March 11,2010, our board of directors authorized a distribution payable to stockholdersof record on March 31, 2010.  The distribution will be paid in cashon or before April 16, 2010.  The declared distribution equals amonthly amount of $0.0271 per share of common stock, which is equivalent to anannual distribution rate of 3.25% on a purchase price of $10.00 pershare.  Distributions are authorized at the discretion of our board ofdirectors based on its analysis of numerous factors, including but not limitedto our forthcoming cash needs, and there is no assurance that distributionswill continue or at any particular rate.  All or a portion of thedistribution may constitute return of capital for tax purposes.

 

Thegeneral indicators of performance in the commercial office market havecontinued to be weak as a result of the global recession and the inherentlagging nature of office recovery comparative to the broader economy.  Inthis environment, rental concessions to keep assets leased along with increasedcapital expenditures in the form of tenant improvements and leasing commissionshave the effect of reducing cash available for distributions.  The boardof directors continues to monitor these and other indicators consistent withits previously stated objective of preserving equity and capital for ourstockholders.

 

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**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 23, 2010, which is expected tobe filed with the Securities and Exchange Commission prior to April 30,2010, 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 23, 2010, which is expected tobe filed with the Securities and Exchange Commission prior to April 30,2010, and is incorporated herein by reference.

 

**Item 12.****                                                   ****Security Ownership of CertainBeneficial Owners 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 23, 2010, which is expected tobe filed with the Securities and Exchange Commission prior to April 30,2010, 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 23, 2010, which is expected tobe filed with the Securities and Exchange Commission prior to April 30,2010, 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 23, 2010, which is expected tobe filed with the Securities and Exchange Commission prior to April 30,2010, and is incorporated herein by reference.

 

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**PART IV**

 

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

 

(a)                                 *List of Documents Filed.*

 

1.                                      *Financial Statements*

 

The list of thefinancial statements filed as part of this Annual Report on Form 10-K isset forth on page F-1 herein.

 

2.*                                     **Financial Statement Schedules*

 

Report of Independent Registered Public Accounting Firm

 

Schedule II Valuation and Qualifying Accounts

 

Schedule III Real Estate and Accumulated Depreciation

 

Schedule IV Mortgage Loans on Real Estate

 

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 in response to Item601 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, III and IV (see (a) 2. above),have been omitted because the required information of such schedules is notpresent, is not present in amounts sufficient to require a schedule or isincluded in the financial statements.

 

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**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 17, 2010 | By:                                     | /s/ Robert S. Aisner |
|                                         |                                    | Robert S. Aisner |
|                                         |                                    | Chief Executive Officer |

 

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 17, 2010 | /s/ Robert M. Behringer               |
|---------------------|---------------------------------------|
|                | Robert M. Behringer                   |
|                | Chairman of the Board  of Directors   |
|                |                                  |
| March 17, 2010 | /s/ Robert S. Aisner                  |
|                | Robert S. Aisner                      |
|                | Chief Executive Officer  and Director |
|                | (Principal Executive  Officer)        |
|                |                                  |
| March 17, 2010 | /s/ Michael A. Ernst                  |
|                | Michael A. Ernst                      |
|                | Chief Financial Officer               |
|                | (Principal Financial  Officer)        |
|                |                                  |
| March 17, 2010 | /s/ Scott W. Fordham                  |
|                | Scott W. Fordham                      |
|                | Chief Accounting  Officer             |
|                | (Principal Accounting  Officer)       |
|                |                                  |
| March 17, 2010 | /s/ Charles G. Dannis                 |
|                | Charles G. Dannis                     |
|                | Director                              |
|                |                                  |
| March 17, 2010 | /s/ Steven W. Partridge               |
|                | Steven W. Partridge                   |
|                | Director                              |
|                |                                  |
| March 17, 2010 | /s/ G. Ronald Witten                  |
|                | G. Ronald Witten                      |
|                | Director                              |

 

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**INDEX TOCONSOLIDATED FINANCIAL STATEMENTS**

 
| ** **                                                                                                               | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                     |       |     |
| **Financial Statements**                                                                                                 |       |     |
|                                                                                                                     |       |     |
| Report  of Independent Registered Public Accounting Firm                                                                 |       | F-2      |
|                                                                                                                     |       |     |
| Consolidated  Balance Sheets as of December 31, 2009 and 2008                                                       |       | F-3      |
|                                                                                                                     |       |     |
| Consolidated  Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2009, 2008 and  2007 |       | F-4      |
|                                                                                                                     |       |     |
| Consolidated  Statements of Equity for the Years Ended December 31,  2009, 2008 and 2007                       |       | F-5      |
|                                                                                                                     |       |     |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007                         |       | F-6      |
|                                                                                                                     |       |     |
| Notes to Consolidated Financial Statements                                                                               |       | F-7      |
|                                                                                                                     |       |     |
| **Financial Statement Schedules**                                                                                        |       |     |
|                                                                                                                     |       |     |
| Report of Independent Registered Public Accounting  Firm                                                                 |       | F-29     |
|                                                                                                                     |       |     |
| Schedule II –  Valuation and Qualifying Accounts                                                                    |       | F-30     |
|                                                                                                                     |       |     |
| Schedule III –  Real Estate and Accumulated Depreciation                                                            |       | F-31     |
|                                                                                                                     |       |     |
| Schedule IV –  Mortgage Loans on Real Estate                                                                        |       | F-34     |

 

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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 31,2009 and 2008 and the related consolidated statements of operations andcomprehensive loss, equity and cash flows for each of the three years in theperiod ended December 31, 2009. These financial statements are theresponsibility of the Company’s management.  Our responsibility is toexpress an opinion on these financial statements based on our 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.  TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal 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 31,2009 and 2008, and the results of its operations and its cash flows for each ofthe three years in the period ended December 31, 2009, in conformity withaccounting principles generally accepted in the United States of America.

 

As discussed in Note 3 tothe consolidated financial statements, on January 1, 2009, the Companychanged its method of accounting for noncontrolling interests andretrospectively adjusted all periods presented in the consolidated financialstatements.

 

 

/s/ Deloitte & Touche LLP

 

Dallas, Texas

March 17, 2010

 

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**BehringerHarvard REIT I, Inc.**

**Consolidated Balance Sheets**

**Asof December 31, 2009 and 2008**

**(inthousands, except share and per share amounts)**

 
| ** **                                                                                                                                                                                               | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                               | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                                                                               |       |                  |       |                  |       |
| **Real estate**                                                                                                                                                                                          |       |                  |       |                  |       |
| Land                                                                                                                                                                                                     |       | $                     | 507,061    |                  | $          | 546,700 |   |
| Buildings,  net                                                                                                                                                                                          |       | 3,254,708             |       | 3,529,309             |       |
| Real  estate under development                                                                                                                                                                           |       | —                |       | 28,924                |       |
| **Total real estate**                                                                                                                                                                                    |       | 3,761,769             |       | 4,104,933             |       |
|                                                                                                                                                                                                     |       |                  |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                               |       | 179,583               |       | 337,458               |       |
| Restricted  cash                                                                                                                                                                                         |       | 126,470               |       | 201,546               |       |
| Accounts  receivable, net                                                                                                                                                                                |       | 89,505                |       | 96,579                |       |
| Prepaid  expenses and other assets                                                                                                                                                                       |       | 9,455                 |       | 9,213                 |       |
| Goodwill                                                                                                                                                                                                 |       | 11,539                |       | 11,655                |       |
| Investments  in unconsolidated entities                                                                                                                                                                  |       | 74,990                |       | 77,256                |       |
| Deferred  financing fees, net                                                                                                                                                                            |       | 24,622                |       | 34,229                |       |
| Notes  receivable                                                                                                                                                                                        |       | 11,002                |       | 13,089                |       |
| Lease  intangibles, net                                                                                                                                                                                  |       | 391,705               |       | 522,642               |       |
| **Total assets**                                                                                                                                                                                         |       | $                     | 4,680,640  |                  | $          | 5,408,600 |   |
|                                                                                                                                                                                                     |       |                  |       |                  |       |
| **Liabilities and equity**                                                                                                                                                                               |       |                  |       |                  |       |
|                                                                                                                                                                                                     |       |                  |       |                  |       |
| **Liabilities**                                                                                                                                                                                          |       |                  |       |                  |       |
| Notes  payable                                                                                                                                                                                           |       | $                     | 2,973,617  |                  | $          | 3,066,529 |   |
| Accounts  payable                                                                                                                                                                                        |       | 2,247                 |       | 13,596                |       |
| Payables  to related parties                                                                                                                                                                             |       | 1,892                 |       | 8,300                 |       |
| Acquired  below-market leases, net                                                                                                                                                                       |       | 122,150               |       | 152,870               |       |
| Distributions  payable                                                                                                                                                                                   |       | 7,938                 |       | 15,910                |       |
| Accrued  liabilities                                                                                                                                                                                     |       | 122,374               |       | 125,986               |       |
| Debentures                                                                                                                                                                                               |       | —                |       | 51,653                |       |
| Deferred  tax liabilities                                                                                                                                                                                |       | 1,424                 |       | 3,450                 |       |
| Other  liabilities                                                                                                                                                                                       |       | 21,689                |       | 25,764                |       |
| **Total liabilities**                                                                                                                                                                                    |       | 3,253,331             |       | 3,464,058             |       |
|                                                                                                                                                                                                     |       |                  |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                        |       |                  |       |                  |       |
|                                                                                                                                                                                                     |       |                  |       |                  |       |
| **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, 292,493,778  and 288,807,752 shares issued and outstanding at December 31, 2009 and  December 31, 2008, respectively |       | 29                    |       | 29                    |       |
| Additional  paid-in capital                                                                                                                                                                              |       | 2,612,961             |       | 2,579,030             |       |
| Cumulative  distributions and net loss                                                                                                                                                                   |       | (1,190,133            | )          | (641,704              | )          |
| Accumulated  other comprehensive loss                                                                                                                                                                    |       | (4,718                | )          | (10,747               | )          |
| **Behringer Harvard REIT I, Inc. stockholders’ equity**                                                                                                                                        |       | 1,418,139             |       | 1,926,608             |       |
| **Noncontrolling interest**                                                                                                                                                                              |       | 9,170                 |       | 17,934                |       |
| **Total equity**                                                                                                                                                                                         |       | 1,427,309             |       | 1,944,542             |       |
| **Total liabilities and equity**                                                                                                                                                                         |       | $                     | 4,680,640  |                  | $          | 5,408,600 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

F-3

----

Table ofContents

 

**BehringerHarvard REIT I, Inc.**

**Consolidated Statements of Operationsand Comprehensive Loss**

**Forthe Years Ended December 31, 2009, 2008 and 2007**

**(inthousands, except share and per share amounts)**

 
| ** **                                                                                                             | ** ** | **2009**    | ** ** | **2008**    | ** ** | **2007**    | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                                             |       |        |       |        |       |        |       |
| **Rental revenue**                                                                                                     |       | $           | 598,056    |        | $          | 600,624     |       | $ | 304,484 |   |
|                                                                                                                   |       |        |       |        |       |        |       |
| **Expenses**                                                                                                           |       |        |       |        |       |        |       |
| Property  operating expenses                                                                                           |       | 184,254     |       | 167,076     |       | 74,120      |       |
| Interest  expense                                                                                                      |       | 187,116     |       | 189,753     |       | 99,203      |       |
| Real  estate taxes                                                                                                     |       | 84,628      |       | 78,286      |       | 42,101      |       |
| Property  management fees                                                                                              |       | 17,461      |       | 17,370      |       | 9,069       |       |
| Asset  management fees                                                                                                 |       | 21,891      |       | 27,811      |       | 13,324      |       |
| Loss  on contract termination                                                                                          |       | —      |       | 5,000       |       | —      |       |
| Asset  impairment losses                                                                                               |       | 241,239     |       | 21,114      |       | —      |       |
| General  and administrative                                                                                            |       | 11,122      |       | 7,333       |       | 2,969       |       |
| Depreciation  and amortization                                                                                         |       | 272,165     |       | 275,337     |       | 137,417     |       |
| **Total expenses**                                                                                                     |       | 1,019,876   |       | 789,080     |       | 378,203     |       |
|                                                                                                                   |       |        |       |        |       |        |       |
| Interest  income                                                                                                       |       | 3,307       |       | 7,027       |       | 25,525      |       |
| Gain  (loss) on early extinguishment of debt                                                                           |       | (4,477      | )          | 1,258       |       | —      |       |
| **Loss from continuing operations before income taxes, equity  in earnings of investments and gain on sale of assets** |       | (422,990    | )          | (180,171    | )          | (48,194     | )          |
|                                                                                                                   |       |        |       |        |       |        |       |
| Benefit  (provision) for income taxes                                                                                  |       | 1,384       |       | (892        | )          | (571        | )          |
| Equity  in earnings of investments                                                                                     |       | 284         |       | 1,331       |       | 5,117       |       |
| **Loss from continuing operations**                                                                                    |       | (421,322    | )          | (179,732    | )          | (43,648     | )          |
|                                                                                                                   |       |        |       |        |       |        |       |
| **Discontinued operations:**                                                                                           |       |        |       |        |       |        |       |
|                                                                                                                   |       |        |       |        |       |        |       |
| Income  (loss) from discontinued operations                                                                            |       | (17,765     | )          | (2,309      | )          | 1,989       |       |
| Gain  on sale of discontinued operations                                                                               |       | —      |       | 16,136      |       | —      |       |
| **Income (loss) from discontinued operations**                                                                         |       | (17,765     | )          | 13,827      |       | 1,989       |       |
|                                                                                                                   |       |        |       |        |       |        |       |
| Gain  on sale of assets                                                                                                |       | —      |       | 5,253       |       | 44          |       |
|                                                                                                                   |       |        |       |        |       |        |       |
| **Net loss**                                                                                                           |       | (439,087    | )          | (160,652    | )          | (41,615     | )          |
|                                                                                                                   |       |        |       |        |       |        |       |
| **Net (income) loss attributable to noncontrolling interest**                                                          |       |        |       |        |       |        |       |
| Noncontrolling  interest in continuing operations                                                                      |       | 5,915       |       | 259         |       | (7          | )          |
| Noncontrolling  interest in discontinued operations                                                                    |       | 2,540       |       | (28         | )          | (9          | )          |
|                                                                                                                   |       |        |       |        |       |        |       |
| **Net loss attributable to common stockholders**                                                                       |       | $           | (430,632   | )           | $          | (160,421    | )          | $ | (41,631 | ) |
|                                                                                                                   |       |        |       |        |       |        |       |
| **Basic and diluted weighted****average shares  outstanding**                                                          |       | 291,738,617 |       | 240,187,641 |       | 171,544,399 |       |
|                                                                                                                   |       |        |       |        |       |        |       |
| **Basic and diluted net loss attributable to common  stockholders per share:**                                         |       |        |       |        |       |        |       |
| Continuing  operations                                                                                                 |       | $           | (1.42      | )           | $          | (0.73       | )          | $ | (0.25 | ) |
| Discontinued  operations                                                                                               |       | (0.05       | )          | 0.06        |       | 0.01        |       |
| **Basic and diluted loss per share**                                                                                   |       | $           | (1.47      | )           | $          | (0.67       | )          | $ | (0.24 | ) |
|                                                                                                                   |       |        |       |        |       |        |       |
| **Amounts attributable to common stockholders:**                                                                       |       |        |       |        |       |        |       |
| Continuing  operations                                                                                                 |       | $           | (415,407   | )           | $          | (174,220    | )          | $ | (43,611 | ) |
| Discontinued  operations                                                                                               |       | (15,225     | )          | 13,799      |       | 1,980       |       |
| **Net loss attributable to common stockholders**                                                                       |       | $           | (430,632   | )           | $          | (160,421    | )          | $ | (41,631 | ) |
|                                                                                                                   |       |        |       |        |       |        |       |
| **Comprehensive loss:**                                                                                                |       |        |       |        |       |        |       |
| Net  loss                                                                                                              |       | $           | (439,087   | )           | $          | (160,652    | )          | $ | (41,615 | ) |
| Other  comprehensive income:                                                                                           |       |        |       |        |       |        |       |
| Reclassification  of unrealized loss on interest rate swap to earnings                                                 |       | 3,649       |       | —      |       | —      |       |
| Unrealized  gain (loss) on interest rate swap                                                                          |       | 2,388       |       | (9,373      | )          | (1,374      | )          |
| Total  other comprehensive income (loss)                                                                               |       | 6,037       |       | (9,373      | )          | (1,374      | )          |
|                                                                                                                   |       |        |       |        |       |        |       |
| Comprehensive  loss                                                                                                    |       | (433,050    | )          | (170,025    | )          | (42,989     | )          |
| Comprehensive  loss attributable to noncontrolling interest                                                            |       | 8,447       |       | 231         |       | (16         | )          |
| Comprehensive  loss attributable to common stockholders                                                                |       | $           | (424,603   | )           | $          | (169,794    | )          | $ | (43,005 | ) |

 

*SeeNotes to Consolidated Financial Statements.*

 

F-4

----

Tableof Contents

 

