Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 

**[MarkOne]**

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

 

**CommissionFile Number: 000-53195**

 

**BehringerHarvard Multifamily REIT I, Inc.**

(Exact name ofregistrant as specified in its charter)

 

| **Maryland**                                                    | ** ** | **20-5383745**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (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)                            |

 

Registrant’stelephone number, including area code:**(866)655-3600**

 

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

**None**

 

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

**Commonstock, $0.0001 par value per share**

(Title of Class)

 

Indicate by check mark ifthe Registrant is a well-known seasoned issuer (as defined in Rule 405 ofthe Securities Act). Yes o  No x

 

Indicate bycheck markif the Registrant is not required to file reportspursuant to Section 13 or Section 15(d) of the Act. Yes o  No x

 

Indicate by check markwhether the Registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the Registrantwas required to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.  Yes x No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. o

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated  filer o |   | Accelerated filer o |   | Non-accelerated  filer o |   | Smaller reporting  company x |
|---------------------------------|--------|--------------------------|--------|-------------------------------|--------|-----------------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).       Yes o   No x

 

While there is noestablished market for the registrant’s common stock, the aggregate marketvalue of the Registrant’s common stock held by non-affiliates of the Registrantas of June 30, 2008 (the last business day of the Registrant’s most recentlycompleted second fiscal quarter) was approximately $127.3 million, assuming amarket value of $10.00 per share.

 

As of March 13,2009, the Registrant had approximately 19.0 million shares of common stockoutstanding.

 

DOCUMENTSINCORPORATED BY REFERENCE

 

**The Registrant incorporates by reference portions of itsDefinitive Proxy Statement for the 2008 Annual Meeting of Stockholders, whichis expected to be filed no later than April 20, 2009, into Part IIIof this Form 10-K to the extent stated herein.**

** **

 

 

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**BEHRINGERHARVARD MULTIFAMILY REIT I, INC.**

**FORM 10-K**

**Year Ended December 31, 2008**

 
| ** **      | ** **                                                                                                          | **Page**   |
|-----------------|---------------------------------------------------------------------------------------------------------------------|------------|
| ** **      | **PART I**                                                                                                     |       |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 1.**     | Business                                                                                                            | 3          |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 1A.**    | Risk  Factors                                                                                                       | 9          |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 1B.**    | Unresolved Staff Comments                                                                                           | 53         |
|            |                                                                                                                |       |
| **Item 2.**     | Properties                                                                                                          | 53         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 3.**     | Legal  Proceedings                                                                                                  | 56         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 4.**     | Submission  of Matters to a Vote of Security Holders                                                                | 56         |
| ** **      | ** **                                                                                                          | ** ** |
| ** **      | **PART II**                                                                                                    | ** ** |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 5.**     | Market  for Registrant’s Common Equity, Related Stockholder Matters and Issuer  Purchases of Equity Securities | 57         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 6.**     | Selected  Financial Data                                                                                            | 60         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 7.**     | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                         | 61         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 7A.**    | Quantitative  and Qualitative Disclosures about Market Risk                                                         | 78         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 8.**     | Financial  Statements and Supplementary Data                                                                        | 79         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 9.**     | Changes  in and Disagreements With Accountants on Accounting and Financial Disclosure                               | 79         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 9A(T).** | Controls  and Procedures                                                                                            | 79         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 9B.**    | Other  Information                                                                                                  | 80         |
| ** **      | ** **                                                                                                          | ** ** |
| ** **      | **PART III**                                                                                                   | ** ** |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 10.**    | Directors,  Executive Officers and Corporate Governance                                                             | 81         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 11.**    | Executive  Compensation                                                                                             | 81         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 12.**    | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                    | 81         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 13.**    | Certain  Relationships and Related Transactions, and Director Independence                                          | 81         |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 14.**    | Principal  Accounting Fees and Services                                                                             | 81         |
| ** **      | ** **                                                                                                          | ** ** |
| ** **      | **PART IV**                                                                                                    | ** ** |
| ** **      | ** **                                                                                                          | ** ** |
| **Item 15.**    | Exhibits,  Financial Statement Schedules                                                                            | 82         |
| ** **      | ** **                                                                                                          | ** ** |
| **Signatures**  |                                                                                                                |       |

 

 

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**Forward-Looking Statements**

 

Certainstatements in this Annual Report on Form 10-K constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”) and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  Theseforward-looking statements, include discussion and analysis of the financialcondition of Behringer Harvard Multifamily REIT I, Inc. and oursubsidiaries (which may be referred to herein as the “Company,” “we,” “us” or “our”),our anticipated capital expenditures required to complete projects, amounts ofanticipated cash distributions to our stockholders in the future and othermatters.  These forward-looking statements are not historical facts butare the intent, belief, or current expectations of our management based ontheir knowledge and understanding of the business and industry.  Wordssuch as “may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,”“estimates,” “would,” “could,” “should” and variations of these words andsimilar expressions are intended to identify forward-looking statements. These statements are not guarantees of future performance and are subject torisks, uncertainties, and other factors, some of which are beyond our control,are difficult to predict and could cause actual results to differ materiallyfrom those expressed or forecasted in the forward-looking statements. We intendfor these forward-looking statements to be covered by the applicable safeharbor provisions created by Section 27A of the Securities Act and Section 21Eof the Exchange Act.

 

Forward-lookingstatements that were true at the time made may ultimately prove to be incorrector false.  We caution investors not to place undue reliance onforward-looking statements, which reflect our management’s view only as of thedate of this Annual Report on Form 10-K.  We undertake no obligationto update or revise forward-looking statements to reflect changed assumptions,the occurrence of unanticipated events or changes to future operatingresults.  The forward-looking statements should be read in light of therisk factors identified in the “Risk Factors” section of this Annual Report on Form 10-K.

 

**Cautionary Note**

 

Therepresentations, warranties, and covenants made by us in any agreement filed asan exhibit to this Annual Report on Form 10-K are made solely for thebenefit of the parties to the agreement, including, in some cases, for thepurpose of allocating risk among the parties to the agreement, and should notbe deemed to be representations, warranties, or covenants to or with any otherparties.  Moreover, these representations, warranties, or covenants shouldnot be relied upon as accurately describing or reflecting the current state ofour affairs.