**BehringerHarvard REIT I, Inc.**

**Consolidated Statements of Equity**

**Forthe Years Ended December 31, 2009, 2008 and 2007**

**(inthousands)**

 
| ** **                                                              | ** ** | ** **             | ** ** | ** **        | ** ** | ** **     | ** ** | ** **               | ** ** | ** **  | ** ** | **Cumulative**    | ** ** | ** **        | ** ** | ** **         | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|-------------|------------|-------------------|------------|-------------------|------------|--------------------|------------|------------|------------|
| ** **                                                              | ** ** | ** **             | ** ** | ** **        | ** ** | ** **     | ** ** | ** **               | ** ** | ** **  | ** ** | **Distributions** | ** ** | ** **        | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | ** **             | ** ** | ** **        | ** ** | ** **     | ** ** | ** **               | ** ** | ** **  | ** ** | **and**           | ** ** | ** **        | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | ** **             | ** ** | ** **        | ** ** | ** **     | ** ** | ** **               | ** ** | ** **  | ** ** | **Net Loss**      | ** ** | **Accumulated**   | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **                                                              | ** ** | **Convertible  Stock** | ** ** | **Common  Stock** | ** ** | **Additional** | ** ** | **Attributable to** | ** ** | **Other**   | ** ** | ** **        | ** ** | ** **        | ** ** |
| ** **                                                              | ** ** | **Number**             | ** ** | **Par**           | ** ** | **Number**     | ** ** | **Par**                  | ** ** | **Paid-in** | ** ** | **Common**        | ** ** | **Comprehensive** | ** ** | **Noncontrolling** | ** ** | **Total**  | ** ** |
| ** **                                                              | ** ** | **of  Shares**         | ** ** | **Value**         | ** ** | **of  Shares** | ** ** | **Value**                | ** ** | **Capital** | ** ** | **Stockholders**  | ** ** | **Loss**          | ** ** | **Interest**       | ** ** | **Equity** | ** ** |
| Balance  at January 1, 2007                                        |       | 1                      |       | $                 | —     |           | 121,884    |                     | $          | 12          |       | $                 | 1,085,806  |              | $          | (171,376           | )          | $          | —     |   | $ | 3,072 |   | $ | 917,514 |   |
|                                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Comprehensive  loss:                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Net  income (loss)                                                      |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | (41,631           | )          | —            |       | 16                 |       | (41,615    | )          |
| Unrealized  loss on interest rate swap                                  |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | —            |       | (1,374            | )          | —             |       | (1,374     | )          |
| Total  comprehensive loss                                               |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | (41,631           | )          | (1,374            | )          | 16                 |       | (42,989    | )          |
|                                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Issuance  of common stock, net                                          |       | —                 |       | —            |       | 80,029         |       | 9                        |       | 712,756     |       | —            |       | —            |       | —             |       | 712,765    |       |
| Redemption  of common stock                                             |       | —                 |       | —            |       | (2,291         | )          | —                   |       | (19,984     | )          | —            |       | —            |       | —             |       | (19,984    | )          |
| Distributions  declared                                                 |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | (114,520          | )          | —            |       | (290               | )          | (114,810   | )          |
| Shares  issued pursuant to Distribution Reinvestment Plan, net          |       | —                 |       | —            |       | 5,941          |       | —                   |       | 55,899      |       | —            |       | —            |       | —             |       | 55,899     |       |
| Acquisition  value adjustment                                           |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | —            |       | —            |       | 15,251             |       | 15,251     |       |
|                                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Balance  at December 31, 2007                                      |       | 1                      |       | $                 | —     |           | 205,563    |                     | $          | 21          |       | $                 | 1,834,477  |              | $          | (327,527           | )          | $          | (1,374     | ) | $ | 18,049 |   | $ | 1,523,646 |   |
|                                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Comprehensive  loss:                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Net  loss                                                               |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | (160,421          | )          | —            |       | (231               | )          | (160,652   | )          |
| Unrealized  loss on interest rate swap                                  |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | —            |       | (9,373            | )          | —             |       | (9,373     | )          |
| Total  comprehensive loss                                               |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | (160,421          | )          | (9,373            | )          | (231               | )          | (170,025   | )          |
|                                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Issuance  of common stock, net                                          |       | —                 |       | —            |       | 78,556         |       | 8                        |       | 698,589     |       | —            |       | —            |       | —             |       | 698,597    |       |
| Redemption  of common stock                                             |       | —                 |       | —            |       | (3,710         | )          | —                   |       | (33,040     | )          | —            |       | —            |       | —             |       | (33,040    | )          |
| Distributions  declared                                                 |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | (153,756          | )          | —            |       | (661               | )          | (154,417   | )          |
| Shares  issued pursuant to Distribution Reinvestment Plan, net          |       | —                 |       | —            |       | 8,399          |       | —                   |       | 79,004      |       | —            |       | —            |       | —             |       | 79,004     |       |
| Acquisition  value adjustment                                           |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | —            |       | —            |       | 777                |       | 777        |       |
|                                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Balance  at December 31, 2008                                      |       | 1                      |       | $                 | —     |           | 288,808    |                     | $          | 29          |       | $                 | 2,579,030  |              | $          | (641,704           | )          | $          | (10,747    | ) | $ | 17,934 |   | $ | 1,944,542 |   |
|                                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Comprehensive  loss:                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Net  loss                                                               |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | (430,632          | )          | —            |       | (8,455             | )          | (439,087   | )          |
| Reclassifications  of unrealized loss on interest rate swap to earnings |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | —            |       | 3,644             |       | 5                  |       | 3,649      |       |
| Unrealized  gain on interest rate swap                                  |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | —            |       | 2,385             |       | 3                  |       | 2,388      |       |
| Total  comprehensive loss                                               |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | (430,632          | )          | 6,029             |       | (8,447             | )          | (433,050   | )          |
|                                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Redemption  of common stock                                             |       | —                 |       | —            |       | (3,250         | )          |                     |       | (31,633     | )          | —            |       | —            |       | —             |       | (31,633    | )          |
| Contributions  from noncontrolling interest                             |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | —            |       | —            |       | 27                 |       | 27         |       |
| Distributions  declared                                                 |       | —                 |       | —            |       | —         |       | —                   |       | —      |       | (117,797          | )          | —            |       | (344               | )          | (118,141   | )          |
| Shares  issued pursuant to Distribution Reinvestment Plan, net          |       | —                 |       | —            |       | 6,936          |       | —                   |       | 65,900      |       | —            |       | —            |       | —             |       | 65,900     |       |
| Costs  of share issuance                                                |       | —                 |       | —            |       | —         |       | —                   |       | (336        | )          | —            |       | —            |       | —             |       | (336       | )          |
|                                                                    |       |                   |       |              |       |           |       |                     |       |        |       |              |       |              |       |               |       |       |       |
| Balance  at December 31, 2009                                      |       | 1                      |       | $                 | —     |           | 292,494    |                     | $          | 29          |       | $                 | 2,612,961  |              | $          | (1,190,133         | )          | $          | (4,718     | ) | $ | 9,170 |   | $ | 1,427,309 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

F-5

----

Tableof Contents

 

**BehringerHarvard REIT I, Inc.**

**Consolidated Statements of Cash Flows**

**Forthe Years Ended December 31, 2009, 2008 and 2007**

**(inthousands)**

 
| ** **                                                                             | ** ** | **2009** | ** ** | **2008** | ** ** | **2007**   | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|
| **Cash flows from operating activities**                                               |       |     |       |     |       |       |       |
| Net  loss                                                                              |       | $        | (439,087   | )        | $          | (160,652   | )          | $ | (41,615 | ) |
| Adjustments  to reconcile net loss to net cash flows provided by operating activities: |       |     |       |     |       |       |       |
| Asset  impairment losses                                                               |       | 259,063  |       | 21,114   |       | —     |       |
| Gain  on sale of assets                                                                |       | —   |       | (5,253   | )          | (44        | )          |
| Gain  on sale of discontinued operations                                               |       | —   |       | (16,136  | )          | —     |       |
| (Gain)  loss on early extinguishment of debt                                           |       | 4,477    |       | (1,258   | )          | —     |       |
| Loss  on contract termination                                                          |       | —   |       | 5,000    |       | —     |       |
| Loss  on derivatives                                                                   |       | 2,296    |       | —   |       | —     |       |
| Depreciation  and amortization                                                         |       | 275,045  |       | 280,621  |       | 141,462    |       |
| Amortization  of lease intangibles                                                     |       | 1,549    |       | 1,653    |       | 1,322      |       |
| Amortization  of above/below market rent                                               |       | (12,463  | )          | (13,539  | )          | (10,054    | )          |
| Amortization  of deferred financing and mark-to-market costs                           |       | 8,405    |       | 8,851    |       | 1,872      |       |
| Interest  income capitalized to notes receivable                                       |       | (18      | )          | (77      | )          | (530       | )          |
| Equity  in earnings of investments                                                     |       | (284     | )          | (1,331   | )          | (5,117     | )          |
| Distributions  from investments                                                        |       | 1,068    |       | 1,331    |       | 5,117      |       |
| Change  in accounts receivable                                                         |       | (13,597  | )          | (25,375  | )          | (18,193    | )          |
| Change  in prepaid expenses and other assets                                           |       | (435     | )          | (1,654   | )          | 2,134      |       |
| Change  in lease commissions                                                           |       | (15,795  | )          | (12,109  | )          | (11,283    | )          |
| Change  in other lease intangibles                                                     |       | (403     | )          | (2,564   | )          | (2,703     | )          |
| Change  in accounts payable                                                            |       | 162      |       | (1,024   | )          | 2,502      |       |
| Change  in accrued liabilities                                                         |       | (3,447   | )          | (14,278  | )          | (1,981     | )          |
| Change  in payables to related parties                                                 |       | (3,526   | )          | 5,164    |       | 905        |       |
| **Cash provided by operating activities**                                              |       | 63,010   |       | 68,484   |       | 63,794     |       |
|                                                                                   |       |     |       |     |       |       |       |
| **Cash flows from investing activities**                                               |       |     |       |     |       |       |       |
| Return  of investments                                                                 |       | 1,482    |       | 8,306    |       | 5,812      |       |
| Purchases  of real estate                                                              |       | (2,477   | )          | (233,638 | )          | (895,701   | )          |
| Investments  in unconsolidated entities                                                |       | —   |       | (49      | )          | (4,430     | )          |
| Escrow  deposits, pre-acquisition and pre-disposition costs                            |       | —   |       | (5,000   | )          | (922       | )          |
| Capital  expenditures for real estate                                                  |       | (68,463  | )          | (56,058  | )          | (20,595    | )          |
| Capital  expenditures for real estate under development                                |       | (43,362  | )          | (12,244  | )          | (3,876     | )          |
| Investment  in variable rate demand notes                                              |       | —   |       | (80,000  | )          | —     |       |
| Proceeds  from investment in variable rate demand notes                                |       | —   |       | 80,000   |       | —     |       |
| Notes  receivable advances                                                             |       | —   |       | —   |       | (36,000    | )          |
| Proceeds  from notes receivable                                                        |       | 2,126    |       | 4        |       | 36,533     |       |
| Insurance  proceeds received                                                           |       | 16,000   |       | 5,057    |       | —     |       |
| Proceeds  from sale of discontinued operations                                         |       | 41,749   |       | 40,281   |       | —     |       |
| Change  in payables to related parties                                                 |       | —   |       | —   |       | (500       | )          |
| Proceeds  from sale of assets                                                          |       | —   |       | 6,628    |       | —     |       |
| Change  in restricted cash                                                             |       | 75,076   |       | 34,242   |       | (126,693   | )          |
| **Cash provided by (used in) investing activities**                                    |       | 22,131   |       | (212,471 | )          | (1,046,372 | )          |
|                                                                                   |       |     |       |     |       |       |       |
| **Cash flows from financing activities**                                               |       |     |       |     |       |       |       |
| Financing  costs                                                                       |       | (2,456   | )          | (1,328   | )          | (27,420    | )          |
| Proceeds  from notes payable                                                           |       | 150,000  |       | 280,000  |       | 340,000    |       |
| Payments  on notes payable                                                             |       | (242,660 | )          | (448,858 | )          | (2,102     | )          |
| Termination  of interest rate hedge                                                    |       | (2,101   | )          | —   |       | —     |       |
| Payments  on capital lease obligations                                                 |       | (74      | )          | (5,438   | )          | (24        | )          |
| Issuance  of common stock                                                              |       | —   |       | 782,540  |       | 799,125    |       |
| Redemptions  of common stock                                                           |       | (31,633  | )          | (33,040  | )          | (19,984    | )          |
| Offering  costs                                                                        |       | (337     | )          | (84,334  | )          | (86,208    | )          |
| Distributions                                                                          |       | (60,213  | )          | (70,454  | )          | (55,293    | )          |
| Contributions  from noncontrolling interest                                            |       | 27       |       | —   |       | —     |       |
| Conversion  of debentures                                                              |       | (52,891  | )          | (26,251  | )          | (270       | )          |
| Change  in subscriptions for common stock                                              |       | —   |       | (2,984   | )          | (232       | )          |
| Change  in subscription cash received                                                  |       | —   |       | 2,984    |       | 232        |       |
| Change  in payables to related parties                                                 |       | (678     | )          | (6,339   | )          | 4,753      |       |
| **Cash (used in) provided by financing activities**                                    |       | (243,016 | )          | 386,498  |       | 952,577    |       |
|                                                                                   |       |     |       |     |       |       |       |
| Net  change in cash and cash equivalents                                               |       | (157,875 | )          | 242,511  |       | (30,001    | )          |
| Cash  and cash equivalents at beginning of year                                        |       | 337,458  |       | 94,947   |       | 124,948    |       |
| Cash  and cash equivalents at end of year                                              |       | $        | 179,583    |     | $          | 337,458    |       | $ | 94,947 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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Tableof Contents

 

Behringer HarvardREIT I, Inc.Notes to Consolidated Financial Statements

 

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

 

***Organization***

 

Behringer Harvard REIT I, Inc.(which, along with our subsidiaries, may be referred to as the “Company,” “we,”“us,” or “our”) was incorporated in June 2002 as a Maryland corporationand has elected to be taxed, and currently qualifies, as a real estateinvestment trust, or REIT, for federal income tax purposes.  We operate institutional quality realestate.  In particular, we have focusedon acquiring institutional quality office properties that we believe havepremier business addresses, desirable locations and high quality construction,and offer personalized amenities, leased to highly creditworthy commercialtenants.  We have focused substantiallyall of our investments in institutional quality office properties, or indevelopment of these types of properties, located in metropolitan cities andsuburban markets in the United States. As of December 31, 2009, we owned interests in 73 office propertieslocated in 23 states and the District of Columbia.  The properties include 72 operatinginstitutional quality office buildings with office space that is currently 86%leased to tenants and one property, the initial development of which wascompleted in November 2009 but is currently unleased and not yetoperational.

 

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

 

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

 

***PublicOfferings***

 

We have completed threepublic offerings of our common stock at a price of $10.00 per share.  We terminated the third primary publicoffering on December 31, 2008 and terminated the Distribution ReinvestmentPlan (“DRP”) portion of our third public offering in January 2009.  We de-registered the remaining shares on March 31,2009.

 

On January 5, 2009,we commenced a public offering of up to 60,000,000 shares of common stockoffered at a price of $9.50 per share under our DRP pursuant to a RegistrationStatement on Form S-3 filed under the Securities Act.  We are offering shares under our DRP untilthe earlier of January 5, 2014 or the date we sell all $570 million worthof shares in this offering.  As of December 31,2009, we had raised a total of approximately $2.9 billion of gross offeringproceeds as a result of these offerings (inclusive of distributionreinvestments and net of redemptions).

 

As of December 31,2009, we had 292,493,778 shares of our common stock outstanding, which includes275,038,644 shares issued through our primary offerings, 5,521,002 sharesissued as a result of our 10% stock dividend in October 2005, 18,765,847shares issued through distribution reinvestment, and 22,000 shares issued toBehringer Harvard Holdings LLC (“Behringer Harvard Holdings”), offset by6,853,715 shares redeemed.  As of December 31,2009, we had no shares of preferred stock issued and outstanding and options topurchase 74,500 shares of common stock outstanding at a weighted averageexercise price of $9.29.  At December 31,2009, Behringer OP had 432,586 units of limited partnership interest held bythird parties, after giving effect to the 10% stock dividend issued October 1,2005.  These units of limited partnershipinterest are convertible into an equal number of shares of our commonstock.  We sold 1,000 shares of ournon-participating, non-voting convertible stock to Behringer Advisors for$1,000 on March 22, 2006.  Pursuantto its terms, the convertible stock is convertible into shares of our commonstock with a value equal to 15% of the amount by which (1) our enterprisevalue, including the total amount of distributions paid to our stockholders,exceeds (2) the sum of the aggregate capital invested by stockholders plusa 9% cumulative, non-compounded, annual return on such capital.  At the date of issuance of the shares ofconvertible stock, management determined the fair value under accountingprinciples generally accepted in the United States of America (“GAAP”) was lessthan the nominal value paid for the shares; therefore, the difference is notmaterial. The weighted average number of shares and earnings per share data foreach reported period throughout this report reflect the effects of the stockdividend issued on October 1, 2005.

 

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Behringer HarvardREIT I, Inc.Notes to Consolidated Financial Statements

 

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

 

Our common stock is notcurrently listed on a national exchange. However, between 2013 and 2017 management anticipates either listing thecommon stock on a national securities exchange or liquidating our assets.  Depending upon then prevailing marketconditions, it is the intention of our management to consider beginning theprocess of listing or liquidating prior to 2013.  In the event we do not obtain listing of ourcommon stock or complete the liquidation of our assets prior to 2017, ourcharter requires us to liquidate our assets, unless a majority of the board ofdirectors and a majority of the independent directors extend such date.

 

**2.****            ****Summary of Significant AccountingPolicies**

 

***Useof Estimates in the Preparation of Financial Statements***

 

The preparation offinancial statements in conformity with GAAP requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  These estimatesinclude such items as the purchase price allocation for real estateacquisitions, impairment of assets, depreciation and amortization and allowancefor doubtful accounts.  Actual resultscould differ from those estimates.

 

***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 based on applicable GAAP which requires theconsolidation of VIEs in which we are deemed to be the primary beneficiary.  If the interest in the entity is determinednot to be a VIE, then the entities are evaluated for consolidation based onlegal form, economic substance, and the extent to which we have control and/orsubstantive participating rights under the respective ownership agreement.

 

***RealEstate***

 

Upon theacquisition of real estate properties, we recognize the assets acquired, theliabilities assumed, and any noncontrolling interest as of the acquisitiondate, measured at their fair values.  Theacquisition date is the date on which we obtain control of the real estateproperty.  These assets acquired andliabilities assumed may consist of land, inclusive of associated rights,buildings, assumed debt, identified intangible assets and asset retirementobligations.  Identified intangibleassets generally consist of the above-market and below-market leases, in-placeleases, in-place tenant improvements, in-place leasing commissions and tenantrelationships.  Goodwill is recognized asof the acquisition date and measured as the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree overthe fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain is recognizedin current earnings when the aggregate fair value of the considerationtransferred and any noncontrolling interests in the acquiree is less than thefair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in theperiod incurred.

 

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

 

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 isdepreciated over the estimated useful life of 25 years using the straight-linemethod.

 

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 at the date ofthe assumption.  Any difference betweenthe fair value and stated value of the assumed debt is recorded as a discountor premium and amortized over the remaining life of the loan using theeffective interest method.

 

We determine the value ofabove-market and below-market leases for acquired properties based on thepresent value (using an interest rate that reflects the risks associated withthe leases acquired) of the difference between (1) the contractual amountsto be paid pursuant to the in-place leases and (2) management’s estimateof current market lease rates for the corresponding in-place leases, measuredover a period equal to (a) the remaining non-cancelable lease term forabove-market leases, or (b) the remaining non-cancelable lease term plusany fixed rate renewal options for below-market

 

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Behringer HarvardREIT I, Inc.Notes to Consolidated Financial Statements

 

leases.  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 leases, in-place tenant improvements, in-place leasing commissions andtenant relationships based on our evaluation of the specific characteristics ofeach tenant’s lease and our overall relationship with that respectivetenant.  The aggregate value for tenantimprovements and leasing commissions is based on estimates of these costsincurred at inception of the acquired leases, amortized through the date ofacquisition.  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 toexecute similar leases including leasing commissions, legal fees and tenantimprovements as well as an estimate of the likelihood of renewal as determinedby management on a tenant-by-tenant basis.