 

**PART I**

 

**1.             Business**

 

**Organization**

 

Behringer HarvardMultifamily REIT I, Inc. (which may be referred to as the “Company,” “we,”“us,” or “our”) was organized in Maryland on August 4, 2006 and haselected to be taxed, and currently qualifies, as a real estate investment trust(“REIT”) for federal income tax purposes. As a REIT, we generally are notsubject to corporate-level income taxes. To maintain our REIT status, we are required, among other requirements,to distribute annually at least 90% of our “REIT taxable income”, as defined bythe Internal Revenue Code of 1986, as amended (the “Code”), to ourstockholders.  If we fail to qualify as aREIT in any taxable year, we would be subject to federal income tax on ourtaxable income at regular corporate tax rates. As of December 31, 2008 we believe we are in compliance with allapplicable REIT requirements.  

 

We invest in and operatemultifamily communities. These multifamily communities include conventionalmultifamily assets, such as mid-rise, high-rise, and garden style properties,and may also include student housing and age-restricted properties, typicallyrequiring residents to be age 55 or older, as well as more opportunistic propertiesin various phases of development, redevelopment or repositioning.  We intend to make investments directly inwholly owned investments and indirectly through co-investment arrangements withother participants (“Co-Investment Ventures”). Further, we may invest in commercial real estate, options to acquirereal estate, real estate-related securities, collateralized mortgage-backedsecurities, mortgage, bridge, mezzanine or other loans and Section 1031tenant-in-common interests, or in entities that make similar investments.  We completed our first investment in April 2007and, as of December 31, 2008, we have made investments in ten multifamilycommunities, nine in various stages of development and one operating property.

 

We have no employees andare supported by related party service agreements. We are externally managed byBehringer Harvard Multifamily Advisors I LP (“Behringer Harvard MultifamilyAdvisors I”), a Texas limited partnership organized in 2006. Behringer HarvardMultifamily Advisors I is responsible for managing our affairs on a day-to-daybasis and for identifying and 

 

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making real estateinvestments on our behalf.  Substantiallyall our business is conducted through our operating partnership BehringerHarvard Multifamily OP I LP, a Delaware limited partnership (“Behringer HarvardMultifamily OP I”). Our wholly-owned subsidiary, BHMF, Inc., a Delawarecorporation (“BHMF Inc.”) owns less than 0.1% of Behringer Harvard MultifamilyOP I as its sole general partner. The remaining ownership interest in BehringerHarvard Multifamily OP I is held as a limited partner’s interest by BHMFBusiness Trust, a Maryland business trust.

 

Our office is located at15601 Dallas Parkway, Suite 600, Addison, Texas 75001, and our toll freetelephone number is (866) 655-3600.  Thename Behringer Harvard is the property of Behringer Harvard Holdings, LLC andis used by permission.

 

**Offerings of our Common Stock**

 

We are authorized toissue 875,000,000 shares of common stock, 1,000 shares of convertible stock and124,999,000 shares of preferred stock. All shares of common stock have a parvalue of $.0001 per share. On August 4, 2006 (date of inception), we sold1,249 shares of our common stock to Behringer Harvard Holdings, LLC (“BehringerHarvard Holdings”) for cash of $10,004. On November 28, 2007, we sold anadditional 23,720 shares of our common stock to Behringer Harvard Holdings forcash of $189,997.

 

On November 22,2006, we commenced a private offering pursuant to Regulation D of theSecurities Act of 1933, as amended (the “Securities Act”) to sell a maximum ofapproximately $400 million of common stock to accredited investors (the “PrivateOffering”). We held all Private Offering proceeds in escrow until after we hadsold our initial $1.5 million of shares of common stock. In April 2007,the Company released the proceeds from escrow and began issuing shares of ourcommon stock. We terminated the Private Offering on December 28, 2007. Wesold a total of approximately 14.2 million shares of common stock and raised atotal of approximately $127.3 million in gross offering proceeds in the PrivateOffering. Net proceeds, after selling commissions, dealer manager fees, andother offering costs, were approximately $114.3 million.

 

On September 5,2008, we commenced a public offering (the “Initial Public Offering”) of up to200,000,000 shares of common stock offered at a price of $10.00 per sharepursuant to a Registration Statement on Form S-11 filed under theSecurities Act.   The Initial PublicOffering also covered the registration of up to an additional 50,000,000 sharesof common stock at a price of $9.50 per share pursuant to our distributionreinvestment plan (“DRIP”).  We reservethe right to reallocate shares of our common stock between the primary offeringand our DRIP.  As of December 31,2008, we sold a total of approximately 1.1 million shares of common stock andraised a total of approximately $10.9 million in gross offering proceeds in theInitial Public Offering. Net proceeds, after selling commissions, dealermanager fees, and other offering costs, were approximately $9.5 million.

 

As of December 31,2008, we had issued approximately 15.4 million shares of our common stock,including 24,969 shares owned by Behringer Harvard Holdings and 18,034 sharesthrough the DRIP and 6,000 shares of restricted stock issued to our independentdirectors for no cash.  As of December 31,2008, we had redeemed 16,667 shares of our common stock and had approximately15.3 million shares of our common stock outstanding.  As of December 31, 2008, we had 1,000shares of non-participation, non-voting convertible stock issued andoutstanding and no shares of preferred stock issued and outstanding.  Aggregate gross offering proceeds from our offeringstotal approximately $138.1 million and net proceeds, after selling commissions,dealer manager fees, and organization and offering expenses, totalapproximately $123.7 million.

 

We intend to use theproceeds from our offerings of our common stock, after deducting offeringexpenses, primarily to make investments in multifamily communities, with aparticular focus on using multiple strategies to acquire high qualitymultifamily communities that will produce rental income. We will acquire ablended portfolio consisting of core, stabilized income generating assets,assets that may benefit from enhancement or repositioning and developmentassets for stabilization to retain as core assets generating income withpotential capital appreciation.