 

We amortize the value ofin-place leases, in-place tenant improvements and in-place leasing commissionsto expense over the initial term of the respective leases.  The tenant relationship values are amortizedto expense over the initial term and any anticipated renewal periods, but in noevent does the amortization period for intangible assets exceed the remainingdepreciable life of the building.  Shoulda tenant terminate its lease, the unamortized portion of the acquired leaseintangibles would be charged to expense. The estimated remaining average useful lives for acquired leaseintangibles range from less than one year to more than ten years.  Anticipated amortization associated with theacquired lease intangibles for each of the following five years is as follows(in thousands):

 
| 2010 |   | $      | 57,239 |   |
|------|--------|--------|--------|--------|
| 2011 |   | 40,660 |   |
| 2012 |   | 31,541 |   |
| 2013 |   | 24,749 |   |
| 2014 |   | 20,969 |   |

 

As of December 31,2009 and 2008, accumulated depreciation and amortization related to ourconsolidated real estate properties and related lease intangibles were asfollows (in thousands):

 
| ** **                           | ** ** | ** **                      | ** ** | **Lease Intangibles**        | ** ** |
|--------------------------------------|------------|---------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | ** **                      | ** ** | **Assets**                   | ** ** | **Liabilities** | ** ** |
| **as of  December 31, 2009**    | ** ** | **Buildings and  Improvements** | ** ** | **Other Lease  Intangibles** | ** ** | **Acquired  Above-Market  Leases** | ** ** | **Acquired  Below-Market  Leases** | ** ** |
| Cost                                 |       | $                               | 3,678,242  |                         | $          | 589,144 |   | $ | 61,784 |   | $ | (183,470 | ) |
| Less:  depreciation and amortization |       | (423,534                        | )          | (228,100                     | )          | (31,123 | ) | 61,320 |   |
| Net                                  |       | $                               | 3,254,708  |                         | $          | 361,044 |   | $ | 30,661 |   | $ | (122,150 | ) |

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

 

***Cashand Cash Equivalents***

 

We consider investmentsin highly-liquid money market funds or investments with original maturities ofthree months or less to be cash equivalents.

 

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Behringer HarvardREIT I, Inc.Notes to Consolidated Financial Statements

 

***RestrictedCash***

 

Restricted cash includesrestricted money market accounts, as required by our lenders, for anticipatedtenant expansions and improvements, property taxes and insurance for ourconsolidated properties.  As of December 31,2008, restricted cash also included monies held by a trustee used for thepurpose of paying interest and principal amounts due on the debentures as wellas for the payment of any redemptions or conversions allowed under the originalindenture agreements.

 

***AccountsReceivable***

 

Accounts receivable, netof allowance for doubtful accounts, totaled approximately $89.5 million andapproximately $96.6 million at December 31, 2009 and 2008,respectively.  Accounts receivableprimarily consists of straight-line rental revenue receivables of approximately$76.5 million and $59.0 million as of December 31, 2009 and 2008,respectively, approximately $17.2 million and $17.5 million of receivables fromtenants of our consolidated real estate properties as of December 31, 2009and 2008, respectively, and approximately $1.0 million and $1.8 million ofother non-tenant receivables as of December 31, 2009 and 2008,respectively.  Accounts receivable at December 31,2008 also included a $20.0 million receivable for estimated insurance proceedsresulting from hurricane damage that occurred at our Energy Centre propertylocated in New Orleans, Louisiana prior to our acquisition of the property in December 2007.  During 2009, the estimate was revised toapproximately $16.0 million and we received final payment of approximately$16.0 million for the insurance proceeds and the receivable balance was zero asof December 31, 2009.  Our allowancefor doubtful accounts was approximately $5.2 million and $1.7 million as of December 31,2009 and 2008, respectively.

 

***PrepaidExpenses and Other Assets***

 

Prepaid expenses andother assets include prepaid directors’ and officers’ insurance, as well asprepaid insurance and real estate taxes of the properties we consolidate.

 

***Goodwill***

 

Goodwill consists ofgoodwill recorded in connection with our purchase of the subsidiaries of IPC USReal Estate Investment Trust (“IPC”) through a business combination that wascompleted on December 12, 2007.  Inaccordance with GAAP, our goodwill is not amortized, but instead is evaluatedfor impairment at least annually.  Basedon our analysis, we concluded that no impairment in the value of goodwilloccurred for the years ended December 31, 2009 or 2008.  During 2009, goodwill was reduced byapproximately $0.1 million, related to the sale of our Royal Caribbean Centerand DeVry University properties.

 

***Investmentsin Unconsolidated Entities***

 

Investments inunconsolidated entities consists of our undivided tenant-in-common (“TIC”)interests in two office buildings, Alamo Plaza and St. Louis Place, and ournon-controlling 60% interest in the Wanamaker Building.  Consolidation of these investments is notrequired as the entities do not qualify as VIEs and do not meet theconsolidation requirements based on legal form, economic substance, or controland/or substantive participating rights under the respective ownershipagreements.

 

We account for theseinvestments using the equity method of accounting in accordance with GAAP.  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 our share ofinter-company transactions, and increased (decreased) for contributions(distributions).  We use the equitymethod of accounting because the shared decision-making involved in theseinvestments creates an opportunity for us to have some influence on theoperating and financial 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.

 

***Impairmentof Real Estate Related Assets***

 

For our consolidated realestate assets, we monitor events and changes in circumstances that may indicatethat carrying 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 including its eventual disposition, to the carrying amount of theasset.  In the event that the carryingamount exceeds the estimated future undiscounted cash flows, we recognize animpairment loss to adjust the carrying amount of the asset to estimated fairvalue.

 

For our unconsolidatedreal estate assets, including those we own through an investment in a jointventure, TIC interest or other similar investment structure, at each reportingdate, we compare the estimated fair value of our investment

 

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Behringer HarvardREIT I, Inc.Notes to Consolidated Financial Statements

 

to the carryingamount.  An impairment charge is recordedto the extent the fair value of our investment is less than the carrying amountand the decline in value is determined to be other than a temporary decline.

 

As a result of adverseeconomic conditions and dislocations in the credit markets that have andcontinue to negatively impact the commercial real estate market as a whole, andlikewise our portfolio of real estate assets, at December 31, 2009, weevaluated our real estate assets for impairment. We assessed the potentialimpairment of each of our real estate assets by comparing estimated futureundiscounted cash flows expected to be generated over the life of the asset,including both operating cash flows as well as proceeds from eventualdisposition, to the carrying amount of the asset.  In the event that thecarrying amount exceeded the estimated future undiscounted cash flows, werecognized an impairment loss to adjust the carrying amount of the asset to itsestimated fair value at December 31, 2009. As a result of our evaluation, we recorded non-cash impairment losses ofapproximately $259.1 million for the year ended December 31, 2009,including approximately $17.8 million in impairment losses included indiscontinued operations.  If ourassumptions regarding expected future cash flows from our use and eventualdisposition of our assets decrease, we may incur additional impairment chargesin the future.  We recorded non-cashimpairment losses of approximately $21.1 million for the year ended December 31,2008.  We did not record any impairmentlosses for the year ended December 31, 2007.  In addition, we may incur impairment chargeson assets classified as held for sale in the future if the carrying amount ofthe asset upon classification as held for sale exceeds the estimated fairvalue, less costs to sell.

 

***DeferredFinancing Fees***

 

Deferred financing feesare recorded at cost and are amortized to interest expense using astraight-line method that approximates the effective interest method over thelife of the related debt.  Deferredfinancing fees, net of accumulated amortization, totaled approximately $24.6million and approximately $34.2 million at December 31, 2009 and December 31,2008, respectively.  Accumulatedamortization of deferred financing fees was approximately $17.5 million andapproximately $12.3 million as of December 31, 2009 and 2008,respectively.

 

***NotesReceivable***

 

Notesreceivable totaled approximately $11.0 million and approximately $13.1 millionat December 31, 2009 and 2008, respectively.

 

Ournotes receivable at December 31, 2009 and 2008 included a $10.0 millionmezzanine loan on the Galleria Office Towers in Houston, Texas.  This investment earns interest monthly at theLondon Interbank Offer Rate (“LIBOR”) plus 750 basis points and had a maturitydate of December 9, 2009.  Monthlypayments of interest only are required with principal due at maturity.  As of December 31, 2009, the principalamount remained unpaid and the loan was in default.  We have evaluated the collectability of allamounts due according to the contractual terms of the loan and no impairmentloss has been recorded.  As of December 31,2009, the note is earning interest at a rate of 7.73%.  As of March 10, 2010, the loan maturity datewas extended to February 9, 2013.

 

At December 31,2008, our notes receivable also included a $3.1 million receivable representinga mortgage loan we made related to unentitled land held by third parties forfuture development of additional office buildings in the Terrace Office Parklocated in Austin, Texas.  We purchasedthe developed portion of the Terrace Office Park, an office park that currentlyincludes four buildings, in June 2006 from parties related to the borrowerof this mortgage loan.  We have theexclusive right of first offer to participate in the future development of theunentitled land.  In accordance with theprovisions of the loan agreement which allows for prepayment, the borrowerrepaid $2.0 million of the outstanding principal balance in July 2009,resulting in an outstanding balance of approximately $1.0 million at December 31,2009. The borrower is currently making principal and interest payments based ona revised amortization schedule that will result in the loan being paid in fullupon maturity on June 21, 2013.  Theannual interest rate under the loan is fixed at 7.75% and as of December 31,2009, the loan was current.

 

***Debentures***

 

As part of ouracquisition of the subsidiaries of IPC, we assumed a liability for outstandingdebentures.  These debentures arereferred to herein as “Series A” and “Series B.”  As of December 31, 2008, the liabilityrelated to outstanding debentures was approximately $51.7 million.  Series A debentures representedapproximately $15.0 million of the outstanding liability, and Series Bdebentures represented approximately $36.7 million of the outstandingliability.  Restricted cash, totalingapproximately $62.4 million at December 31, 2008, was held by the trusteefor the purpose of paying interest and principal amounts due on the debenturesas well as for the payment of any redemptions or conversions allowed under theindenture.

 

On April 10, 2009,we tendered an offer to the holders to purchase their debentures.  On May 29, 2009, the tender offer wasextended until June 25, 2009 and provided that the debentures would bepurchased at the face amount plus a premium for both series with payment madeto the tendering holders on June 30, 2009. Pursuant to the tender offer, on

 

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Behringer HarvardREIT I, Inc.Notes to Consolidated Financial Statements

 

June 30, 2009, wepaid approximately $10.5 million of principal, approximately $0.1 million ofaccrued interest, and approximately $0.3 million of premiums to acquireapproximately 73% of the outstanding Series A debentures.  Additionally, we paid approximately $25.5million of principal, approximately $0.4 million of accrued interest, andapproximately $0.6 million of premiums to acquire approximately 71% of theoutstanding Series B debentures under the tender offer.  The total payment of approximately $37.4million was funded from our unrestricted cash.

 

A meeting of thedebenture holders was held on August 10, 2009 amending the maturity dateof the debentures to August 13, 2009 from November 30, 2014 and September 30,2012 for the Series A and Series B debentures, respectively.   Using restricted cash held by the trustee,during the third quarter of 2009, all outstanding debentures were repaidincluding those debentures held by us. After repayment of all outstanding debentures, the trustee returned tous the excess restricted cash totaling approximately $7.3 million.   As of December 31, 2009, there was noremaining liability related to debentures.

 

***Asset Retirement Obligations***

 

We record the fair valueof any conditional asset retirement obligations if they can be reasonablyestimated.  As part of the anticipatedrenovation of acquired properties, we will incur costs for the abatement ofregulated materials, primarily asbestos-containing materials, as required underenvironmental regulations.  Our estimateof the fair value of the liabilities is based on future anticipated costs to beincurred for the legal removal or remediation of the regulated materials.   As of December 31, 2009 and 2008, thebalance of our asset retirement obligations was approximately $9.3 million andapproximately $9.7 million, respectively, and is included in other liabilities.

 

***DerivativeFinancial Instruments***

 

We record allderivatives on the balance sheet at fair value.  The accounting forchanges in the fair value of derivatives depends on the intended use of thederivative, whether we have elected to designate a derivative in a hedgingrelationship and apply hedge accounting and whether the hedging relationshiphas satisfied the criteria necessary to apply hedge accounting.  Derivatives designated and qualifying as ahedge of the exposure to changes in the fair value of an asset, liability, orfirm commitment attributable to a particular risk, such as interest rate risk,are considered fair value hedges.  Forderivatives designated as fair value hedges, the changes in the fair value ofboth the derivative instrument and the hedged items are recorded in earnings.Derivatives designated and qualifying as a hedge of the exposure to variabilityin expected future cash flows, or other types of forecasted transactions, areconsidered cash flow hedges.  Forderivatives designated as cash flow hedges, the effective portions of changesin the fair value of the derivative are reported in accumulated othercomprehensive income (loss) (“OCI”) and are subsequently reclassified intoearnings when the hedged item affects earnings. Changes in the fair value of derivative instruments not designated ashedges and ineffective portions of hedges are recognized in earnings in theaffected period.  Derivatives may also bedesignated as hedges of the foreign currency exposure of a net investment in aforeign operation.  Hedge accountinggenerally provides for the matching of the timing of gain or loss recognitionon the hedging instrument with the recognition of the changes in the fair valueof the hedged asset or liability that are attributable to the hedged risk in afair value hedge or the earnings effect of the hedged forecasted transactionsin a cash flow hedge.  We may enter intoderivative contracts that are intended to economically hedge certain of ourrisk, even though hedge accounting does not apply or we elect not to apply hedgeaccounting.

 

As of December 31,2009 and 2008, we do not have any derivatives designated as fair value hedgesor hedges of net investments in foreign operations, nor are derivatives beingused for trading or speculative purposes.

 

***RevenueRecognition***

 

We recognize rentalincome generated from all leases on real estate assets that we consolidate on astraight-line basis over the terms of the respective leases, including theeffect of rent holidays, if any.  Thetotal net increase to rental revenues due to straight-line rent adjustments forthe years ended December 31, 2009, 2008 and 2007 was approximately $19.2million, $28.1 million and $22.3 million, respectively, and includes amountsrecognized in discontinued operations.  As discussed above, our rental revenue also includes amortization ofabove- and below-market leases.  Thetotal net increase to rental revenues due to the amortization of above- andbelow-market leases for the years ended December 31, 2009, 2008 and 2007was approximately $12.5 million, $13.5 million and $10.1 million, respectively,and includes amounts recognized in discontinued operations. Revenues relatingto lease termination fees are recognized at the time that a tenant’s right tooccupy the leased space is terminated and we have satisfied all obligationsunder the agreement.  We recognized leasetermination fees of approximately $7.9 million, $27.2 million and $6.5 millionfor the years ended December 31, 2009, 2008 and 2007, respectively.

 

***IncomeTaxes***

 

We have elected to betaxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of1986, as amended (the “Code”), and have qualified as a REIT since the yearended December 31, 2004.  To qualifyas a REIT, we must meet a number of organizational and operational requirements,including a requirement that we distribute at least 90% 

 

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Behringer HarvardREIT I, Inc.Notes to Consolidated Financial Statements

 

of our REIT taxableincome (excluding net capital gains) to our stockholders.  As a REIT, we generally will not be subjectto federal income tax at the corporate level (except to the extent wedistribute less than 100% of our taxable income and/or net taxable capitalgains).  We are organized and operate insuch a manner as to qualify for taxation as a REIT under the Code, and weintend to continue to operate in such a manner, but no assurance can be giventhat we will operate in a manner so as to qualify or remain qualified as aREIT.

 

Weacquired the subsidiaries of IPC on December 12, 2007 and have qualifiedfor IPC (US), Inc. to be taxed as a REIT for federal income tax purposessince the tax year ended December 31, 2008.  We believe IPC (US), Inc. is organizedand operates in a manner to qualify for this election.  Prior to acquisition, IPC (US), Inc. wasa taxable C-Corporation, and for balance of the year ended December 31,2007, IPC (US), Inc. was treated as a taxable REIT subsidiary of theCompany for federal income tax purposes.

 

On March 14,2003, the IRS released final regulations concerning the treatment of netbuilt-in gains of C-corporation assets that become assets of a REIT in acarryover basis transaction. The regulations generally require that unless theC-corporation elects to recognize gains and be subject to corporate-level taxas if it had sold all the assets transferred at fair market value at the timeof the transaction, then the REIT will be subject to the rules of Section 1374of the Code. In general terms, Section 1374 subjects the REIT to themaximum corporate-level tax rate on these built-in gains upon a taxabledisposition of these assets that occurs within ten years from the date the REITacquired the assets.  We have determinedthat the regulations are applicable to the assets held by IPC (US), Inc.and subsidiaries and are subject to the rules of Section 1374 of theCode for any built-in gains recognized within ten years of the acquisition of IPC(US), Inc. and subsidiaries. However, based upon our projected holding periods, we believe that wewill be able to forego incurring a tax liability attributable to any underlyingdifference between the tax basis of the acquired assets and the financialreporting basis as a result of applying fair value in purchaseaccounting.  Accordingly, we have not recorded an income tax provision, ordeferred taxes, except for the net operating loss carry-forward and otherdeferred tax liabilities discussed below, with respect to IPC.

 

Post acquisition federalnet operating losses (“NOL”) do not reduce the built-in gain subject to the Section 1374tax.  However, with some limitation, anyfederal NOL carryovers that existed within IPC (US), Inc. and subsidiariesat the time of acquisition are generally available for future use and canoffset some or all of the realized built-in gain subject to tax.  As of December 31, 2009, IPC (US), Inc.and subsidiaries had approximately $55.8 million of federal NOL carryovers, andthe deferred tax assets associated with the federal NOL carryovers isapproximately $19.5 million at December 31, 2009.  As a result of our electing REIT status forIPC (US), Inc. for 2008 and our expectation to not recognize any built-ingain during the ten year period after the IPC acquisition in excess ofavailable federal NOL carryovers, a valuation allowance has been establishedfor approximately $19.5 million, as we do not expect to realize the deferredtax assets associated with the acquired federal NOL carryovers.  The NOL carryovers will begin to expire in2023.