 

# **While conducting an offering, weadmit new stockholders at least monthly. All subscription proceeds are held ina separate account until the subscribing investors are admitted asstockholders. Upon admission of new stockholders, subscription proceeds aretransferred to operating cash and may be utilized as consideration forinvestments and the payment or reimbursement of dealer manager fees, sellingcommissions, offering expenses and operating expenses. Until required for suchpurposes, net offering proceeds are held in short-term, liquid investmentsincluding but not limited to money market accounts and FDIC-insured deposits.**

# ** **

# **Our common stock is not currentlylisted on a national securities exchange. However, management anticipateswithin four to six years after the termination of our public offering to beginthe process of either listing the common stock on a national securitiesexchange or liquidating our assets, depending on the then-prevailing marketconditions.**

# ** **

 

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**2008 Highlights**

 

During2008, we completed the following key transactions:

 

·                  Our InitialPublic Offering become effective for sales in all 50 states and we issuedapproximately 1.1 million shares of our Initial Public Offering of common stock(inclusive of distribution reinvestments and without regard to redemptions),resulting in gross proceeds to us of approximately $10.9 million;

 

·                  We made distributionsof $5.9 million;

 

·                  We earned netincome of $2.6 million, compared to a net loss of $0.2 million in 2007;

 

·                  Our share ofinvestment in unconsolidated Co-Investment Ventures was $96.5 million.  Significant real estate investments by theseCo-Investment Ventures included:

 

·                  advancedapproximately $49.1million under loans with a weighted average interest rate of10.1% to partially fund seven multifamily developments located in Texas,Maryland, Florida, Nevada and Colorado, including the recapitalizationmentioned below;

 

·                  recapitalizedan existing investment in a 430 unit, multifamily community in Henderson,Nevada, acquiring a limited partnership interest for $5.2 million and advancing$14.7 million on a $21.0 million mezzanine loan;

 

·                  acquired a newlimited partnership interest for $7.3 million in a 400 unit, multifamilycommunity in Denver, Colorado; and

 

·                  acquired a newlimited partnership interest for $2.9 million in a 168 unit, multifamilycommunity in Clark County, Nevada.

 

**Investment Objectives**

 

Ouroverall investment objectives, in their relative order of importance are:

 

·                  to preserve andprotect investors capital investments;

 

·                  to generatedistributable cash to our stockholders;

 

·                  to realizegrowth in the value of our investments within four to six years of thetermination of the offering; and

 

·                  to enableinvestors to realize a return on their investment by beginning the process ofliquidation and distribution cash or listing our shares on a nationalsecurities exchange within four to six years of termination of the InitialPublic Offering.

 

**Investment Policies**

 

Our investmentstrategy is designed to provide our stockholders with a diversified portfolioof investments in high quality multifamily investments. We intend to primarilyinvest in, acquire and operate multifamily communities, with a particular focuson using multiple strategies to acquire investments in high quality multifamilycommunities that produce stabilized rental income. We will invest in andacquire a blended portfolio consisting of “core,” stabilized income generatingassets, assets that may benefit from enhancement or repositioning anddevelopment assets forstabilization to retain as core assets generating income with potentialcapital appreciation. As of December 31, 2008, all of these investmentshave been made in multifamily communities located in a top 50 metropolitanstatistical area (“MSA”), nine development projects and one operating property.  Targeted communities include existing coreproperties that are already well positioned and producing rental income, aswell as more opportunistic properties in various phases of development,redevelopment or in need of repositioning.  Further, we may invest incommercial real estate, including office buildings, shopping centers, businessand industrial parks, manufacturing facilities, warehouses and distributionfacilities and motel and hotel properties. We intend to make investments on ourown or through Co-Investment Ventures. We may invest in real estate-relatedsecurities, including securities issued by other real estate companies, eitherfor investment or in change of control transactions completed on a negotiatedbasis or otherwise. We also may originate or invest in commercialmortgage-backed securities, mortgage, bridge, mezzanine or other loans and Section 1031tenant-in-common interests (including those issued by programs sponsored by 

 

 

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Behringer HarvardHoldings, LLC), or in entities that make investments similar to the foregoing.Although we intend to primarily invest in real estate assets located in theUnited States, in the future, we may make investments in real estate assetslocated outside the United States. As of December 31, 2008, we have notmade any international investments. We will not make international investmentsuntil all of our non-independent directors and one of our independent directorshave at least three years of relevant experience acquiring and managing suchinternational investments.

 

As part of our long-terminvestment strategy to acquire high quality multifamily communities, as of December 31,2008, we have made substantially all of our real estate investments byinvesting in Co-Investment Ventures. We believe the strategy will allow us toincrease the number of investments thereby providing greater riskdiversification and to participate with greater economic interest in largerreal estate investments thereby providing greater access to high qualityinvestment opportunities.  To accomplishthis strategy, we intend to enter into additional Co-Investment Ventures whichinvest in mortgage, mezzanine or other loans, equity interests, or otherco-ownership arrangements to acquire, develop or improve properties with thirdparties or certain affiliates of our advisor, including the real estate limitedpartnerships and REITs sponsored by affiliates of our advisor.  Investments inmezzanine and mortgage loans generally can provide higher current income thanequity investments in development real estate projects. Accordingly, we expectto employ a loan strategy primarily during the development phase of theprojects, generally lasting one to three years. In certain cases we may havethe option of converting our loan investment into an equity position, where ourreported earnings may initially decrease upon conversion, but stabilize as the completedproject is leased up. We would attempt to realize value appreciate upon sale ofthe property. We believe this combination of loan and equity investments canlead to higher average returns and a higher-quality portfolio over the longerterm. As of December 31, 2008, loan investments in development projectsthrough Co-Investment Ventures represent a substantial portion of our totalinvestment portfolio.

 

Currentmarket conditions may provide us with near-term opportunities for investmentsin core properties, which are producing rental income where projectingoccupancy and rental rates is more quantifiable and financing is available atsatisfactory terms. Investments in development or redevelopment projects willdepend on securing construction on satisfactory terms and underwritingassumptions which include realistic assessments of current rental rates andoccupancies. These may be structured as Co-Investment Ventures or wholly ownedinvestments. We expect to negotiate terms, particularly purchase price and financingterms, and in the case of equity investments, preferred returns andsubordinations with respect to other equity holders. There is no assurance thatwe will be able to acquire new investments on these terms.

 

In the currenteconomic environment, where both debt and equity capital has become scarce,many owners of real estate require additional capital funding, often in orderto remove or reduce a construction loan, mezzanine loan, other loan or equitycomponent of a project.  We will seek to acquire interests in multifamily communitiesby recapitalizing their capital structures in ways that affords us anadvantaged, first-position priority return relative to other investors in theproject.  In this environment, we envision the ability to provide debt andequity investment capital to recapitalizations on terms that favor us overexisting investors in the project as to our percentage ownership and as topreferred current returns and preferred returns of invested capital.

 

We will look toacquire completed and stabilized multifamily communities that generateattractive current returns and that we believe will also generate a competitivegrowth component for total returns.  To date, one of our Co-Investment Ventures,Johns Creek Walk, was of this type.  If current economic conditionspersist, we expect that the lack of capital will enable us to acquire more ofthese types of assets that meet our investment criteria and are being sold bydistressed sellers.