 

In addition, at December 31,2009, we have deferred tax liabilities of approximately $1.4 million anddeferred tax assets of approximately $0.9 million related to various statetaxing jurisdictions.  At December 31, 2008, we had deferred taxliabilities of approximately $3.5 million and deferred tax assets ofapproximately $37,000 related to various state taxing jurisdictions.

 

We have reviewed our taxpositions under GAAP guidance that clarifies the relevant criteria and approachfor the recognition and measurement of uncertain tax positions.  Theguidance prescribes a recognition threshold and measurement attribute for thefinancial statement recognition of a tax position taken, or expected to betaken, in a tax return.  A tax position may only be recognized in thefinancial statements if it is more likely than not that the tax position willbe sustained upon examination.  We believe it is more likely than notthat the tax positions taken relative to our status as a REIT and IPC (US), Inc.’sstatus as a REIT will be sustained in any tax examination.  In addition, we believe that it is morelikely than not that the tax positions taken relative to the taxable REITsubsidiaries will be sustained in any tax examination.

 

For the year ended December 31,2009, we recognized a benefit for income taxes of approximately $1.4 millionrelated to certain state and local income taxes.  For the year ended December 31, 2008 and2007, we recognized a provision for income taxes of approximately $0.9 millionand $0.6 million, respectively, related to certain state and local incometaxes.

 

***StockBased Compensation***

 

We have a stock-basedincentive award plan for our independent directors and consultants and for employeesand consultants of our affiliates (as defined in the plan). Awards are grantedat the fair market value on the date of grant with fair value estimated usingthe Black-Scholes-Merton option valuation model, which incorporates assumptionssurrounding volatility, distribution yield, the risk-free interest rate,expected life, and the exercise price as compared to the underlying

 

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Behringer HarvardREIT I, Inc.Notes to Consolidated Financial Statements

 

stock price on the grantdate. Any tax benefits associated with these share-based payments areclassified as financing activities in the consolidated statements of cashflows.  For the years ended December 31,2009, 2008 and 2007, we had no significant compensation cost related to theseshare-based payments.

 

***RedeemableCommon Stock***

 

Our board of directorshas authorized a share redemption program for stockholders who hold theirshares for more than one year.  Our boardreserves the right in its sole discretion at any time and from time to time to (1) waivethe one-year holding period in the event of the death, disability, confinementto a long-term care facility, or other exigent circumstances such asbankruptcy, a mandatory distribution requirement under a stockholder’s IRA orwith respect to shares purchased under or through our DRP, (2) reject anyrequest for redemption, (3) change the purchase price for redemptions, (4) limitthe funds to be used for redemptions or otherwise change the limitations onredemption or (5) amend, suspend (in whole or in part) or terminate theprogram.

 

GAAP requires thatsecurities that are convertible for cash at the option of the holder to beclassified outside of equity. Accordingly, we do not reclassify the shares to be redeemed from equityto a liability until such time as the redemption has been formally approved.

 

***Concentrationof Credit Risk***

 

We have cash and cashequivalents and restricted cash deposited in certain financial institutions inexcess of federally insured levels.  Wehave diversified our cash and cash equivalents with several bankinginstitutions in an attempt to minimize exposure to any one of these institutions.  We regularly monitor the financial stabilityof these financial institutions and believe that we are not exposed to anysignificant credit risk in cash and cash equivalents or restricted cash.

 

***Noncontrollinginterest***

 

We hold a direct orindirect controlling interest in certain real estate partnerships and thus,consolidate their accounts with and into our accounts.  Noncontrolling interest in partnershipsrepresents the third-party partners’ proportionate share of the equity inconsolidated real estate partnerships. Income and losses are allocated to noncontrolling interest holders basedon their weighted average percentage ownership during the period.

 

Noncontrolling interestalso includes units of limited partnership interests issued by Behringer OP tothird parties.  In conjunction with the July 28,2005 acquisition of our Buena Vista Plaza property, 393,260 units of limitedpartnership interests in Behringer OP were issued at $8.90 per unit.  As of December 31, 2009, Behringer OPhad 432,586 units of limited partnership interest held by third parties, aftergiving 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.

 

Noncontrolling interestalso includes 124 shares of preferred stock issued by IPC (US), Inc. inorder for it to qualify as a REIT for federal income tax purposes.

 

***Earningsper Share***

 

Earnings per share iscalculated based on the weighted average number of common shares outstandingduring each period.  As of December 31,2009, we had options to purchase 74,500 shares of common stock outstanding at aweighted average exercise price of $9.29, and at December 31, 2009,Behringer OP had 432,586 units of limited partnership interest held by thirdparties, after giving effect to the 10% stock dividend issued October 1,2005.  These units of limited partnershipinterest are convertible into an equal number of shares of our commonstock.  The weighted average shares andearnings per share for all periods presented in this report reflect the effectsof the stock dividend.  The options andunits of limited partnership interest are excluded from the calculation ofearnings per share for all periods presented in this report because the effectwould be anti-dilutive.  Gain on sale ofassets is included in the calculation of loss from continuing operations pershare in accordance with SEC guidelines.

 

***ReportableSegments***

 

Our current businessconsists of owning, operating, acquiring, developing, investing in anddisposing of real estate assets.  All ofour consolidated revenues are from our consolidated real estateproperties.  Our chief operating decisionmaker evaluates operating performance on an individual property level and viewsall of our real estate assets as one industry segment, and, accordingly, all ofour properties are aggregated into one reportable segment.

 

***SubsequentEvents***

 

Wehave evaluated subsequent events for recognition or disclosure in ourconsolidated financial statements.

 

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Table ofContents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

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

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued authoritative guidanceon business combinations.  This guidance makes certain modifications toprevious standards, including a broader definition of a business, recognitionrequirements for contractual and certain noncontractual contingencies, gainrecognition resulting from a bargain purchase and the requirement thatacquisition-related costs be expensed as incurred. The acquisition of a realestate property has been determined to meet the definition of a businesscombination as defined in this guidance. We adopted this guidance on January 1, 2009 and expect that it willhave a material effect on our accounting for future acquisitions of properties,if any, primarily as acquisition costs will no longer be capitalized, but willbe expensed.

 

In December 2007,the FASB issued authoritative guidance on noncontrolling interests.  Thisguidance clarifies that a noncontrolling interest in a subsidiary, which issometimes referred to as minority interest, is an ownership interest in theconsolidated entity that should be reported as equity in the consolidatedfinancial statements.  Among other requirements, this guidance requiresconsolidated net income to be reported, on the face of the consolidated incomestatement, at amounts that include the amounts attributable to both the parentand the noncontrolling interest.  Our adoption of this guidance on January 1,2009 increased our total equity by approximately $17.9 million for the yearended December 31, 2008.  Net income(loss) no longer includes an allocation of income or losses to noncontrollinginterests.  Income available to commonstockholders was not affected.

 

In March 2008, theFASB issued authoritative guidance on disclosures about derivative instrumentsand hedging activities.  This guidance requires entities to providegreater transparency about how and why the entity uses derivative instruments,how the instruments and related hedged items are accounted for, and how theinstruments and related hedged items affect the financial position, results ofoperations, and cash flows of the entity.   We adopted this guidanceon January 1, 2009, and have included the required disclosures in theaccompanying notes to our financial statements.

 

In April 2009, theFASB issued additional authoritative guidance for estimating fair value whenthe volume and level of activity for the asset or liability have significantlydecreased.   We adopted this guidance on April 1, 2009, and itdid not have a material effect on our consolidated financial statements.

 

In April 2009, theFASB issued authoritative guidance requiring an entity to provide disclosuresabout fair value of financial instruments in interim financialinformation.  We adopted this guidance onApril 1, 2009 and have included the required disclosures in theaccompanying notes to our interim financial statements issued subsequent to ouradoption of the guidance.

 

In May 2009, theFASB issued authoritative guidance for subsequent events.  This guidance establishes general standardsof accounting for and disclosure of events that occur after the balance sheetdate but before financial statements are issued or are available to beissued.  We adopted this guidance on April 1,2009 and have included the required disclosures in the accompanying Note 2 toour financial statements.

 

In June 2009, theFASB issued authoritative guidance on the consolidation of a VIE.  The new guidance requires revised evaluationsof whether entities represent variable interest entities, ongoing assessmentsof control over such entities, and additional disclosures for variableinterests. This guidance is effective for interim and annual periods beginningafter November 15, 2009 with early adoption prohibited.  The adoption of this new guidance will nothave a material impact on our financial statements.

 

**4.****                                    ****Fair Value Measurements**

 

**Assets and Liabilities Measuredat Fair Value on a Recurring Basis**

 

***Derivative financial instruments***

 

Currently, we useinterest rate swaps to manage our interest rate risk.  The valuation of these instruments isdetermined using widely accepted valuation techniques including discounted cashflow analysis of the expected cash flows of each derivative. This analysisreflects the contractual terms of the derivatives, including the period tomaturity, and uses observable market-based inputs, including interest ratecurves and implied volatilities.  Thefair values of interest rate swaps are determined using the market standardmethodology of netting the discounted future fixed cash receipts (or payments)and the discounted expected variable cash payments (or receipts).  Thevariable cash payments (or receipts) are based on an expectation of futureinterest rates (forward curves) derived from observable market interest ratecurves.

 

Fair value, as defined byGAAP, is a market-based measurement, not an entity-specific measurement.  Therefore, a fair value measurement should bedetermined based on the assumptions that market participants would use inpricing the asset or liability.  As abasis for considering market participant assumptions in fair valuemeasurements, a fair value hierarchy that distinguishes between marketparticipant assumptions based on market data obtained from sources independentof the reporting entity (observable inputs that are classified within Levels 1and 2 of the hierarchy) and the

 

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

reporting entity’s ownassumptions about market participant assumptions (unobservable inputsclassified within Level 3 of the hierarchy) has been established.

 

We incorporate creditvaluation adjustments to appropriately reflect both our own nonperformance riskand the respective counterparty’s nonperformance risk in the fair valuemeasurements.  In adjusting the fairvalue of our derivative contracts for the effect of nonperformance risk, wehave considered the impact of netting and any applicable credit enhancements,such as collateral postings, thresholds, mutual puts, and guarantees.

 

Although we havedetermined that the majority of the inputs used to value our derivatives fallwithin Level 2 of the fair value hierarchy, the credit valuation adjustmentsassociated with our derivatives utilize Level 3 inputs, such as estimates ofcurrent credit spreads to evaluate the likelihood of default by us and ourcounterparties.  However, as of December 31,2009, we have assessed the significance of the impact of the credit valuationadjustments on the overall valuation of our derivative positions and havedetermined that the credit valuation adjustments are not significant to theoverall valuation of our derivatives.  Asa result, we have determined that our derivative valuations in their entiretyare classified in Level 2 of the fair value hierarchy.  Unrealized gains or losses on derivatives arerecorded in accumulated other OCI within equity at each measurement date.

 

The following table setsforth our financial liabilities measured at fair value on a recurring basis,which equals book value, by level within the fair value hierarchy as of December 31,2009 and 2008 (in thousands).  Ourderivative financial instruments are included in other liabilities on ourconsolidated balance sheet.

 
| ** **                        | ** ** | ** **          | ** ** | **Basis of Fair Value Measurements** | ** ** |
|-----------------------------------|------------|---------------------|------------|----------------------------------------------------------|------------|
| ** **                        | ** ** | ** **          | ** ** | **Quoted Prices**                                   | ** ** | **Significant** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **          | ** ** | **In Active**                                       | ** ** | **Other** | ** ** | **Significant** | ** ** |
| ** **                        | ** ** | **Fair Value** | ** ** | **Markets for**                                     | ** ** | **Observable** | ** ** | **Unobservable** | ** ** |
| ** **                        | ** ** | **of Assets**  | ** ** | **Identical Items**                                 | ** ** | **Inputs** | ** ** | **Inputs** | ** ** |
| **Description**                   | ** ** | **(Liabilities)**   | ** ** | **(Level 1)**                                       | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** |
| **as of December 31, 2009**       |       |                |       |                                                     |       |   |   |   |   |   |   |   |   |
| Derivative  financial instruments |       | $                   | (4,904     | )                                                        | $          | — |   | $ | (4,904 | ) | $ | — |   |
|                              |       |                |       |                                                     |       |   |   |   |   |   |   |   |   |
| **as of December 31, 2008**       | ** ** | ** **          | ** ** | ** **                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Derivative  financial instruments |       | $                   | (10,747    | )                                                        | $          | — |   | $ | (10,747 | ) | $ | — |   |

 

**Assets and Liabilities Measuredat Fair Value on a Nonrecurring Basis**

 

***Impairmentof Real Estate Related Assets***

 

As a result of thecontinued adverse economic conditions and dislocations in the credit marketsthat have and continue to negatively impact the commercial real estate marketas a whole, and likewise our portfolio of real estate assets, at December 31,2009, we evaluated our real estate assets for impairment. As a result of ourevaluation, we recorded non-cash impairment losses of approximately $259.1million for the year ended December 31, 2009, including approximately$17.8 million in impairment losses included in discontinued operations.  The inputs used to calculate the fair valueof these assets included projected cash flows and a risk-adjusted rate ofreturn that we estimated would be used by a market participant in valuing theseassets.  These fair value estimates areconsidered Level 3 under the fair value hierarchy described above.

 

The following tablesummarizes our impaired assets during December 31, 2009 measured at fairvalue (in thousands):

 
| ** **      | ** ** | ** **          | ** ** | **Basis of Fair Value Measurements** | ** ** | ** **         | ** ** | ** **         | ** ** |
|-----------------|------------|---------------------|------------|----------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **      | ** ** | ** **          | ** ** | **Quoted Prices**                                   | ** ** | **Significant**    | ** ** | ** **         | ** ** | ** ** | ** ** |
| ** **      | ** ** | ** **          | ** ** | **In Active**                                       | ** ** | **Other**          | ** ** | **Significant**    | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Fair Value** | ** ** | **Markets for**                                     | ** ** | **Observable**     | ** ** | **Unobservable**   | ** ** | **Total** | ** ** |
| ** **      | ** ** | **of Assets**  | ** ** | **Identical Items**                                 | ** ** | **Inputs**         | ** ** | **Inputs**         | ** ** | **Gains/** | ** ** |
| **Description** | ** ** | **(Liabilities)**   | ** ** | **(Level 1)**                                       | ** ** | **(Level 2)** | ** ** | **(Level 3)** | ** ** | **(Losses) (1)** | ** ** |
| Real  estate    |       | $                   | 452,300    |                                                     | $          | —             |       | $                  | —     |   | $ | 452,300 |   | $ | (241,239 | ) |
|                 |            |                     |            |                                                          |            |                    |            |                    |            |  |  |  |  |  |  |  |

 

----

(1)   Excludesapproximately $17.8 million in impairment losses of our discontinued operationsthat were disposed of as of December 31, 2009.

 

***FairValue of Financial Instruments***

 

Notes payable totalingapproximately $3.0 billion in principal amount as of December 31, 2009 hada fair value of approximately $2.7 billion based upon interest rates for noteswith similar terms and remaining maturities that management believes we couldhave obtained on December 31, 2009. The notes payable totaling approximately $3.1 billion as of December 31,2008 had a fair value of approximately $2.8 billion based upon interest ratesfor notes with similar terms and remaining maturities that management believeswe could have obtained on December 31, 2008.  The carrying value of our

 

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

notes receivablereasonably approximates fair value based on expected interest rates for notesto similar borrowers with similar terms and remaining maturities.

 

Other financialinstruments held at December 31, 2009 but not measured at fair value on arecurring basis include cash and cash equivalents, restricted cash, accountsreceivable, accounts payable, accrued expenses, other liabilities anddistributions payable.  The carryingvalue of these items reasonably approximates their fair value based on theirhighly-liquid nature and/or short-term maturities.

 

**5.****                                    ****Real Estate Activities**

 

***Acquisition***

 

On December 30,2009, we acquired a tract of land consisting of approximately 1.6 acresadjacent to our One BriarLake Plaza property in Houston, Texas for a contractpurchase price of approximately $2.4 million.

 

***Dispositions***

 

On December 31, 2009,we sold our Royal Caribbean Center property, consisting of approximately129,000 square feet, and our DeVry University property, consisting ofapproximately 94,000 square feet, to an unaffiliated third party for a combinedcontract sales price of approximately $43.0 million. These properties are bothlocated in Miramar, Florida.  Prior tothe sale, we owned an 86% controlling interest in each of theseproperties.  The sale generated proceedsof approximately $41.7 million of which approximately $26.8 million was used torepay the related mortgage debt..  Animpairment loss of approximately $17.8 million was recorded on these propertiesduring the year ended December 31, 2009. There was no gain or loss recorded on the sale of these properties.

 

***BusinessCombination***

 

On December 12,2007, we completed the purchase of the subsidiaries of IPC, which ownedinterests in a portfolio of 34 office properties, comprising a total ofapproximately 9.6 million square feet of rentable space.  The acquisitiondiversified our portfolio from a geographic prospective.  The acquired intangible assets andliabilities are amortized over the terms of the acquired leases or remaininglives of the assumed mortgages.