 

When appropriate,we may also incorporate into our investment portfolio value-added multifamily communitiesthat have either been mismanaged or otherwise have not realized what we believeto be full appreciation and income-generation potential.  Generally, wewould make capital improvements or seek to aesthetically improve the asset andits amenities, increase rents, and stabilize occupancy with the goal of addingan attractive increase in yield and improving total returns.

 

**Co-InvestmentVentures**

 

Asof December 31, 2008, substantially all of our real estate investmentshave been conducted through Co-Investment Ventures. As of December 31,2008 all of our unconsolidated joint ventures have been with Behringer HarvardMaster Partnership I LP (“Behringer Harvard Master Partnership I”) in which weare the manager. The 1% general partner of Behringer Harvard Master PartnershipI is Behringer Harvard Institutional GP LP, a related party that is indirectlyowned by our sponsor, Behringer Harvard Holdings and the 99% limited partner isan unaffiliated social work sector pension fund based in The Netherlands, Stichting Pensioenfonds Zorg en Welijn (“PGGM” unlessby its context “PGGM” also will include the 1% general partner interest). Foreach of our co-investments we have established a separate joint venture (“BHMPCO-JV”) to invest in individual projects.

 

 

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Eachindividual operating property or development project has established one ormore separate legal entities for the sole purpose of obtaining legallyseparated financing, investments in and holding its respective operatingproperty or development project. The collective group of each operatingproperty’s or development project’s separate legal entities is referred toherein as a “Property Entity.” Each Property Entity has been legally separatedand is not co-mingled or cross-collateralized with any other Property Entity;however, we refer to the collective group herein as the “Property Entities.”

 

Asof December 31, 2008, nine of our ten BHMP CO-JVs have made investments inmezzanine or mortgage loans in development, multifamily real estate projects.These BHMP CO-JVs are dependent on the borrowers to pay contractual interestand other obligations. In addition, as of December 31, 2008, seven of ourten BHMP CO-JVs have made equity investments where one   Property Entity is an operating multifamilyproject. These BHMP CO-JVs are dependent on individual multifamily tenants topay contractual rents. We are not aware of any borrowers or tenants who willnot be able to pay their contractual obligations, which if not paid would havea material impact on a BHMP CO-JV or our results of operations. See “Item 2.Properties” for a description of each of these investments.

 

**Borrowing Policies**

 

Ourboard of directors has adopted policies to generally limit our consolidatedborrowings. Our consolidated borrowings shall not exceed 300% of our adjustedconsolidated net assets. For these purposes we define adjusted consolidated netassets as our consolidated net equity less certain intangibles plus accumulatedproperty and finance related depreciation and amortization.  Also,our board of directors has adopted a policy to generally limit our aggregateborrowings to approximately 75% of the aggregate value of our assets unlesssubstantial justification exists that borrowing a greater amount is in our bestinterests.  Our policy limitation,however, does not apply to unconsolidated investments of individual real estateassets and only will apply once we have ceased raising capital under theInitial Public Offering or any subsequent offering and invested substantiallyall of our capital.  As a result, we expectto borrow more than 75% of the contract purchase price of a particular realestate asset we acquire, to the extent our board of directors determines thatborrowing these amounts is prudent.  Forthese purposes, the value of our assets is based on methodologies and policiesdetermined by the board of directors and may include, but do not require,independent appraisals. As of December 31, 2008, we have no consolidatedborrowings. Accordingly, as of December 31, 2008, these policies have notconstrained our ability to incur debt. Should we incur consolidated borrowings,the board of directors may in their discretion modify these limits if in theirjudgment they determine there is substantial justification that borrowings of agreater amount is in our best interests. Our board of directors must review ouraggregate borrowings at least quarterly. In addition to these formal policies, our board will evaluate otherfactors in determining the aggregate borrowings both on a consolidated basisand individually on a per property basis as assets are acquired, disposed andrefinanced. These factors may include debt service coverage, fixed rate andvariable rate targets and scheduling of maturities. Following the investment ofthe proceeds to be raised in the Initial Public Offering, we will seek a long termleverage ratio of approximately 60% upon stabilization of the aggregate valueof our assets.  Our board of directorsmust review our aggregate borrowings at least quarterly.

 

Similarto our investment policies, the current disruptions in the capital markets willrequire us to take a very flexible policy to borrowings. Notwithstanding theabove policies, depending on market conditions we may elect lower leveragepercentages or not borrow at all on a consolidated basis. We may also choose tohave less financing in our Co-Investment Ventures or Property Entityproperties. We will further evaluate both the individual and portfolio maturityterms, where in certain market conditions we may elect to extend maturities forfinancings deemed to have favorable terms. If we do choose to incur fewerborrowings, we would expect to acquire fewer properties. Depending on themarket cap rates and interest rates, this may result in lower net returns onour investments.

 

**Tax Status**

 

Wehave elected to be taxed as a REIT under Sections 856 through 860 of the Code,and have qualified as a REIT since the year ended December 31, 2007. To qualify as a REIT, we must meet a number of organizational and operationalrequirements, including a requirement that we distribute at least 90% of ourREIT taxable income to our stockholders.  As a REIT, we generally will notbe subject to federal income tax at the corporate level.  We are organizedand operate in such a manner as to qualify for taxation as a REIT under theCode, and we intend to continue to operate in such a manner, but no assurancecan be given that we will operate in a manner so as to qualify or remainqualified as a REIT.

 

**Distribution Policy**

 

Inorder to qualify as a REIT, we are required to distribute at least 90% of ourannual REIT taxable income to our stockholders. Until we generate sufficient cash flow from operations or funds fromoperations (“FFO”) to fully fund the payment of distributions, some or all of 

 

 

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our distributions will be paid from othersources.  As of December 31, 2008,our distributions were partially funded from operating cash flow and theremainder from other financing activities, such as our offering proceeds.  In addition, to the extent our investmentsare in development or redevelopment projects or in properties that havesignificant capital requirements, our ability to make distributions may benegatively impacted, especially during our early periods of operation.  As development projects are completed andbegin to generate income, we expect to have additional funds available todistribute to you.  We cannot assure asto when we will begin to generate sufficient cash flow solely from operationsto make distributions.

 

Distributions have andwill continue to be authorized at the discretion of our board of directors,based on its analysis of our earnings, cash flow, anticipated cash flow,capital expenditure requirements, general financial condition or other factorsthat our board of directors deem relevant. The board’s discretion will be influenced, in substantial part, by itsobligation to cause us to comply with the REIT requirements. Because we mayreceive income from interest or rents at various times during our fiscal year,distributions may not reflect our income earned in that particular distributionperiod but may be paid in anticipation of cash flow that we expect to receiveduring a later period or of receiving funds in an attempt to make distributionsrelatively uniform.  Our board ofdirectors currently declares distributions on a monthly or quarterly basis,portions of which are paid on a monthly basis. Monthly distributions are paid based on daily record and distributiondeclaration dates so our investors will be entitled to be paid distributionsbeginning on the day they purchase shares.

 

Many of the factors thatcan affect the availability and timing of cash distributions to stockholdersare beyond our control, and a change in any one factor could adversely affectour ability to pay future distributions. There can be no assurance that futurecash flow will support paying our currently established distributions ormaintaining distributions at any particular level or at all.  Since we began operations, our board ofdirectors has declared distributions as summarized below:

 
| **Period**                | ** ** | **Approximate Amount  Per Share  (Rounded)** | ** **  | **Annualized  Percentage  Return** | ** ** |
|---------------------------|------------|--------------------------------------------------------|-------------|----------------------------------------------|------------|
| Fourth Quarter 2008       |       | $                                                      | 0.001780800 |                                         | 6.5%       | (1) |
| Third Quarter 2008        |       | $                                                      | 0.001013699 |                                         | 4.0%       | (2) |
| Second Quarter 2008       |       | $                                                      | 0.001013699 |                                         | 4.0%       | (2) |
| First Quarter 2008        |       | $                                                      | 0.001013699 |                                         | 4.0%       | (2) |
|                      |       |                                                   |        |                                         |       |
| December 2007        |       | $                                                      | 0.001013699 |                                         | 4.0%       | (2) |
| July - November 2007 |       | $                                                      | 0.000986301 |                                         | 4.0%       | (3) |

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(1)          Assuming a share price of $10.00 per share

 

(2)          Assuming a share price of $9.25 per share

 

(3)          Assuming a share price of $9.00 per share

 

**Competition**

 

We are subject tosignificant competition in seeking real estate investments and residents. We compete with many third parties engaged in real estate investment activitiesincluding other REITs, specialty finance companies, savings and loanassociations, banks, mortgage bankers, insurance companies, mutual funds,institutional investors, investment banking firms, lenders, hedge funds,governmental bodies and other entities.  We also face competition fromother real estate investment programs, including other Behringer Harvardprograms, for investments that may be suitable for us.  Many of ourcompetitors have substantially greater financial and other resources than wehave and may have substantially more operating experience than either us orBehringer Harvard Multifamily Advisors I.  They also may enjoy significantcompetitive advantages, among other things, related to cost of capital,governmental regulation, access to real estate investments and residentservices.

 

 

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**Regulations**

 

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

 

**Environmental**

 

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

 

**Employees**

 

We have noemployees.  Behringer Harvard Multifamily Advisors I and other affiliatesof Behringer Harvard Holdings perform a full range of real estate services forus, including acquisitions, property management, accounting, legal, assetmanagement, wholesale brokerage and investor relations services.

 

We are dependenton affiliates of Behringer Harvard Holdings for services that are essential tous, including the sale of shares of our common stock, asset acquisitiondecisions, property management and other general administrativeresponsibilities.  In the event that these companies were unable toprovide these services to us, we would be required to provide such servicesourselves or obtain such services from other sources.

 

**Industry Segment**

 

Our current businessconsists of investing in and operating multifamily communities. Substantiallyall of our consolidated net income is from real estate properties that we ownthrough joint ventures, and we account for each joint venture under the equitymethod of accounting. Management evaluates operating performance on anindividual joint venture level. However, as each of our joint ventures hassimilar economic characteristics in our consolidated financial statements, thecompany is managed on an enterprise-wide basis with one reportable segment.

 

**Available Information**

 

We electronicallyfile annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and all amendments to those reports with theSecurities and Exchange Commission (the “SEC”).  We also have filed withthe SEC registration statements on Form S-11 in connection with theInitial Public Offering of our common stock.  Copies of our filings withthe SEC may be obtained from the website maintained for us and our affiliatesat *www.behringerharvard.com* or at the SEC’swebsite at *www.sec.gov*.  Access to thesefilings is free of charge.  We are not incorporating our website or anyinformation from the website into this Form 10-K.

 

**Item 1A.  Risk Factors**

 

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

 

 

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**RisksRelated to an Investment in Behringer Harvard Multifamily REIT I**

 

***There is no public trading market for shares of our commonstock; therefore, it will be difficult for you to sell your shares.  Ifyou are able to sell your shares, you may have to sell them at a substantialdiscount from the offering price.***

 

There is no public marketfor the shares.  In addition, the price you receive for the sale of anyshares of our common stock is likely to be less than the proportionate value ofour investments.  Therefore, you should purchase the shares only as along-term investment.  The minimum purchase requirements and suitabilitystandards imposed on prospective investors in this offering also apply tosubsequent purchasers of our shares.  If you are able to find a buyer foryour shares, you may not sell your shares to such buyer unless the buyer meetscertain applicable blue sky (state-mandated) suitability standards, which mayinhibit your ability to sell your shares.  Moreover, our board ofdirectors has approved the share redemption program.  Our board ofdirectors may reject any request for redemption of shares or amend, suspend orterminate our share redemption program at any time.  Therefore, it will bedifficult for you to sell your shares promptly or at all.  You may not beable to sell your shares in the event of an emergency, and, if you are able tosell your shares, you may have to sell them at a substantial discount from theoffering price.  It is also likely that your shares would not be acceptedas the primary collateral for a loan.

 

***Both we and our advisor have limited operating histories.***

 

We and our advisor arerecently organized companies and have limited operating histories.  Wewere incorporated in August 2006, and we have acquired real estate-relatedassets relating to only ten specific properties, and no assurances can be giventhat we will acquire any additional properties or real estate-relatedassets.  Neither our officers and directors, nor the officers andemployees of our advisor, have extensive experience investing in or originatingdifferent forms of debt financing such as mortgages, bridge, mezzanine or otherloans beyond this real estate program.

 

You should consider ourAnnual Report in light of the risks, uncertainties and difficulties frequentlyencountered by companies that are, like us, in their early stage ofdevelopment.  To be successful in this market, we must, among otherthings:

 

·                  identify and acquire properties and other realestate-related assets that further our investment strategies;

 

·                  maintain our dealer manager’s network oflicensed securities brokers and other agents;

 

·                  attract, integrate, motivate and retainqualified personnel to manage our day-to-day operations;

 

·                  respond to competition for our targetedproperties and other real estate-related assets as well as for potentialinvestors in us; and

 

·                  continue to build and expand ouroperations structure to support our business.