 

Our ConsolidatedStatements of Operations include the operations of the subsidiaries of IPC forthe years ended December 31, 2009, 2008 and for the period from December 12,2007 (the date of acquisition) through December 31, 2007.  The following summary presents the results ofoperations (in thousands) for the year ended December 31, 2007 on anunaudited pro forma basis, as if the transaction had occurred as of January 1,2007.  The proforma results are forillustrative purposes only and do not purport to be indicative of the actualresults that would have occurred had the transaction occurred on January 1,2007, nor are they indicative of results of operations that may occur in thefuture.

 
| ** **                                             | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|----------|------------|
| Total  revenue                                         |       | $        | 560,351    |   |
| Total  expenses                                        |       | (724,249 | )          |
| Interest  income                                       |       | 25,525   |       |
| Gain  on sale of assets                                |       | 44       |       |
| Income  tax provision                                  |       | 686      |       |
| Equity  in losses from investments                     |       | (1,139   | )          |
| Income  from discontinued operations                   |       | 1,989    |       |
| Net  loss                                              |       | (136,793 | )          |
| Net  loss attributable to noncontrolling interest      |       | (2,851   | )          |
| Net  loss attributable to common stockholders          |       | $        | (139,644   | ) |
|                                                   |       |     |       |
| Basic  and diluted weighted average shares outstanding |       | 171,544  |       |
|                                                   |       |     |       |
| Basic  and diluted loss per share                      |       | $        | (0.81      | ) |

 

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

 

Investments inunconsolidated entities consists of our undivided TIC interests in two officebuildings and our non-controlling 60% interest in the Wanamaker Building.  The following is a summary of our investmentsin unconsolidated entities as of December 31, 2009 and 2008 (inthousands):

 

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 
| ** **          | ** ** | **Ownership** | ** ** | ** **                      | ** ** | ** **                      | ** ** |
|---------------------|------------|---------------|------------|---------------------------------|------------|---------------------------------|------------|
| **Property  Name**  | ** ** | **Interest**  | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** |
|                |       |          |       |                            |       |                            |       |
| Wanamaker  Building |       | 60.00         | %          | $                               | 52,921     |                            | $          | 54,257 |   |
| Alamo  Plaza        |       | 33.93         | %          | 12,171                          |       | 12,697                          |       |
| St.  Louis Place    |       | 35.71         | %          | 9,898                           |       | 10,302                          |       |
| Total               |       |          |       | $                               | 74,990     |                            | $          | 77,256 |   |

 

Forthe year ended December 31, 2009, we recorded approximately $0.3 millionof equity in earnings and approximately $2.6 million of distributions from ourinvestments in unconsolidated entities. For the year ended December 31, 2008, we recorded approximately$1.3 million of equity in earnings and approximately $9.6 million ofdistributions from our investments in unconsolidated entities.  During 2008, we acquired the remainingthird-party TIC interests in the 1300 Main, Minnesota Center and the ColoradoBuilding properties and as a result, consolidated the 1300 Main propertyeffective September 30, 2008 and the Minnesota Center and the ColoradoBuilding properties effective December 31, 2008.  On July 1, 2008, we sold our 36.31% TICinterest in Enclave on the Lake, a property located in Houston, Texas, to anunaffiliated third party for a contract sales price of approximately $13.5million.  Our equity in earnings for theyears ended December 31, 2009 and 2008 from these investments representsour proportionate share of the combined earnings for the period of ourownership and for the period prior to consolidation, if applicable.

 

**7.****                                     NoncontrollingInterest**

 

As part of ouracquisition of the subsidiaries of IPC, we acquired a controlling interest incertain real estate partnerships and thus, consolidate the accounts with andinto our accounts.  Noncontrolling interestin real estate properties represents the third-party partners’ proportionateshare of the equity in consolidated real estate partnerships.  Income and losses are allocated tononcontrolling interest holders based on their weighted average percentageownership during the year. Noncontrolling interest also includes units of limited partnershipinterests issued by Behringer OP to third parties.  In conjunction with the July 28, 2005acquisition of our Buena Vista Plaza property, 393,260 units of limitedpartnership interests in Behringer OP were issued at $8.90 per unit.  At December 31, 2009 and 2008, BehringerOP had 432,586 units of limited partnership interest outstanding with thirdparties, after giving effect to the 10% stock dividend issued October 1,2005.  These units of limited partnershipinterest are convertible into an equal number of shares of our commonstock.  Noncontrolling interest alsoincludes 124 shares of preferred stock issued by IPC (US), Inc. in orderfor it to qualify as a REIT for federal income tax purposes.

 

Thefollowing table is a summary of our noncontrolling interest investments (inthousands):

 
| ** **                                          | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | **2009**              | ** ** | **2008**              | ** ** |
| Noncontrolling  interests in real estate properties |       | $                     | 7,454      |                  | $          | 15,428 |   |
| Limited  partnership units                          |       | 1,702                 |       | 2,506                 |       |
| IPC  (US), Inc. preferred shares               |       | 14                    |       | —                |       |
|                                                |       | $                     | 9,170      |                  | $          | 17,934 |   |

 

**8.****                                     CapitalizedCosts**

 

Wecapitalize interest, property taxes, insurance and construction costs on ourreal estate properties under development, which include the development of anew building at Eldridge Place in Houston, Texas (“Three Eldridge Place”) anddevelopment of a parking facility at our Burnett Plaza property in Ft. Worth,Texas.  For the year ended December 31,2009 and 2008, we capitalized a total of approximately $32.4 million and $21.9million in costs associated with real estate under development, respectively,including approximately $2.6 million and $0.5 million in interest for realestate under development, respectively. In November 2009, we completed the major construction activity onour Three Eldridge Place property and the property was classified within Landand Building on our consolidated balance sheet at December 31, 2009.  At December 31, 2009, the property wasnot yet held available for occupancy and interest, property taxes, insuranceand other property expenses continue to be capitalized.  We also halted the development of the parkingfacility at our Burnett Plaza property and that land was classified within Landon our consolidated balance sheet at December 31, 2009.

 

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Tableof Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

**9.****                                     LeasingActivity**

 

Futureminimum base rental payments due to us under non-cancelable leases in effect asof December 31, 2009, for operating properties we consolidate are asfollows (in thousands):

 
| **Year**   | ** ** | **Amount** | ** ** |
|------------|------------|------------|------------|
| 2010       |       | $          | 392,891    |   |
| 2011       |       | 343,105    |       |
| 2012       |       | 298,185    |       |
| 2013       |       | 249,088    |       |
| 2014       |       | 202,481    |       |
| Thereafter |       | 559,081    |       |
| Total      |       | $          | 2,044,831  |   |
|            |            |            |            |  |  |

 

**10.****                              DerivativeInstruments and Hedging Activities**

 

We may be exposed to therisk associated with variability of interest rates that might impact our cashflows and the results of operations.  Our objectives in using interestrate derivatives are to add stability to interest expense and to manage ourexposure to interest rate movements.  Toaccomplish this objective, we primarily use interest rate swaps as part of ourinterest rate risk management strategy. Our interest rate swaps involve the receipt of variable-rate amountsfrom a counterparty in exchange for us making fixed-rate payments over the lifeof the agreements without exchange of the underlying notional amount.  Our hedging strategy of entering intointerest rate swaps, therefore, is to eliminate or reduce, to the extentpossible, the volatility of cash flows.

 

In December 2007,we entered into two interest rate swap agreements, each with a notional valueof $100.0 million, or $200.0 million of notional value in total.  The swaps were entered into to fix theinterest rate on $200.0 million of borrowings under our credit facility.  In June 2009, we terminated $50.0million of notional amount under one of our swap agreements and paid down $50.0million of the borrowings under our credit facility.  At that time, the remaining portion of thepartially terminated swap no longer qualified for hedge accounting and has notbeen re-designated as a qualifying hedge since the debt and swap were partiallyterminated.  We paid approximately $2.1million to terminate the $50.0 million notional amount of the swap.  The effective portion of changes in the fairvalue of derivatives designated and that qualify as cash flow hedges isrecorded in accumulated OCI and is subsequently reclassified into earnings inthe period that the hedged forecasted transaction affects earnings.  During the year ended December 31, 2009,we accelerated the reclassification of amounts in OCI to earnings as a resultof the previously hedged forecasted transaction becoming not probable ofoccurring.  The accelerated amountresulted in additional expense of approximately $2.5 million.

 

The agreements with ourderivative counterparties contain provisions where, after giving effect to anyapplicable notice requirement or grace period, (1) if Behringer OPdefaults on any of its indebtedness, including default where repayment of theindebtedness has not been accelerated by the lender, then it could also bedeclared in default on its derivative obligations; or (2) it could bedeclared in default on its derivative obligations if repayment of theunderlying indebtedness is accelerated by the lender due to its default on theindebtedness.

 

The following tablesummarizes the notional values of our derivative financial instruments (inthousands) as of December 31, 2009. The notional values provide an indication of the extent of ourinvolvement in these instruments at December 31, 2009, but do notrepresent exposure to credit, interest rate, or market risks:

 
| ** **                      | ** ** | ** **              | ** ** | **Number of**   | ** ** | **Interest Swap** | ** ** | **Interest Swap** | ** **   | ** **   | ** **              |
|---------------------------------|------------|-------------------------|------------|-----------------|------------|-------------------|------------|-------------------|--------------|--------------|-------------------------|
| **Type/Description**            | ** ** | **Notional Value** | ** ** | **Instruments** | ** ** | **Pay Rate**      | ** ** | **Receive Rate**  | ** **   | **Maturity** | ** **              |
| Interest  rate swap - cash flow |       | $                       | 100,000    |            | 1          |              | 3.9925     | %                 | 30-day LIBOR |         | December 13,  2010 |   |
| Interest  rate swap - other     |       | $                       | 50,000     |            | 1          |              | 3.9925     | %                 | 30-day LIBOR |         | December 13,  2010 |   |

 

F-19

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

The table below presentsthe fair value of our derivative financial instruments, included in otherliabilities on our consolidated balance sheets, as of December 31, 2009and 2008 (in thousands):

 
| ** **                                             | ** ** | **Liability derivatives**   | ** ** |
|--------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **December 31,  2009** | ** ** | **December 31,  2008** | ** ** |
| **Derivatives designated as hedging instruments:**     |       |                        |       |   |   |
| Interest  rate swap                                    |       | $                           | (3,269     | ) | $ | (10,747 | ) |
|                                                   |       |                        |       |   |   |
| **Derivatives not designated as hedging instruments:** |       |                        |       |   |   |
| Interest  rate swap                                    |       | $                           | (1,635     | ) | $ | — |   |
|                                                   |       |                        |       |   |   |
| Total  derivatives                                     |       | $                           | (4,904     | ) | $ | (10,747 | ) |

 

# **The tables below present the effect of the change infair value of our derivative financial instruments in our consolidatedstatements of operations and comprehensive loss for the years ended December 31,2009 and 2008 (in thousands):**

 

**Derivatives in Cash Flow HedgingRelationship**

 
| ** **            | ** ** | **Amount recognized in OCI on derivative**                 | ** ** |
|-----------------------|------------|------------------------------------------------------------|------------|
| ** **            | ** ** | **For the Years Ended**                                    | ** ** |
| ** **            | ** ** | **December 31, 2009**                            | ** ** | **December 31, 2008** | ** ** |
| Interest  rate swap   |       | $                                                          | 2,388      |   | $ | (9,373 | ) |
| Total                 |       | $                                                          | 2,388      |   | $ | (9,373 | ) |
|                  |       |                                                       |       |   |   |
| ** **            | ** ** | **Amount  reclassified from accumulated  OCI into income** | ** ** |
| ** **            | ** ** | **For the  Years Ended**                                   | ** ** |
| **Location**          | ** ** | **December 31, 2009**                            | ** ** | **December 31, 2008** | ** ** |
| Interest  expense (1) |       | $                                                          | 4,631      |   | $ | 2,260 |   |
| Interest  expense (2) |       | 1,105                                                      |       | — |   |
| Total                 |       | $                                                          | 5,736      |   | $ | 2,260 |   |

 

----

(1)                     Increase in fair value as aresult of accrued interest associated with our swap transactions are recordedin accumulated OCI and subsequently reclassified into income. Such amounts areshown net in the statements of equity and offset dollar for dollar.

(2)                     Represents amortization of discontinued cashflow hedge.

 
| ** **            | ** ** | **Amount recognized in income on derivative  (ineffective portion and amount  excluded from effectiveness testing)** | ** ** |
|-----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **            | ** ** | **For the Years Ended**                                                                                                                                      | ** ** |
| **Location**          | ** ** | **December 31, 2009**                                                                                                                                             | ** ** | **December   31, 2008** | ** ** |
| Interest  expense (1) |       | $                                                                                                                                                                           | 2,544      |   | $ | — |   |
| Total                 |       | $                                                                                                                                                                           | 2,544      |   | $ | — |   |

 

----

(1)                     Represents the accelerated reclassification ofamounts in OCI to earnings as a result of the previously hedged forecastedtransaction becoming not probable to occur.

 

F-20

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Tableof Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

**Derivatives Not Designated as Hedge Instuments**

 
| ** **          | ** ** | ** **       | ** ** | **Amount recognized in income on  derivative** | ** ** |
|---------------------|------------|------------------|------------|------------------------------------------------|------------|
| ** **          | ** ** | ** **       | ** ** | **For the Years Ended**                        | ** ** |
| **Description**     | ** ** | **Location**     | ** ** | **December 31, 2009**                | ** ** | **December 31, 2008** | ** ** |
|                |       |             |       |                                           |       |   |   |
| Interest  rate swap |       | Interest expense |       | $                                              | 278        |   | $ | — |   |
| Total               |       |             |       | $                                              | 278        |   | $ | — |   |

 

Over time the unrealizedloss of approximately $4.7 million held in accumulated OCI will be reclassifiedto earnings, all of which is expected to be reclassified over the next 12months.

 

**11.****                              NotesPayable**

 

Our notes payable wasapproximately $3.0 billion in principal amount at December 31, 2009, whichconsists of approximately $2.8 billion of loans secured by mortgages on ourproperties and $150.0 million of borrowings under the revolving loansoutstanding under our credit facility. During June 2009, we paid down $50.0 million of the borrowingsunder our credit facility.  Our notespayable was approximately $3.1 billion at December 31, 2008.  At December 31, 2009, the stated annualinterest rates on our notes payable ranged from 5.02% to 8.33%, with aneffective weighted average interest rate of approximately 5.80%.  As of December 31, 2009, all of our $3.0billion in debt is fixed rate debt, including the $150.0 million in revolvingloans which bear interest at a variable rate, but which are effectively fixedthrough use of interest rate swap agreements. At December 31, 2009, our notes payable had maturity dates thatrange from October 2010 to May 2017. Approximately $209.2 million, or approximately 7%, of our December 31,2009 outstanding debt matures in 2010, $150.0 million of which represents therevolving loans under our credit facility which mature in December 2010and we intend to extend for one year, pursuant to the terms of the creditfacility.  Approximately $542.3 million,or approximately 18%, of our December 31, 2009 outstanding debt matures in2011.

 

Our loan agreementsgenerally require us to comply with certain reporting and financialcovenants.  On December 31, 2009, werestructured the loan secured by Ashford Perimeter, as discussed below under “—TroubledDebt Restructuring,” which was in default prior to the transaction, and as of December 31,2009, we were in default or had events of default on four non-recourse propertyloans with a combined outstanding balance of approximately $129.4 millionsecured by 1650 Arch Street, 222 Bloomingdale Road, Executive Park and theWestern Office portfolio, which consists of the 17655 Waterview, Gateway 12,Gateway 22, Gateway 23 and Southwest Center properties.  Of this $129.4 million, subsequent to December 31,2009, we completed a discounted purchase, through a wholly-owned subsidiary, ofthe approximately $42.8 million note associated with the 1650 Arch Streetproperty, resulting in a gain on the extinguishment of debt of approximately$9.6 million.  The approximately $42.8 millionnote payable remains a liability of the borrower, a limited partnership inwhich we own a 90% controlling interest, and the debt remains in default.  However, for consolidation purposes the debtis fully eliminated.  For the otherproperties with loans in default or that have experienced events of default asof December 31, 2009, we are in discussions with each of the lenders toeither restructure the debt in a way that is supported by the underlying assetvalues of the properties collateralizing the debt, similar to the AshfordPerimeter transaction, or to purchase or payoff the debt at a discount, similarto the 1650 Arch Street transaction.  Wecan provide no assurance that we will be able to restructure the debt or topurchase or payoff the debt at a discount, which could result in foreclosure ora transfer of ownership of the properties to the lenders.  For example, subsequent to December 31,2009, pursuant to a deed in lieu of foreclosure, we transferred ownership ofKeyBank Center to the lender associated with the property.   Further, we believe at least six otherproperties and potentially others have property loans that need to be modifiedduring 2010 in order to support the underlying asset value.  At December 31, 2009, we believe we werein compliance with each of the debt covenants under each of our other loanagreements.

 

***CreditFacility***

 

On December 11, 2007, we, through our operatingpartner, Behringer OP, entered into a secured credit agreement (the “CreditAgreement”) providing for up to $500.0 million of secured borrowings withKeyBanc Capital Markets and Wachovia Securities as co-lead arrangers andKeyBank National Association as administrative agent (referred to herein as “Lender”and as the “Agent,” in their respective roles), and other lending institutionsthat are parties to the credit facility (collectively, the “Lenders”). This credit facility allowed Behringer OP to borrow up to $300.0 million ofrevolving loans and up to $200.0 million in a secured term loan.  As of December 31,2008, there was $200.0 million outstanding under the term loan and noneoutstanding under any revolving loans.

 

F-21

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

On June 9, 2009,Behringer OP entered into a first amendment (the “Modification”) to the CreditAgreement.  Among other things, theModification (1) reduced the total amount of secured borrowings availableunder the credit facility to $193.0 million, available as revolving loans(subject to increase to $300.0 million upon Lender approval and payment ofcertain activation fees to the Agent and Lenders), (2) provided for therepayment and retirement of the $200.0 million term loan contained in theoriginal credit facility, (3) reduced the ratio of EBITDA to fixed chargesthat Behringer OP is required to maintain, (4) allowed Behringer OP to usethe acquisition cost of certain properties in calculating “gross asset value” (asdefined in the Credit Agreement), (5) allowed Behringer OP to incur up to10% of gross asset value in additional recourse indebtedness not previouslypermitted under the loan covenants, (6) eliminated cross-defaults tonon-recourse indebtedness, (7) reduced the required minimum consolidatedtangible net worth to $1.2 billion, (8) expanded the scope of permittedinvestments to include, subject to stated limits, mezzanine mortgagereceivables and securities of publicly-traded REITs, and (9) provided forborrowings to be supported by additional collateral owned by certain of oursubsidiaries, each of which has guaranteed the credit facility and granted afirst mortgage or deed of trust on its real property (the “Collateral PoolProperties”) as security for the credit facility.  The Collateral PoolProperties consist of our One BriarLake Plaza, Westway One and Three EldridgePlace properties in Houston, Texas; our 5 & 15 Wayside property inBurlington, Massachusetts; our 5104 Eisenhower Boulevard property in Tampa,Florida; and our Centreport Office Center property in Ft. Worth, Texas.** **In addition, the Collateral PoolProperties must always have a borrowing base value of $200.0 million, and mustinclude at least four separate properties. As of December 31, 2009, theCollateral Pool Properties has a value, as defined in the Modification, ofapproximately $304.7 million.  The creditfacility will continue to be secured by a perfected first priority lien andsecurity interest in collateral that includes Behringer OP’s interests incertain subsidiaries that directly own our properties, as well as anydistributions from Behringer OP’s subsidiaries, and to be guaranteed byBehringer Harvard REIT I, Inc. and our material subsidiaries, to theextent permitted under other debt obligations.