 

We cannot guarantee thatwe will succeed in achieving these goals, and our failure to do so could causeyou to lose all or a portion of your investment.

 

***The prior performance of real estate investment programssponsored by affiliates of our advisor or our Chairman of the Board, Robert M.Behringer, may not be an indication of our future results.***

 

You should not rely uponthe past performance of other real estate investment programs sponsored byaffiliates of our advisor or Robert M. Behringer to predict our futureresults.  Accordingly, the prior performance of real estate investmentprograms sponsored by affiliates of our Chairman of the Board, Mr. Behringer,and our advisor may not be indicative of our future results.

 

***We may suffer from delays in locating suitable investments,which could adversely affect the return on your investment****.*

 

Our ability to achieveour investment objectives and to make distributions to our stockholders isdependent upon the performance of our advisor in the acquisition of ourinvestments and the determination of any financing arrangements as well as theperformance of our property manager, the selection of multifamily communityresidents and the negotiation of leases.  The current market forproperties that meet our investment objectives is highly competitive as is theleasing market for such properties.  The more shares we sell in thisoffering, the greater our challenge will be to invest all of the net offeringproceeds on attractive terms.  Except for the investments described in the“Item 2. Properties” section of this annual report, you will have noopportunity to evaluate the terms of transactions or other economic orfinancial data concerning our investments.  You must rely entirely on theoversight of our board of directors, the management ability of our advisor andthe performance of the property manager.  We cannot be sure that ouradvisor will be successful in obtaining suitable investments on financiallyattractive terms.

 

 

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We could suffer fromdelays in locating suitable investments as a result of our reliance on ouradvisor at times when management of our advisor is simultaneously seeking tolocate suitable investments for other Behringer Harvard-sponsored programs,some of which have investment objectives and employ investment strategies thatare similar to ours.  Although our sponsor generally seeks to avoidsimultaneous public offerings of funds that have a substantially similar mix offund characteristics, including targeted investment types, investmentobjectives and criteria, and anticipated fund terms, there may be periodsduring which one or more Behringer Harvard-sponsored programs are seeking toinvest in similar properties.

 

Additionally, as a publiccompany, we are subject to the ongoing reporting requirements under theExchange Act.  Pursuant to the Exchange Act, we may be required to filewith the SEC financial statements of properties we acquire and investments wemake in real estate-related assets.  To the extent any required financialstatements are not available or cannot be obtained, we will not be able toacquire the investment.  As a result, we may not be able to acquirecertain properties or real estate-related assets that otherwise would be asuitable investment.  We could suffer delays in our investmentacquisitions due to these reporting requirements.

 

Furthermore, where weacquire properties prior to the start of construction or during the earlystages of construction, it will typically take several months to completeconstruction and rent available space.  Therefore, you could suffer delaysin the receipt of distributions attributable to those particular properties.

 

Delays we encounter inthe selection, acquisition and development of properties could adversely affectyour returns.  In addition, if we are unable to invest our offeringproceeds in real properties and real estate-related assets in a timely manner,we will hold the proceeds of this offering in an interest-bearing account,invest the proceeds in short-term, liquid investments, including, but notlimited to, money market accounts and FDIC-insured deposits, or, ultimately,liquidate.  In such an event, our ability to pay distributions to ourstockholders and the returns to our stockholders would be adversely affected.

 

***Investors who invest in us at the beginning of our offeringmay realize a lower rate of return than later investors.***

 

Because we have onlyminimal investments and have not identified a significant number of investmentsfor which to apply proceeds from this offering, there can be no assurances asto when we will begin to generate sufficient cash flow to fully fund orcontinue making distributions.  As a result, investors who invest in usbefore we commence significant real estate operations or generate significantcash flow may realize a lower rate of return than later investors.  Weexpect to have little cash flow from operations available for distributionuntil we make substantial investments.  In addition, to the extent ourinvestments may be in development or redevelopment projects, properties, orother real estate-related assets that have significant capital requirements,our ability to make distributions may be negatively impacted, especially duringour early periods of operation.  Therefore, until such time as we havesufficient cash flow from operations to fund fully the payment of distributionstherefrom, some or all of our distributions will be paid from other sources,such as from the proceeds of this or other offerings, cash advances to us byour advisor, cash resulting from a waiver of asset management fees, andborrowings, including borrowings secured by our assets, in anticipation offuture operating cash flow.

 

***Investors who invest later in this offering may realize alower rate of return than investors who invest earlier in the offering to theextent we fund distributions from other than operating cash flow.***

 

To the extent we incurdebt to fund distributions earlier in this offering, the amount of cashavailable for distributions in future periods will be decreased by therepayment of such debt.  Similarly, if we use offering proceeds to funddistributions, later investors may experience immediate dilution in theirinvestment because a portion of our net assets would have been used to funddistributions instead of retained in our company and used to make real estateinvestments.  Earlier investors will benefit from the investments madewith funds raised later in the offering, while later investors may not share inall of the net offering proceeds raised from earlier investors.

 

***We may have to make expedited decisions on whether to investin certain properties or real estate-related assets, including prior to receiptof detailed information on the investment.***

 

In the current realestate market, our advisor and board of directors may frequently be required tomake expedited decisions in order to effectively compete for the acquisition ofproperties and other real estate-related assets.  Additionally, we may berequired to make substantial non-refundable deposits prior to the completion ofour analysis and due diligence on property or real estate-related assetacquisitions and the actual time period during which we will be allowed toconduct due diligence may be limited.  In these cases, the informationavailable to our advisor and board of directors at the time of making anyparticular investment decision, including the decision to pay anynon-refundable deposit and the decision to consummate any particularacquisition, may be limited, and our advisor and board of directors may nothave access to detailed information regarding any particular investmentproperty, such as physical 

 

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characteristics,environmental matters, zoning regulations or other local conditions affectingthe investment property.  Therefore, no assurance can be given that ouradvisor and board of directors will have knowledge of all circumstances thatmay adversely affect an investment.  In addition, our advisor and board ofdirectors expect to rely upon independent consultants in connection with theirevaluation of proposed investment properties, and no assurance can be given asto the accuracy or completeness of the information provided by such independentconsultants.

 

***Because this is a blind pool offering and we have not specifiedproperties or real estate-related assets to acquire with a significant portionof the proceeds from this offering, you will not have the opportunity toevaluate our additional investments before we make them.***

 

Because we have not yetidentified any additional investments that we may make with proceeds from thisoffering, we are only able to provide you with information to evaluate ourcurrent, limited number of investments.  We will seek to investsubstantially all of the offering proceeds available to us for investment,after the payment of fees and expenses, in the acquisition of real estate andreal estate-related assets.

 

Because we have onlyacquired a few interests in properties and other real estate-related assets,our success is totally dependent on our ability to acquire additionalinvestments.  Thus, your investment will be subject to the risks generallyattendant to real property and other real estate-related assets, such as:

 

·                  the risk that assets may not perform in accordancewith expectations, including projected occupancy and rental rates for realproperties;

 

·                  the risk that we may overpay for assets; and

 

·                  the risk that we may underestimate thecost of improvements required to bring an acquired property up to standardsestablished for its intended use or its intended market position.

 

***If we are unable to raise substantial funds in thisoffering, we will be limited in the number and type of properties and realestate-related assets we may acquire and the return on your investment in usmay fluctuate with the performance of the specific investments we acquire.***

 

This offering is beingmade on a “best efforts” basis, whereby the brokers participating in theoffering are required to use only their best efforts to sell our shares andhave no firm commitment or obligation to purchase any of the shares.  As aresult, we cannot assure you as to the amount of proceeds that will be raisedin this offering.  If we are unable to raise substantial funds in thisoffering, we will make fewer additional investments resulting in lessdiversification in terms of the number of assets owned, the geographic regionsin which our properties and real estate-related assets are located and thetypes of assets that we acquire.  In such event, the likelihood of ourprofitability being affected by the performance of any one of our assets willincrease.  For example, in the event we are not able to raise substantialproceeds from this offering, we will most likely be limited to make ouradditional investments only through one or more joint ventures with thirdparties and may only be able to make a few such investments.  As of December 31,2008, we have made substantially all of our current investments through jointventures and intend to continue this strategy.  If we are able to makeonly a few additional investments, we would not achieve broad diversificationof our assets.  Additionally, we are not limited in the number or size ofour assets or the percentage of net proceeds we may dedicate to a singleasset.  Your investment in our shares will be subject to greater risk tothe extent that we lack a diversified portfolio.  In addition, if we areunable to raise substantial funds, our fixed operating expenses, as apercentage of gross income, would be higher, and our financial condition andability to make distributions could be adversely affected.

 

***If welose or are unable to obtain key personnel, our ability to implement ourinvestment strategies could be delayed or hindered***.

 

*Oursuccess depends to a significant degree upon the continued contributions of ourchairman and certain executive officers and other key personnel of us, ouradvisor and its affiliates, including Robert M. Behringer and Robert S. Aisner,each of whom would be difficult to replace. We do not have employment agreements with the executive officers andother key personnel of us, our advisor and its affiliates, and we cannotguarantee that they will remain affiliated with us.  Although several of the executive officersand other key personnel of us, our advisor and its affiliates, including Mr. Behringerand Mr. Aisner, have entered into employment agreements with affiliates ofour advisor, including Harvard Property Trust, these agreements are terminableat will, and we cannot guarantee that such persons will remain affiliated withour advisor.  If any of our key personnelwere to cease their affiliation with us, our advisor or its affiliates, our operatingresults could suffer.  Further, althoughBehringer Harvard Holdings has key person insurance on the lives*

* *

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* *

*ofRobert M. Behringer, Robert S. Aisner, Gerald J. Reihsen, III, Gary S.Bresky and M. Jason Mattox and Jeffrey S. Schwaber, we do not intend toseparately maintain key person life insurance on these individuals, or anyother person.  We believe that our futuresuccess depends, in large part, upon our advisor’s and its affiliates’ abilityto hire and retain highly skilled managerial, operational and marketingpersonnel.  Competition for persons withthese skills is intense, and we cannot assure you that our advisor will besuccessful in attracting and retaining such skilled personnel.  Further, we have established, and intend inthe future to establish, strategic relationships with firms that have specialexpertise in certain services or as to assets both nationally and in certaingeographic regions.  Maintaining theserelationships will be important for us to effectively compete for assets.  We cannot assure you that we will besuccessful in attracting and retaining such strategic relationships.  If we lose or are unable to obtain the servicesof key personnel or do not establish or maintain appropriate strategicrelationships, our ability to implement our investment strategies could bedelayed or hindered.*

* *

***If we internalize our management functions, your interest inus could be diluted, and we could incur other significant costs associated withbeing self-managed.***

 

Our strategy may involveinternalizing our management functions.  If we internalize our managementfunctions, we may elect to negotiate to acquire our advisor’s and propertymanager’s assets and personnel.  Under our advisory management agreement,we are restricted from hiring or soliciting any employee of our advisor or itsaffiliates for one year from the termination of the agreement.  We aresimilarly restricted under our property management agreement with respect tothe employees of our property manager or its affiliates.  Theserestrictions could make it difficult to internalize our management functionswithout acquiring assets and personnel from our advisor and its affiliates forconsideration that would be negotiated at that time.  At this time, wecannot be sure of the form or amount of consideration or other terms relatingto any such acquisition.  Such consideration could take many forms,including cash payments, promissory notes and shares of our stock.  Thepayment of such consideration could result in dilution of your interests as astockholder and could reduce the net income per share and funds from operationsper share attributable to your investment.

 

In addition, while wewould no longer bear the costs of the various fees and expenses we expect topay to our advisor under the advisory management agreement if we internalizemanagement, our direct expenses would include general and administrative costs,including legal, accounting and other expenses related to corporate governanceand SEC reporting and compliance.  We would also incur the compensationand benefits costs of our officers and other employees and consultants that wenow expect will be paid by our advisor or its affiliates.  In addition, wemay issue equity awards to officers, employees and consultants, which awardswould decrease net income and funds from operations and may further dilute yourinvestment.  We cannot reasonably estimate the amount of fees to ouradvisor we would save and the costs we would incur if we becameself-managed.  If the expenses we assume as a result of an internalizationare higher than the expenses we avoid paying to our advisor, our net income pershare and funds from operations per share would be lower as a result of theinternalization than it otherwise would have been, potentially decreasing theamount of funds available to distribute to our stockholders and the value ofour shares.

 

As currently organized,we will not directly employ any employees.  If we elect to internalize ouroperations, we would employ personnel and would be subject to potentialliabilities commonly faced by employers, such as workers disability andcompensation claims, potential labor disputes and other employee-relatedliabilities and grievances.  Nothing in our charter prohibits us fromentering into the transaction described above.