 

The credit facilitymatures on December 11, 2010.  It may be extended one additional yearupon payment of an extension fee in an amount equal to fifteen basis points onthe total amount of the credit facility in effect on the original maturitydate.  Availability under the Modification is limited, during the initialterm, to the lesser of (a) 60% of the aggregate appraised value of theCollateral Pool Properties (during the initial term), or 57.5% of thataggregate appraised value (during the extension term), or (b) the amountof debt that the Collateral Pool Properties could support under a debt servicecoverage test, determined in the manner provided in the Modification, based ona debt service coverage ratio of 1.30 during the initial term or 1.40 duringthe extension term (the “Borrowing Base Availability”).   Until our Three Eldridge Place propertybecomes stabilized, its contribution to the borrowing base will be equal toBehringer OP’s cash incurred costs, subject to a limit of 25% of the aggregateborrowing base value of all Collateral Pool Properties.

 

Pursuant to theModification, loans under the credit facility bear interest at an annual ratethat is equal to either (1) 0.5% per annum over the “base rate”(calculated as the greater of (i) the Agent’s “prime rate” or (ii) 0.5%above the Federal Funds Effective Rate) or (2) LIBOR plus 2.75%, thelatter of which was applicable following the closing of the Modification andequaled 3.02%.  Previously, the interest rate applicable to loans underthe credit facility could vary based on Behringer OP’s ratio of consolidatedtotal indebtedness to gross asset value and prior to the closing was LIBOR plus1.80%, which equaled 2.12%.  Behringer OP has the right to prepay theoutstanding amount of the loans, in whole or in part, at any time withoutpenalty, provided that any partial payment is in a minimum amount of $1.0million.  Certain mandatory prepayments may be required in the event of acasualty or condemnation of a Collateral Pool Property, or if the outstandingbalance of the loans exceeds the Borrowing Base Availability.

 

As of December 31,2009 there was approximately $150.0 million outstanding under the revolvingloans and we had approximately $32.6 million of additional borrowings availableunder the revolving loans.  As of December 31,2009, as a result of the interest rate swap agreements, the revolving loanseffectively bore interest at a fixed rate of approximately 6.74%.

 

Thefollowing table summarizes our notes payable as of December 31, 2009 (inthousands):

 
| **Principal  payments due in:** |   |      |      |
|---------------------------------|--------|-----------|-----------|
| 2010                            |   | $         | 223,607   |   |
| 2011                            |   | 562,547   |      |
| 2012                            |   | 93,542    |      |
| 2013                            |   | 73,656    |      |
| 2014                            |   | 94,003    |      |
| Thereafter                      |   | 1,927,551 |      |
| unamortized discount            |   | (1,289    | )         |
| Total                           |   | $         | 2,973,617 |   |

 

F-22

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

***Troubled Debt Restructuring***

 

On December 31, 2009, we completed a restructureof the loan secured by our Ashford Perimeter property, located in Atlanta,Georgia.  The balance prior to therestructure of approximately $34.3 million was bifurcated into two tranches withthe second tranche subordinate to the return of and return on additionalcontributions provided by us for debt service on the first tranche, operatingshortfalls, anticipated re-leasing costs and capital improvements at theproperty. In addition, the loan maturity date was extended from February 1,2012 to February 1, 2016. As part of the restructure, loan reserves ofapproximately $2.8 million were applied to the outstanding balance.

 

The loan restructure is considered a “troubled debtrestructuring” as defined by GAAP. The anticipated future cash flows, includingindeterminable future cash payments, may exceed the current carrying value;therefore no change is made to the carrying amount and no gain or loss wasrecognized at December 31, 2009.

 

**12.****                             ****Stockholders’ Equity**

 

***Capitalization***

 

As of December 31,2009, we had 292,493,778 shares of our common stock outstanding, which includes275,038,644 shares issued through our primary offerings, 5,521,002 sharesissued as a result of our 10% stock dividend in October 2005, 18,765,847shares issued through distribution reinvestment, and 22,000 shares issued toBehringer Harvard Holdings, offset by 6,853,715 shares redeemed.  As of December 31, 2009, BehringerHarvard REIT I, Inc. had no shares of preferred stock issued andoutstanding and had options to purchase 74,500 shares of common stockoutstanding at a weighted average exercise price of $9.29.  At December 31, 2009, Behringer OP had432,586 units of limited partnership interest held by third parties, aftergiving 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.  We sold 1,000 shares of ournon-participating, non-voting convertible stock to Behringer Advisors for$1,000 on March 22, 2006.  Pursuant toits terms, the convertible stock is convertible into shares of our common stockwith a value equal to 15% of the amount by which (1) our enterprise value,including the total amount of distributions paid to our stockholders, exceeds (2) thesum of the aggregate capital invested by stockholders plus a 9% cumulative,non-compounded, annual return on such capital. At the date of issuance of the shares of convertible stock, managementdetermined the fair value under GAAP was less than the nominal value paid forthe shares; therefore, the difference is not material.

 

***Share Redemption Program***

 

Our board ofdirectors has authorized a share redemption program for stockholders who haveheld their shares for more than one year. In March 2009, our board of directors suspended, until furthernotice, redemptions under our share redemption program, other than thosesubmitted in respect of a stockholder’s death, disability or confinement to along-term care facility (referred to herein as “exceptional redemptions”) subjectto the limits set forth in our share redemption program.  In November 2009, our board of directorselected until further notice to set a funding limit of $10.0 million forexceptional redemptions considered during 2010 proportional to each redemption period.

 

Under the amendedand restated share redemption program, the per share redemption price willequal:

 

·                 in the case of redemptions other than exceptionalredemptions, 90% of the most recently disclosed estimated value per share (the “valuation”)as determined in accordance with our valuation policy (the “valuation policy”),as such valuation policy is amended from time to time; provided, however, thatthe purchase price per share may not exceed: (1) prior to the firstvaluation conducted by our board, or a committee thereof (the “initial boardvaluation”), under the valuation policy, 90% of the original share price (asdefined herein) less the aggregate amount of net sale proceeds per share, ifany, distributed to stockholders prior to the redemption

 

F-23

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

date as a result of thesale of one or more of our properties (the “sale distributions”); or (2) onor after the initial board valuation, the original share price less any saledistributions; and

 

·                 in the case of exceptional redemptions, (1) priorto the initial board valuation, the original share price less any saledistributions; or (2) on or after the initial board valuation, the mostrecently disclosed valuation, provided, however, that the purchase price pershare may not exceed the original share price less any sale distributions.

 

“Original share price” means the average price pershare the original purchaser or purchasers of shares paid to us for all of hisor her shares (as adjusted for any stock dividends, combinations, splits,recapitalizations and the like with respect to our common stock, withoutattributing any purchase price to the shares issued pursuant to the 10% stockdividend made on October 1, 2005, to holders of shares of record on September 30,2005).

 

We will not redeem,during any twelve-month period, more than 5% of the weighted average number ofshares outstanding during the twelve-month period immediately prior to the dateof redemption.  Further, our board may,from time to time, in its sole discretion, limit the funds that we use toredeem shares; provided that in no event may the funds used for redemptionduring any period exceed the proceeds from our DRP during the period consistingof the preceding four fiscal quarters for which financial statements areavailable, less any redemptions during the same period as set forth in theFourth Amended and Restated Share Redemption Program adopted by our board in November 2009.  Our board reserves the right in its solediscretion at any time and from time to time to (1) waive the one-yearholding period applicable to requests for exceptional redemptions or otherexigent circumstances such as bankruptcy, a mandatory distribution requirementunder a stockholder’s IRA or with respect to shares purchased under or throughour DRP, (2) reject any request for redemption, (3) change thepurchase price for redemptions, (4) limit the funds to be used forredemptions or otherwise change the limitations on redemption or (5) amend,suspend (in whole or in part) or terminate the program.

 

In November 2009,our board of directors elected until further notice to set a funding limit of$10.0 million for exceptional redemptions considered during 2010 proportionalto each redemption period.   Our board maintainsits right to redeem additional shares, subject to the limits set forth in ourshare redemption program, if it deems it to be in the best interest of theCompany and its stockholders.

 

Forthe years ended December 31, 2009 and 2008, we redeemed approximately 3.3million and 3.7 million shares for approximately $31.6 million and $33.0million, respectively.

 

***StockPlans***

 

Our stockholders have approved and adopted the 2005Incentive Award Plan, which allows for equity-based incentive awards to be grantedto our independent directors and consultants and to employees and consultantsof affiliates (as defined in the plan). The 2005 Incentive Award Plan replaced the Non-Employee Director StockOption Plan, the Non-Employee Director Warrant Plan and the 2002 Employee StockOption Plan, each of which was terminated upon the approval of the 2005Incentive Award Plan.  Under our 2005Incentive Award Plan, each non-employee director is automatically granted anoption to purchase 5,000 shares of common stock on the date he first becomes adirector and upon each reelection as a director.  As of December 31, 2009, we hadoutstanding to the independent members of the board of directors options topurchase 74,500 shares of our common stock at a weighted average exercise priceof $9.29 per share, as adjusted for the 10% stock dividend issued October 1,2005 for options that were issued prior to September 30, 2005.  These options have a maximum term of tenyears.  For the grants made in 2005, 2006and 2007 under the 2005 Incentive Award Plan, the options are exercisable asfollows:  25% during 2011, 25% during 2012and 50% during 2013.  For the grants madein 2008 and thereafter under the 2005 Incentive Award Plan, the options becomeexercisable one year after the date of grant. The options were anti-dilutive to earnings per share for the year ended December 31,2009, 2008 and 2007.

 

***Distributions***

 

For the first threemonths of 2009, the declared distributions rate was equal to a daily amount of$0.0017808 per share of common stock, which is equivalent to an annualdistribution rate of 6.5% assuming the share was purchased for $10.00.  Effective April 2009, the declareddistributions rate was reduced to a monthly amount of $0.0271 per share ofcommon stock, which is equivalent to an annual distribution rate of 3.25%assuming the share was purchased for $10.00.

 

Pursuantto our DRP, stockholders may elect to reinvest any cash distribution inadditional shares of common stock.  Werecord a liability for distributions when declared.  The stock issued through the DRP is recordedto equity when the shares are issued. For the years ended December 31, 2009 and 2008, distributionsdeclared and recorded as a reduction to noncontrolling interest in connectionwith the Behringer OP limited partnership units were approximately $0.2 millionand $0.3 million, respectively. Distributions declared and payable as of December 31, 2009 wereapproximately $7.9

 

F-24

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

million, which included approximately $4.0 million ofcash distributions payable and approximately $3.9 million of DRP distributionspayable.

 

Thefollowing are the distributions declared for both our common stock and theBehringer OP limited partnership units during the years ended December 31,2009 and 2008 (in thousands):

 
| **2009**    | ** ** | **Total** | ** ** | **Cash** | ** ** | **DRP** | ** ** |
|-------------|------------|-----------|------------|----------|------------|---------|------------|
| 1st Quarter |       | $         | 46,603     |     | $          | 21,440  |       | $ | 25,163 |   |
| 2nd Quarter |       | 23,777    |       | 11,415   |       | 12,362  |       |
| 3rd Quarter |       | 23,783    |       | 11,891   |       | 11,892  |       |
| 4th Quarter |       | 23,809    |       | 12,236   |       | 11,573  |       |
| Total       |       | $         | 117,972    |     | $          | 56,982  |       | $ | 60,990 |   |
|        |       |      |       |     |       |    |       |
| **2008**    |       |      |       |     |       |    |       |
| 1st Quarter |       | $         | 33,168     |     | $          | 15,628  |       | $ | 17,540 |   |
| 2nd Quarter |       | 35,280    |       | 16,623   |       | 18,657  |       |
| 3rd Quarter |       | 39,590    |       | 18,199   |       | 21,391  |       |
| 4th Quarter |       | 45,994    |       | 20,788   |       | 25,206  |       |
| Total       |       | $         | 154,032    |     | $          | 71,238  |       | $ | 82,794 |   |

 

**13.****                             ****Related Party Transactions**

 

Our advisor and certainof its affiliates have earned fees and compensation in connection with each ofour public offerings and earn fees and compensation in connection with theacquisition, debt financing, management and sale of our assets.  We terminated the third and final primarypublic offering on December 31, 2008.

 

Behringer Advisors, orits affiliates, receives acquisition and advisory fees of up to 2.5% of (1) thepurchase price of real estate investments acquired directly by us, includingany debt attributable to these investments, or (2) when we make aninvestment indirectly through another entity, our pro rata share of the grossasset value of real estate investments held by that entity.  Behringer Advisors or its affiliates alsoreceives up to 0.5% of the contract purchase price of each asset purchased orthe principal amount of each loan made by us for reimbursement of expensesrelated to making the investment. Behringer Advisors earned approximately $0.1 million in acquisition andadvisory fees or reimbursement of expenses in the year ended December 31,2009.  Behringer Advisors earnedapproximately $13.7 million in acquisition and advisory fees and reimbursementof expenses for the investments we acquired in the year ended December 31,2008.  Amounts recognized during the yearended December 31, 2009 were capitalized as part of an acquisition ofland.  Amounts recognized during the yearended December 31, 2008 were capitalized as part of our real estate,goodwill or investments in unconsolidated entities.

 

We pay Behringer Advisorsor its affiliates a debt financing fee equal to 1% of the amount of any debtmade available to us.  We incurred nodebt financing fees for the year ended December 31, 2009 and incurredapproximately $0.9 million in debt financing fees for the year ended December 31,2008.

 

HPT Management Services LP(“HPT Management”), our property manager and an affiliate of our advisor,receives fees for management, leasing and construction supervision of ourproperties, which may be subcontracted to unaffiliated third parties.  The management fees are generally equal toapproximately 3% of gross revenues of the respective property; leasingcommissions are based upon the customary leasing commission applicable to thegeographic location of the respective property; and construction supervisionfees are generally equal to an amount not greater than 5% of all hardconstruction costs incurred in connection with capital improvements, majorbuilding reconstruction and tenant improvements.  In the event that we contract directly with anon-affiliated third party property manager for management of a property, wepay HPT Management an oversight fee equal to 0.5% 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 $17.5 million and $17.6 million inthe years ended December 31, 2009 and 2008, respectively, inclusive ofamounts recorded within discontinued operations, for the services provided byHPT Management in connection with our real estate and investment properties.

 

Depending on the natureof the asset at the time the fee is incurred, we pay Behringer Advisors anannual asset management fee of either (1) 0.6% of aggregate asset valuefor operating assets or (2) 0.6% of total contract purchase price plusbudgeted improvement costs for development or redevelopment assets (each feepayable monthly in an amount equal to one-twelfth of 0.6% of such total amountas of the date it is determinable).  Forthe year ended December 31, 2009, we incurred and expensed approximately$21.9 million of asset management fees as compared to approximately $28.0million

 

F-25

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Table of Contents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

for the year ended December 31,2008, respectively, inclusive of amounts recorded within discontinuedoperations.  Asset management fees of approximately$7.5 million were waived for the year ended December 31, 2009.

 

Behringer Advisorsrequires us to reimburse it for costs and expenses paid or incurred to provideservices to us, including the costs of goods, services or materials used by usand the salaries and benefits of persons employed by it and its affiliates andperforming services for us; provided, however, no reimbursement is made forsalaries and benefits to the extent the advisor receives a separate fee for theservices provided.  HPT Management alsorequires us to reimburse it for costs and expenses paid or incurred to provideservices to us, including salaries and benefits of persons employed by it andits affiliates and engaged in the operation, management, maintenance and leasingof our properties.

 

For the year ended December 31,2009, we incurred and expensed approximately $28.2 million for reimbursement ofthese costs and expenses to Behringer Advisors and HPT Management as comparedto approximately $20.0 million for the year ended December 31, 2008.

 

At December 31,2009, we had payables to related parties of approximately $1.9 millionconsisting primarily of expense reimbursements payable to Behringer Advisorsand property management fees payable to HPT Management.  At December 31, 2008, we had payables torelated parties of approximately $8.3 million consisting primarily ofacquisition and advisory fees, asset management fees, offering costs andoperating expense reimbursements payable to Behringer Advisors and propertymanagement fees payable to HPT Management.

 

Behringer Advisors or itsaffiliates will be paid disposition fees if the advisor or its affiliatesprovide 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, orits affiliates, an amount equal to the lesser of (subject to the limitation setforth below): (a) one-half of the brokerage commission paid, or (b) 3%of the sales price of each property sold. This fee will not be earned or paid unless and until our stockholdershave received total distributions (excluding the 10% stock dividend) in anamount equal to or greater than the sum of the aggregate capital contributed bystockholders plus a 9% annual, cumulative, non-compounded return thereon.  Subordinated disposition fees that are notearned and payable at the date of sale are considered a contingent liabilitywhich will be earned and paid when the above condition has been satisfied, ifever.  As of December 31, 2009,assuming all the conditions above are met, Behringer Advisors would be paidapproximately $1.0 million in disposition fees.

 

We are dependent onBehringer Advisors and HPT Management for certain services that are essentialto us, including 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.

 

**14.****                             ****Commitments and Contingencies**

 

As of December 31,2009, we had commitments of approximately $24.6 million for future tenantimprovements and leasing commissions.

 

Behringer Advisors or itsaffiliates will be paid disposition fees if the advisor or its affiliatesprovides a substantial amount of services, as determined by our independentdirectors, in connection with the sale of one or more properties.  As of December 31, 2009, assuming allconditions are met, Behringer Advisors would be paid approximately $1.0 millionin disposition fees.

 

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Table ofContents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

**15.          Supplemental Cash Flow Information**

 

Supplemental cash flowinformation is summarized below for the years ended December 31, 2009,2008 and 2007 (in thousands):

 
| ** **                                                                | ** ** | **2009** | ** ** | **2008** | ** ** | **2007**  | ** ** |
|---------------------------------------------------------------------------|------------|----------|------------|----------|------------|-----------|------------|
| **Interest paid, net of amounts capitalized**                             |       | $        | 178,072    |     | $          | 181,064   |       | $ | 94,158 |   |
| **Income taxes paid**                                                     |       | $        | 2,039      |     | $          | 2,669     |       | $ | — |   |
|                                                                      |       |     |       |     |       |      |       |
| **Non-cash investing activities:**                                        |       |     |       |     |       |      |       |
| Property  and equipment additions in accrued liabilities                  |       | $        | 7,411      |     | $          | 18,079    |       | $ | 3,742 |   |
| Addition  to investment in unconsolidated entities in accrued liabilities |       | —   |       | —   |       | —    |       |
| Escrow  deposit applied to purchase of real estate                        |       | —   |       | 1,000    |       | —    |       |
|                                                                      |       |     |       |     |       |      |       |
| **Non-cash financing activities:**                                        | * *   | * * | * *   | * * | * *   | * *  | * *   |
| Common  stock issued in distribution reinvestment plan                    |       | $        | 65,900     |     | $          | 79,796    |       | $ | 56,283 |   |
| Stock  dividend                                                           |       | —   |       | —   |       | —    |       |
| Limited  partnership units issued in purchase of real estate              |       | —   |       | —   |       | —    |       |
| Redemption  of stock in accrued liabilities                               |       | —   |       | —   |       | —    |       |
| Mortgage  notes assumed                                                   |       | —   |       | 90,503   |       | 1,251,086 |       |
| Mortgage  notes assumed by purchaser                                      |       | —   |       | (26,827  | )          | —    |       |
| Financing  costs in accrued liabilities                                   |       | —   |       | 17       |       | —    |       |
| Cancellation  of debt through transfer of real estate                     |       | —   |       | 25,698   |       | —    |       |
| Recapture  of noncontrolling interest in lieu of note                     |       | —   |       | 844      |       | —    |       |

 

**16.          Discontinued Operations**

 

On December 31,2009, we sold our Royal Caribbean Center and DeVry University properties, eachlocated in Miramar, Florida to an unaffiliated third party for a combined contractsales price of approximately $43.0 million and resulting in proceeds ofapproximately $41.7 million of which approximately $26.8 million was used torepay the related mortgage debt.  On February 15,2008, we sold our 9100 Mineral Circle property, located in Englewood, Colorado,to an unaffiliated third party for a contract sale price of approximately $27.0million.  On June 5, 2008, wetransferred our 11 Stanwix Street property, located in Pittsburg, Pennsylvania,to the lender associated with the property. On August 1, 2008, we sold our 2383 Utah property, located in ElSegundo, California, to an unaffiliated third party for a contract sale priceof approximately $35.0 million.  Theresults of operations for these properties have been reclassified asdiscontinued operations in the accompanying consolidated statements ofoperations for the years ended December 31, 2009, 2008 and 2007 assummarized in the following table (in thousands):

 
| ** **                                     | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------------|------------|----------------------------------|------------|
| ** **                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                           |       |                             |       |   |   |   |   |
| **Rental revenue**                             |       | $                                | 6,027      |   | $ | 9,780 |   | $ | 9,736 |   |
|                                           |       |                             |       |   |   |   |   |
| **Expenses**                                   |       |                             |       |   |   |   |   |
| Property  operating expenses                   |       | 334                              |       | 1,993 |   | 857 |   |
| Interest  expense                              |       | 1,513                            |       | 3,724 |   | 1,525 |   |
| Real  estate taxes                             |       | 1,169                            |       | 695 |   | 879 |   |
| Property  and asset management fees            |       | 72                               |       | 403 |   | 457 |   |
| Asset  impairment losses                       |       | 17,824                           |       | — |   | — |   |
| Depreciation  and amortization                 |       | 2,880                            |       | 5,283 |   | 4,045 |   |
| **Total expenses**                             |       | 23,792                           |       | 12,098 |   | 7,763 |   |
|                                           |       |                             |       |   |   |   |   |
| Interest  income                               |       | —                           |       | 9 |   | 16 |   |
| **Income (loss) from discontinued operations** |       | $                                | (17,765    | ) | $ | (2,309 | ) | $ | 1,989 |   |

 

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Table ofContents

 

Behringer Harvard REIT I, Inc.

Notes to Consolidated Financial Statements

 

**17.          Quarterly Results (Unaudited)**

 

Presented below is asummary of the unaudited quarterly financial information for the years ended December 31,2009 and 2008 (in thousands except per share data):

 
| **2009 Quarters Ended**                           | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
|                                              |       |              |       |             |       |                  |       |                 |       |
| Rental  revenue                                   |       | $                 | 153,954    |             | $          | 148,625               |       | $                    | 144,911    |   | $ | 150,566 |   |
|                                              |       |              |       |             |       |                  |       |                 |       |
| Loss  from continuing operations                  |       | (45,355           | )          | (246,574         | )          | (47,123               | )          | (82,270              | )          |
| Income  (loss) from discontinued operations       |       | (88               | )          | 73               |       | (50                   | )          | (17,700              | )          |
| Gain  on sale of assets                           |       | —            |       | —           |       | —                |       | —               |       |
| Net  loss                                         |       | (45,443           | )          | (246,501         | )          | (47,173               | )          | (99,970              | )          |
| Net  loss attributable to noncontrolling interest |       | 837               |       | 4,661            |       | 171                   |       | 2,786                |       |
| Net  loss attributable to common stockholders     |       | $                 | (44,606    | )                | $          | (241,840              | )          | $                    | (47,002    | ) | $ | (97,184 | ) |
| Weighted  average shares outstanding              |       | 290,426           |       | 292,022          |       | 292,085               |       | 292,395              |       |
| Basic  and diluted loss per share                 |       | $                 | (0.15      | )                | $          | (0.83                 | )          | $                    | (0.16      | ) | $ | (0.33 | ) |

 
| **2008 Quarters Ended**                           | ** ** | **March 31** | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|------------------|------------|-----------------------|------------|----------------------|------------|
|                                              |       |              |       |             |       |                  |       |                 |       |
| Rental  revenue                                   |       | $                 | 138,080    |             | $          | 155,210               |       | $                    | 154,829    |   | $ | 152,505 |   |
|                                              |       |              |       |             |       |                  |       |                 |       |
| Loss  from continuing operations                  |       | (42,145           | )          | (30,053          | )          | (33,804               | )          | (73,730              | )          |
| Income  (loss) from discontinued operations       |       | 5,233             |       | (1,223           | )          | 9,657                 |       | 160                  |       |
| Gain  on sale of assets                           |       | 185               |       | —           |       | 5,068                 |       | —               |       |
| Net  loss                                         |       | (36,727           | )          | (31,276          | )          | (19,079               | )          | (73,570              | )          |
| Net  loss attributable to noncontrolling interest |       | 286               |       | 234              |       | 247                   |       | (536                 | )          |
| Net  loss attributable to common stockholders     |       | $                 | (36,441    | )                | $          | (31,042               | )          | $                    | (18,832    | ) | $ | (74,106 | ) |
| Weighted  average shares outstanding              |       | 210,475           |       | 223,973          |       | 245,832               |       | 279,974              |       |
| Basic  and diluted loss per share                 |       | $                 | (0.17      | )                | $          | (0.14                 | )          | $                    | (0.07      | ) | $ | (0.26 | ) |

 

**18.          Subsequent Events**

 

On February 1, 2010,pursuant to a deed in lieu of foreclosure, we transferred ownership of ourproperty, KeyBank Center, to the lender associated with this property.  At December 31, 2009, the loan had an outstandingbalance of approximately $27.1 million and a scheduled maturity date of August 2012.  KeyBank Center is located in Cleveland, Ohioand contains approximately 478,000 rentable square feet.

 

On February 9, 2010,we completed a discounted purchase, through a wholly-owned subsidiary, of theapproximately $42.8 million note associated with our property, 1650 Arch, fromthe lender associated with this property, resulting in a gain on extinguishmentof debt of approximately $9.6 million. The loan matures in August 2012. The approximately $42.8 million note payable remains a liability of theborrower, a limited partnership in which we own a 90% controllinginterest.  The debt, which was in defaultat December 31, 2009, remains in default. However, for consolidation purposes the debt is fully eliminated.

 

*****

 

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Table of Contents

 

Reportof Independent****Registered Public Accounting Firm

 

To the Board of Directorsand Stockholders of

Behringer Harvard REIT I, Inc.

Addison, Texas

 

We have audited the consolidatedfinancial statements of Behringer Harvard REIT I, Inc. and subsidiaries(the “Company”) as of December 31, 2009 and 2008 and for each of the threeyears in the period ended December 31, 2009, and have issued our reportthereon dated March 17, 2010 (whichreport expresses an unqualified opinion and includes an explanatory paragraphconcerning the adoption of a new accounting principle in 2009); such financial statements and report are includedelsewhere in this Form 10-K.  Ouraudits also included the financial statement schedules of the Company listed inItem 15.  These financial statementschedules are the responsibility of the Company’s management.  Our responsibility is to express an opinionbased on our audits.  In our opinion,such financial statement schedules, when considered in relation to the basicfinancial statements taken as a whole, present fairly, in all materialrespects, the information set forth therein.

 

/s/ Deloitte & Touche LLP

 

Dallas, Texas

March 17, 2010

 

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Table ofContents

 

**Valuation and Qualifying Accounts**

**Schedule II**

**December 31, 2009**

**( 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, 2009  |       | $                                  | 1,746      |                                | $          | 6,695                          |       | $              | —     |                        | $          | 3,197 |   | $ | 5,244 |   |
| Year  ended December 31, 2008  |       | $                                  | 540        |                                | $          | 1,440                          |       | $              | —     |                        | $          | 234 |   | $ | 1,746 |   |
| Year  ended December 31, 2007  |       | $                                  | 96         |                                | $          | 351                            |       | $              | 93         |                        | $          | — |   | $ | 540 |   |

 

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Table of Contents

 

**BehringerHarvard REIT I, Inc.**

**RealEstate and Accumulated Depreciation**

**Schedule III**

**December 31,2009**

**(inthousands)**

 
| ** **                         | ** ** | ** **       | ** ** | ** **            | ** ** | ** **        | ** ** | ** **      | ** ** | ** **      | ** ** | **Gross  amount**        | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** |
|------------------------------------|------------|------------------|------------|-----------------------|------------|-------------------|------------|-----------------|------------|-----------------|------------|--------------------------|------------|------------------|------------|------------------|------------|--------------|------------|
| ** **                         | ** ** | ** **       | ** ** | ** **            | ** ** | **Initial  cost** | ** ** | **Adjustments** | ** ** | **carried  at** | ** ** | **Accumulated**          | ** ** | **Year of**      | ** ** | **Date**         | ** ** |
| **Property Name**                  | ** ** | **Location**     | ** ** | **Encumbrances  (1)** | ** ** | **Land**          | ** ** | **Building**    | ** ** | **to basis**    | ** ** | **close of  period (2)** | ** ** | **depreciation** | ** ** | **construction** | ** ** | **acquired** | ** ** |
| Ashford  Perimeter                 |       | Atlanta, GA      |       | 31,505                |       | 8,479             |       | 31,662          |       | (12,647         | )          | 27,494                   |       | 6,980            |       | 1982             |       | 01/06/05     |       |
| Lawson  Commons                    |       | St. Paul, MN     |       | 58,062                |       | 2,021             |       | 75,881          |       | 187             |       | 78,089                   |       | 13,710           |       | 1999             |       | 06/10/05     |       |
| Downtown  Plaza                    |       | Long Beach, CA   |       | 12,650                |       | 4,127             |       | 11,874          |       | 1,695           |       | 17,696                   |       | 2,614            |       | 1982             |       | 06/14/05     |       |
| Gateway  12                        |       | Diamond Bar, CA  |       | 70,750                | (3)        | 1,600             |       | 6,319           |       | 11              |       | 7,930                    |       | 1,118            |       | 1999             |       | 07/20/05     |       |
| Gateway  22                        |       | Diamond Bar, CA  |       | —                | (3)        | 3,862             |       | 7,691           |       | (4,088          | )          | 7,465                    |       | 1,325            |       | 1999             |       | 07/20/05     |       |
| Gateway  23                        |       | Diamond Bar, CA  |       | —                | (3)        | 5,295             |       | 10,864          |       | (6,555          | )          | 9,604                    |       | 1,824            |       | 1999             |       | 07/20/05     |       |
| Southwest  Center                  |       | Tigard, OR       |       | —                | (3)        | 2,106             |       | 16,317          |       | 621             |       | 19,044                   |       | 2,977            |       | 2001             |       | 07/20/05     |       |
| 17655  Waterview                   |       | Richardson, TX   |       | —                | (3)        | 2,932             |       | 28,876          |       | 26              |       | 31,834                   |       | 5,106            |       | 1998             |       | 07/20/05     |       |
| Buena  Vista Plaza                 |       | Burbank, CA      |       | 22,000                |       | 3,806             |       | 28,368          |       | 199             |       | 32,373                   |       | 5,044            |       | 1991             |       | 07/28/05     |       |
| One  Financial Plaza               |       | Minneapolis, MN  |       | 43,000                |       | 10,689            |       | 39,482          |       | 4,361           |       | 54,532                   |       | 7,368            |       | 1960             |       | 08/02/05     |       |
| Riverview  Tower                   |       | Knoxville, TN    |       | 30,250                |       | 2,740             |       | 35,181          |       | 951             |       | 38,872                   |       | 6,157            |       | 1985             |       | 10/05/05     |       |
| 1325  G Street                     |       | Washington, D.C. |       | 100,000               |       | 71,313            |       | 60,681          |       | 4,085           |       | 136,079                  |       | 10,629           |       | 1969             |       | 11/15/05     |       |
| Woodcrest  Corporate Center        |       | Cherry Hill, NJ  |       | 50,400                |       | 5,927             |       | 49,977          |       | 1,767           |       | 57,671                   |       | 8,440            |       | 1960             |       | 01/11/06     |       |
| Burnett  Plaza                     |       | Ft Worth, TX     |       | 111,500               |       | 6,239             |       | 157,171         |       | 9,983           |       | 173,393                  |       | 24,988           |       | 1983             |       | 02/10/06     |       |
| AMEC  Paragon I & II      |       | Houston, TX      |       | 16,300                |       | 2,550             |       | 23,338          |       | 33              |       | 25,921                   |       | 3,506            |       | 1999/2003        |       | 03/14/06     |       |
| Paces  West                        |       | Atlanta, GA      |       | 84,000                |       | 8,838             |       | 88,172          |       | 3,106           |       | 100,116                  |       | 13,662           |       | 1987/89          |       | 04/19/06     |       |
| 222  South Riverside Plaza         |       | Chicago, IL      |       | 202,000               |       | 29,787            |       | 190,111         |       | 13,938          |       | 233,836                  |       | 29,807           |       | 1971             |       | 06/02/06     |       |
| The  Terrace Office Park           |       | Austin, TX       |       | 131,000               |       | 17,330            |       | 124,551         |       | 3,071           |       | 144,952                  |       | 18,285           |       | 1997-2002        |       | 06/21/06     |       |
| 600 &  619 Alexander Road |       | Princeton, NJ    |       | 16,500                |       | 3,000             |       | 16,700          |       | 2,319           |       | 22,019                   |       | 2,552            |       | 1983/85          |       | 06/28/06     |       |
| Grandview  II                      |       | Birmingham, AL   |       | 17,000                |       | 1,625             |       | 19,274          |       | 504             |       | 21,403                   |       | 2,533            |       | 1998             |       | 10/20/06     |       |
| Bank  of America Plaza-Charlotte   |       | Charlotte, NC    |       | 150,000               |       | 26,656            |       | 185,215         |       | 5,174           |       | 217,045                  |       | 23,925           |       | 1974             |       | 10/26/06     |       |
| Three  Parkway                     |       | Philadelphia, PA |       | 67,125                |       | 7,905             |       | 69,033          |       | 3,033           |       | 79,971                   |       | 9,470            |       | 1970             |       | 10/30/06     |       |
| 4440  El Camino Real               |       | Los Altos, CA    |       | 26,570                |       | 4,412             |       | 30,794          |       | 123             |       | 35,329                   |       | 3,915            |       | 2000             |       | 11/02/06     |       |
| Fifth  Third Center-Cleveland      |       | Cleveland, OH    |       | 49,250                |       | 1,424             |       | 52,075          |       | 2,690           |       | 56,189                   |       | 6,725            |       | 1991             |       | 11/16/06     |       |
| Resurgens  Plaza                   |       | Atlanta, GA      |       | 82,000                |       | —            |       | 92,980          |       | 4,153           |       | 97,133                   |       | 12,230           |       | 1988             |       | 11/30/06     |       |
| 5 &  15 Wayside           |       | Burlington, MA   |       | —                | (4)        | 8,917             |       | 61,709          |       | 50              |       | 70,676                   |       | 7,411            |       | 1999/2001        |       | 12/08/06     |       |
| One &  Two Eldridge Place |       | Houston, TX      |       | 75,000                |       | 6,605             |       | 89,506          |       | 3,358           |       | 99,469                   |       | 11,587           |       | 1984/86          |       | 12/13/06     |       |
| 250  W. Pratt                      |       | Baltimore, MD    |       | 35,494                |       | 6,700             |       | 39,861          |       | 6,890           |       | 53,451                   |       | 6,854            |       | 1986             |       | 12/04-12/06  |       |
| Centreport  Office Center          |       | Ft Worth, TX     |       | —                | (4)        | 3,175             |       | 12,917          |       | (6,620          | )          | 9,472                    |       | 1,181            |       | 1999             |       | 06/14/07     |       |
| 200  South Wacker                  |       | Chicago, IL      |       | 95,500                |       | 7,842             |       | 141,981         |       | (45,050         | )          | 104,773                  |       | 12,150           |       | 1981             |       | 11/01/07     |       |
| One  Financial Place               |       | Chicago, IL      |       | 188,600               |       | 23,285            |       | 265,099         |       | 10,469          |       | 298,853                  |       | 23,293           |       | 1984             |       | 11/01/07     |       |
| 10 &  120 South Riverside |       | Chicago, IL      |       | 225,000               |       | 40,476            |       | 311,716         |       | 14,996          |       | 367,188                  |       | 28,238           |       | 1965             |       | 11/01/07     |       |
| 111  Woodcrest                     |       | Cherry Hill, NJ  |       | —                |       | 1,000             |       | 5,417           |       | (1,443          | )          | 4,974                    |       | 444              |       | 1964             |       | 11/20/07     |       |
| 1650  Arch Street                  |       | Philadelphia, PA |       | 42,823                |       | 24,000            |       | 60,825          |       | (41,129         | )          | 43,696                   |       | 4,270            |       | 1974             |       | 12/12/07     |       |
| United  Plaza                      |       | Philadelphia, PA |       | 65,042                |       | 23,736            |       | 90,001          |       | 2,448           |       | 116,185                  |       | 7,387            |       | 1975             |       | 12/12/07     |       |
| One  Oxmoor Place                  |       | Louisville, KY   |       | 99,088                | (5)        | 2,851             |       | 17,614          |       | 154             |       | 20,619                   |       | 1,498            |       | 1989             |       | 12/12/07     |       |
| Hurstbourne  Place                 |       | Louisville, KY   |       | —                | (5)        | 4,587             |       | 30,203          |       | (17,441         | )          | 17,349                   |       | 2,203            |       | 1982             |       | 12/12/07     |       |
| Hurstbourne  Park                  |       | Louisville, KY   |       | —                | (5)        | 2,297             |       | 12,728          |       | (3,285          | )          | 11,740                   |       | 1,117            |       | 1971             |       | 12/12/07     |       |
| Hurstbourne  Plaza                 |       | Louisville, KY   |       | —                | (5)        | 4,000             |       | 10,054          |       | 95              |       | 14,149                   |       | 3,282            |       | 1971             |       | 12/12/07     |       |
| Forum  Office Park                 |       | Louisville, KY   |       | —                | (5)        | 6,811             |       | 32,548          |       | 1,443           |       | 40,802                   |       | 2,927            |       | 1984             |       | 12/12/07     |       |
| Lakeview                           |       | Louisville, KY   |       | —                | (5)        | 1,468             |       | 8,574           |       | 343             |       | 10,385                   |       | 813              |       | 1989             |       | 12/12/07     |       |
| Steeplechase  Place                |       | Louisville, KY   |       | —                | (5)        | 1,766             |       | 7,424           |       | 91              |       | 9,281                    |       | 624              |       | 1989             |       | 12/12/07     |       |
| Hunnington                         |       | Louisville, KY   |       | —                | (5)        | 978               |       | 5,507           |       | (2,126          | )          | 4,359                    |       | 420              |       | 1986             |       | 12/12/07     |       |
| City  Hall Plaza                   |       | Manchester, NH   |       | —                | (5)        | 2,516             |       | 27,509          |       | 413             |       | 30,438                   |       | 2,211            |       | 1982             |       | 12/12/07     |       |
| One &  Two Chestnut Place |       | Worcester, MA    |       | —                | (5)        | 2,903             |       | 15,715          |       | (1,091          | )          | 17,527                   |       | 1,226            |       | 1990             |       | 12/12/07     |       |

 

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Table ofContents

 

**BehringerHarvard REIT I, Inc.**

**RealEstate and Accumulated Depreciation**

**ScheduleIII**

**December 31,2009**

**(inthousands)**

** **
| ** **                       | ** ** | ** **         | ** ** | ** **            | ** ** | ** **        | ** ** | ** **      | ** ** | ** **      | ** ** | **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     |       | 5,582                 |       | —            |       | 6,311           |       | (1,994          | )          | 4,317                    |       | 490              |       | 1973             |       | 12/12/07      |       |
| Energy  Centre                   |       | New Orleans, LA    |       | 49,433                |       | 6,134             |       | 59,852          |       | 23,385          |       | 89,371                   |       | 7,550            |       | 1984             |       | 12/12/07      |       |
| Bank  of America Plaza-Las Vegas |       | Las Vegas, NV      |       | 48,239                |       | 10,914            |       | 86,101          |       | (24,411         | )          | 72,604                   |       | 7,601            |       | 1975             |       | 12/12/07      |       |
| KeyBank  Center                  |       | Cleveland, OH      |       | 27,149                |       | 2,031             |       | 21,495          |       | (2,646          | )          | 20,880                   |       | 1,758            |       | 1969             |       | 12/12/07      |       |
| One  Edgewater Plaza             |       | Staten Island, NY  |       | 35,321                | (6)        | 12,789            |       | 26,292          |       | (14,215         | )          | 24,866                   |       | 2,310            |       | 1919             |       | 12/12/07      |       |
| Tice  Building                   |       | Woodcliff Lake, NJ |       | —                | (6)        | 2,500             |       | 18,118          |       | (8,767          | )          | 11,851                   |       | 2,201            |       | 1988             |       | 12/12/07      |       |
| 222  Bloomingdale Road           |       | White Plains, NY   |       | 10,227                |       | —            |       | 13,990          |       | (8,275          | )          | 5,715                    |       | 1,048            |       | 1980             |       | 12/12/07      |       |
| Fifth  Third Center-Columbus     |       | Columbus, OH       |       | 52,500                |       | 3,500             |       | 54,242          |       | 211             |       | 57,953                   |       | 4,621            |       | 1928             |       | 12/12/07      |       |
| City  Center                     |       | St. Petersburg, FL |       | 15,799                |       | 5,200             |       | 30,955          |       | 1,201           |       | 37,356                   |       | 2,973            |       | 1984             |       | 12/12/07      |       |
| 5104  Eisenhower Boulevard       |       | Tampa, FL          |       | —                | (4)        | 2,602             |       | 25,054          |       | —          |       | 27,656                   |       | 2,438            |       | 1998             |       | 12/12/07      |       |
| Crescent  Center                 |       | Memphis, TN        |       | 42,906                |       | 6,377             |       | 59,286          |       | (9,079          | )          | 56,584                   |       | 5,693            |       | 1986             |       | 12/12/07      |       |
| Plaza  at MetroCenter            |       | Nashville, TN      |       | 25,000                |       | 3,341             |       | 35,333          |       | 795             |       | 39,469                   |       | 3,065            |       | 1985             |       | 12/12/07      |       |
| Loop  Central                    |       | Houston, TX        |       | 45,953                |       | 11,653            |       | 86,587          |       | 3,621           |       | 101,861                  |       | 8,168            |       | 1980-1982        |       | 12/12/07      |       |
| Epic  Center                     |       | Wichita, KS        |       | 15,392                | (7)        | 951               |       | 19,609          |       | (6,073          | )          | 14,487                   |       | 1,914            |       | 1987             |       | 12/12/07      |       |
| One  Brittany Place              |       | Wichita, KS        |       | —                | (7)        | 926               |       | 3,478           |       | (2,142          | )          | 2,262                    |       | 264              |       | 1984             |       | 12/12/07      |       |
| Two  Brittany Place              |       | Wichita, KS        |       | —                | (7)        | 926               |       | 1,666           |       | (1,127          | )          | 1,465                    |       | 160              |       | 1984             |       | 12/12/07      |       |
| 801  Thompson                    |       | Rockville, MD      |       | 10,262                |       | 3,200             |       | 10,578          |       | 205             |       | 13,983                   |       | 938              |       | 1963             |       | 12/12/07      |       |
| 500 E.  Pratt                    |       | Baltimore, MD      |       | 58,800                |       | —            |       | 66,390          |       | 366             |       | 66,756                   |       | 5,382            |       | 2004             |       | 12/12/07      |       |
| Westway  One                     |       | Houston, TX        |       | —                | (4)        | 3,655             |       | 26,771          |       | 3,479           |       | 33,905                   |       | 2,752            |       | 2007             |       | 1/15/08       |       |
| One  City Centre                 |       | Houston, TX        |       | 76,162                |       | 19,747            |       | 97,487          |       | 2,949           |       | 120,183                  |       | 5,993            |       | 1962             |       | 6/19/08       |       |
| One  BriarLake Plaza             |       | Houston, TX        |       | —                | (4)        | 9,602             |       | 119,660         |       | 4,268           |       | 133,530                  |       | 6,192            |       | 2000             |       | 9/25/08       |       |
| 1300  Main                       |       | Houston, TX        |       | 34,934                |       | 6,230             |       | 42,253          |       | 671             |       | 49,154                   |       | 2,661            |       | 1955             |       | 10/04 - 09/08 |       |
| Minnesota  Center                |       | Bloomington, MN    |       | 27,608                |       | 3,500             |       | 35,809          |       | (11,039         | )          | 28,270                   |       | 1,780            |       | 1987             |       | 10/03-12/08   |       |
| Colorado  Building               |       | Washington, D.C.   |       | 27,899                |       | 13,328            |       | 28,109          |       | (46             | )          | 41,391                   |       | 1,556            |       | 1903             |       | 08/04-12/08   |       |
| Three  Eldridge Place            |       | Houston ,TX        |       | —                | (4)        | 3,090             |       | 54,968          |       | —          |       | 58,058                   |       | —           |       | 2009             |       | 12/06-11/09   |       |
| Totals                           |       |               |       | 2,807,575             |       | $                 | 542,772    |            | $          | 3,729,889       |       | $                        | (87,358    | )                | $          | 4,185,303        |       | $             | 423,534    |   |   |   |   |   |
|                                  |            |                    |            |                       |            |                   |            |                 |            |                 |            |                          |            |                  |            |                  |            |               |            |  |  |  |  |  |

** **

----

Generally, each ofour properties has a depreciable life of 25 years

 

(1) Excludes unamortizeddiscount of approximately $1.3 million, $150.0 million of revolving loansoutstanding under our credit facility and $17.3 million of consolidated TIC notespayable for our TIC properties, St. Louis Place and Alamo Plaza, which areaccounted for under the equity method of accounting.

(2) The aggregate cost for federal income tax purposes isapproximately $4.7 billion. 

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

(4) 5&15 Wayside, Centreport, 5104 Eisenhower, Westway One, OneBriarLake Plaza and Three Eldridge Place are each held as collateral for ourcredit facility.

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

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

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

 

F-32

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Tableof Contents

 

A summary of activity forreal estate and accumulated depreciation for the years ended December 31,2009, 2008 and 2007 is as follows (in thousands):

 
| ** **                    | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** | **Year Ended**             | ** ** |
|-------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                    | ** ** | **December 31, 2009** | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** |
| Real  Estate:                 |       |                       |       |                       |       |                       |       |
| Balance  at beginning of year |       | $                          | 4,368,727  |                       | $          | 3,997,455                  |       | $ | 1,950,045 |   |
| Additions                     |       | 105,352                    |       | 458,961                    |       | 2,047,410                  |       |
| Deductions                    |       | (288,776                   | )          | (87,689                    | )          | —                     |       |
| Balance  at end of the year   |       | $                          | 4,185,303  |                       | $          | 4,368,727                  |       | $ | 3,997,455 |   |
|                          |       |                       |       |                       |       |                       |       |
| Accumulated  depreciation:    |       |                       |       |                       |       |                       |       |
| Balance  at beginning of year |       | $                          | 263,794    |                       | $          | 116,745                    |       | $ | 42,339 |   |
| Depreciation  expense         |       | 165,871                    |       | 149,987                    |       | 74,406                     |       |
| Deductions                    |       | (6,131                     | )          | (2,938                     | )          | —                     |       |
| Balance  at end of the year   |       | $                          | 423,534    |                       | $          | 263,794                    |       | $ | 116,745 |   |

 

F-33

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Table of Contents

 

**BehringerHarvard REIT I, Inc.**

**MortgageLoans on Real Estate**

**Schedule IV**

**December 31,2009**

**(in thousands)**

 
| **Description**       | ** ** | **Interest  Rate** | ** ** | **Final  Maturity Date** | ** ** | **Periodic payment  terms** | ** ** | **Face amount of  mortgages** | ** ** | **Carrying  amount of  mortgages** | ** ** | **Principal  amount of  loans subject to  deliqunet  principal or  interest** | ** ** |
|-----------------------|------------|--------------------|------------|--------------------------|------------|-----------------------------|------------|-------------------------------|------------|------------------------------------|------------|-------------------------------------------------------------------------------|------------|
|                  |       |               |       |                     |       |                        |       |                          |       |                               |       |                                                                          |       |
| Land  - Austin, Texas |       | 7.75               | %          | June 21,  2013      |       | principal and  interest     |       | $                             | 994        |                               | $          | 994                                                                           |       | $ | — |   |
|                       |            |                    |            |                          |            |                             |            |                               |            |                                    |            |                                                                               |            |  |  |  |

 

The aggregate costfor federal income tax purposes is equal to the gross amount carried at theclose of the period.

 

Changes inmortgage loans for the years ended December 31 are summarized below:

 
| ** **                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |     |       |
| Balance  at beginning of year |       | $        | 3,077      |     | $          | 3,000    |       | $ | 3,000 |   |
| Additions                     |       | 38       |       | 77       |       | —   |       |
| Collections                   |       | (2,121   | )          | —   |       | —   |       |
| Balance  at end of year       |       | $        | 994        |     | $          | 3,077    |       | $ | 3,000 |   |

 

*****

 

F-34

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Table ofContents

 

**EXHIBIT INDEX**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|---------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1                       |       | Eighth Articles  of Amendment and Restatement (previously filed and incorporated by reference  to Form 8-K filed on August 1, 2008)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2                       |       | Amended and  Restated Bylaws (previously filed and incorporated by reference to Amendment  No. 4 to Registrant’s Registration Statement on Form S-11, Commission  File No. 333-91532, filed on February 11, 2003)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2.1                     |       | Amendment to the  Amended and Restated Bylaws (previously filed and incorporated by reference  to Form 8-K filed on February 23, 2009)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1                       |       | Second Amended and  Restated Distribution Reinvestment Plan of the Registrant (previously filed  and incorporated by reference to Form 10-Q filed on November 13,  2009)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2                       |       | Statement regarding  restrictions on transferability of shares of common stock (to appear on stock  certificate or to be sent upon request and without charge to stockholders  issued shares without certificates) (previously filed and incorporated by  reference to Exhibit 4.4 to Registrant’s Post-Effective Amendment  No. 8 to Registration Statement on Form S-11 filed on  April 24, 2008)                                                                                                                                                                                                                                                                                                                                                                     |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1                      |       | Second Amended and  Restated Agreement of Limited Partnership of Behringer Harvard Operating  Partnership I LP (previously filed and incorporated by reference to  Form 8-K filed on January 5, 2007)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2                      |       | Fifth Amended and  Restated Advisory Agreement between the Registrant and Behringer Advisors LP  (previously filed and incorporated by reference to Form 8-K filed on  January 5, 2007), as amended by the First Amendment to the Fifth Amended  and Restated Advisory Management Agreement, dated June 25, 2008  (previously filed and incorporated by reference to Form 8-K filed on  June 25, 2008) and the Second Amendment to the Fifth Amended and  Restated Advisory Management Agreement, dated May 14, 2009, between  Behringer Harvard REIT I, Inc. and Behringer Advisors, LLC (previously  filed and incorporated by reference to Form 10-Q filed on May 15,  2009)                                                                     |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3                      |       | Fifth Amended and  Restated Property Management and Leasing Agreement, dated May 15, 2008,  by and among Behringer Harvard REIT I, Inc., Behringer Harvard Operating  Partnership I LP and HPT Management Services LP (previously filed and  incorporated by reference to Form 8-K filed on May 15, 2008), as  amended by the First Amendment to the Fifth Amended and Restated Property  Management and Leasing Agreement, dated June 25, 2008 (previously filed  and incorporated by reference to Form 8-K filed on June 25, 2008),  and the Second Amendment to the Fifth Amended and Restated Property  Management Agreement, dated August 13, 2008 (previously filed and  incorporated by reference to Form 8-K filed on August 13, 2008) |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4                      |       | Behringer Harvard REIT  I, Inc. 2005 Incentive Award Plan (previously filed and incorporated by  reference to Annex A of the Registrant’s Definitive Proxy Statement on  Schedule 14A, filed on April 15, 2005)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5                      |       | Form of Stock  Option Agreement under Behringer Harvard REIT I, Inc. 2005 Incentive  Award Plan (previously filed and incorporated by reference to Registrant’s  Post-Effective Amendment No. 1 to Form S-3 Registration Statement  on Form S-11, Commission File No. 333-119945, filed on  March 29, 2006)                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6                      |       | Credit Agreement dated  as of December 11, 2007, by and among Behringer Harvard Operating  Partnership I LP, as borrower, Keybank National Association, the other  lenders which are parties to the agreement and other lenders that may become  parties to the agreement, Keybank National Association, as agent, Keybanc  Capital Markets, as Sole Book Manager, Keybank Capital Markets and Wachovia  Bank National Association, as co-lead arrangers, and Aareal Bank AG and  Westdeutsche Immobilienbank AG as co-documentation agents (previously filed  and incorporated by reference to Form 10-K filed on March 31, 2008)                                                                                                                                                |
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7                      |       | First Amendment to the  Credit Agreement and Other Loan Documents by and among Behringer Harvard  Operating Partnership I LP, as borrower, and Behringer Harvard REIT I, Inc,  Behringer Harvard Eldridge Land LP, Behringer Harvard Centreport Office LP,  Behringer Harvard Equity Drive LP, IPC Florida III, LLC, Behringer Harvard  Wayside, LLC and Behringer Harvard Briarlake Plaza                                                                                                                                                                                                                                                                                                                                                                                                       |

 

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Table of Contents

 
|   |   | LP, as guarantors, and  Keybank National Association, as lender, the other lenders which are parties  to the agreement and Keybank National Association, as agent (previously filed  and incorporated by reference to Form 10-Q filed on August 14,  2009)                                                                   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.8   |   | Development Agreement  by and between Behringer Harvard REIT I, Inc. and Behringer Development  Company LP, dated February 29, 2008 (previously filed and incorporated  by reference to Form 8-K filed on March 4, 2008)                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.9   |   | Agreement, dated  November 13, 2008, by and among Behringer Harvard REIT I, Inc.,  Behringer Harvard Operating Partnership I LP, Behringer Advisors, LLC, HPT  Management Services LP and HPT TIC Management Services LP (previously filed  and incorporated by reference to Form 8-K filed on November 18,  2008) |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.10  |   | Letter  Agreement, dated May 14, 2009, between Behringer Harvard REIT  I, Inc. and Behringer Advisors, LLC regarding waiver of asset management  fees (previously filed and incorporated by reference to Form 10-Q filed  on May 15, 2009)                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.11  |   | Letter  Agreement, dated October 29, 2009, between Behringer Harvard REIT  I, Inc. and Behringer Advisors, LLC regarding waiver of asset management  fees (previously filed and incorporated by reference to Form 8-K filed  on October 30, 2009)                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.12  |   | Reimbursement  Agreement, dated November 12, 2009, between Behringer Harvard REIT  I, Inc., Behringer Harvard Holdings, LLC and Robert M. Behringer  (previously filed and incorporated by reference to Form 10-Q filed on  November 13, 2009)                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 10.13  |   | Letter  Agreement, dated February 17, 2010, between Behringer Harvard REIT  I, Inc. and Behringer Advisors, LLC regarding waiver of asset management  fees (previously filed and incorporated by reference to Form 8-K filed  on February 17, 2010)                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 21.1   |   | List of  Subsidiaries *                                                                                                                                                                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 23.1   |   | Consent of  Deloitte & Touche LLP *                                                                                                                                                                                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 31.1   |   | Rule 13a-14(a) or  Rule 15d-14(a) Certification *                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 31.2   |   | Rule 13a-14(a) or  Rule 15d-14(a) Certification *                                                                                                                                                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 32.1   |   | Section 1350  Certifications *                                                                                                                                                                                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 99.1   |   | Fourth Amended and  Restated Share Redemption Program (previously filed and incorporated by  reference to Form 10-Q filed on November 13, 2009)                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                                                                                   |
| 99.2   |   | Amended and Restated  Policy for Estimation of Common Stock Value (previously filed and  incorporated by reference to Form 10-Q filed on August 14, 2009)                                                                                                                                                                    |

 

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*filed herewith

 

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