 

If we internalize ourmanagement functions, we could have difficulty integrating these functions as astand-alone entity.  As of December 31, 2008, certain personnel ofour advisor and its affiliates perform property management, asset managementand general and administrative functions, including accounting and financialreporting, for multiple entities.  We could fail to properly identify theappropriate mix of personnel and capital needs to operate as a stand-aloneentity.  An inability to manage an internalization transaction effectivelycould thus result in our incurring excess costs and/or suffering deficienciesin our disclosure controls and procedures or our internal control overfinancial reporting.  Such deficiencies could cause us to incur additionalcosts, and our management’s attention could be diverted from most effectivelymanaging our portfolio.

 

***If we pay distributions from sources other than our cashflow from operations, we will have fewer funds available to make investmentsand your overall return may be reduced.***

 

Our organizationaldocuments permit us to make distributions from any source, such as from theproceeds of our prior private offering, this offering or other offerings, cashadvances to us by our advisor, cash resulting from a waiver of asset managementfees, and borrowings, including borrowings secured by our assets, inanticipation of future operating cash flow.  If we fund distributions fromfinancings or the net proceeds from this offering, we will have fewer fundsavailable for acquiring properties and other investments, and your overallreturn may be reduced.  Further, to the extent distributions exceed cashflow from operations, a 

 

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stockholder’s basis inour stock will be reduced and, to the extent distributions exceed a stockholder’sbasis, the stockholder may recognize capital gain.  We paid approximately$5,937,182 and $515,214 in distributions, for the year ended December 31,2008 and 2007, respectively.  We have elected to use offering proceedsfrom our offerings to pay a significant portion of these authorizeddistributions with the balance paid from operations and interest income.

 

***Our rights and the rights of our stockholders to recoverclaims against our independent directors are limited, which could reduce yourand our recovery against them if they negligently cause us to incur losses.***

 

Maryland law providesthat a director has no liability in that capacity if he performs his duties ingood faith, in a manner he reasonably believes to be in our best interests andwith the care that an ordinarily prudent person in a like position would useunder similar circumstances.  Our charter provides that generally noindependent director shall be liable to us or our stockholders for monetarydamages and that we will generally indemnify them for losses unless they aregrossly negligent or engage in willful misconduct.  As a result, you andwe may have more limited rights against our independent directors than mightotherwise exist under common law, which could reduce your and our recovery fromthese persons if they act in a negligent manner. In addition, we may beobligated to fund the defense costs incurred by our independent directors (aswell as by our other directors, officers, employees of our advisor and itsaffiliates and agents) in some cases, which would decrease the cash otherwiseavailable for distributions to you.  We will also purchase and maintaininsurance on behalf of all of our directors and officers against liabilityasserted against or incurred by them in their official capacities with us,whether or not we are required or have the power to indemnify them against thesame liability.

 

***We have relatively less experience with respect tointernational investments as compared to domestic investments, which couldadversely affect our return on international investments.***

 

The experience of ouradvisor and its affiliates with respect to investing in multifamily communitiesor other real estate-related assets located outside the United States is not asextensive as it is with respect to investments in the United States.  Wemay make international investments and when one of our independent directorshas at least three years of relevant experience acquiring and managing suchinternational investments.  If and when we do make internationalinvestments, our relatively limited experience with respect to such investmentscould adversely affect our return on them.

 

***Your investment may be subject to additional risks if wemake international investments.***

 

In the future, we maymake investments in real estate assets located outside the United States andmay make or purchase mortgage, bridge, mezzanine or other loans or jointventure interests in mortgage, bridge, mezzanine or other loans made to aborrower located outside the United States or secured by property locatedoutside the United States.  Any international investments may be affectedby factors peculiar to the laws of the jurisdiction in which the borrower orthe property is located.  These laws may expose us to risks that aredifferent from and in addition to those commonly found in the UnitedStates.  Foreign investments could be subject to the following risks:

 

·                  governmental laws, rules andpolicies, including laws relating to the foreign ownership of real property ormortgages and laws relating to the ability of foreign persons or corporationsto remove profits earned from activities within the country to the person’s orcorporation’s country of origin;

 

·                  variations in currency exchange rates;

 

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

 

·                  changes in relative interest rates;

 

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

 

·                  changes in real estate and other taxrates, the tax treatment of transaction structures and other changes inoperating expenses in a particular country where we have an investment;

 

·                  lack of uniform accounting standards(including availability of information in accordance with U.S. generallyaccepted accounting principles);

 

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·                  changes in land use and zoning laws;

 

·                  more stringent environmental laws orchanges in these laws;

 

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

 

·                  we, our sponsor, our advisor and itsaffiliates have relatively less experience investing in real property or otherinvestments outside the United States than within the United States; and

 

·                  legal and logistical barriers toenforcing our contractual rights.

 

Any of these risks couldhave an adverse effect on our business, results of operations and ability topay distributions to our stockholders.

 

***If our sponsor, our advisor or its affiliates waive certainfees due to them, our results of operations and distributions may beartificially high.***

 

From time to time, oursponsor, our advisor or its affiliates may agree to waive or defer all or aportion of the acquisition, asset management or other fees, compensation orincentives due to them, pay general administrative expenses or otherwisesupplement stockholder returns in order to increase the amount of cashavailable to make distributions to stockholders.  If our sponsor, ouradvisor or its affiliates choose to no longer waive or defer such fees andincentives, our results of operations will be lower than in previous periodsand your return on your investment could be negatively affected.

 

**RisksRelated to Conflicts of Interest**

 

We will be subject toconflicts of interest arising out of our relationships with our advisor and itsaffiliates, including the material conflicts discussed below.

 

***Because a number of Behringer Harvard-sponsored real estateprograms use investment strategies that are similar to ours, our advisor andits and our executive officers will face conflicts of interest relating to thepurchase of properties and other real estate-related assets, and such conflictsmay not be resolved in our favor.***

 

Although our sponsorgenerally seeks to avoid simultaneous public offerings of funds that have asubstantially similar mix of fund characteristics, including targetedinvestment types, investment objectives and criteria, and anticipated fundterms, there may be periods during which one or more BehringerHarvard-sponsored programs are seeking to invest in similar properties andother real estate-related investments.  In particular, Behringer HarvardOpportunity REIT II (which is currently conducting an initial public offering)and Behringer Harvard REIT II (which has filed a registration statementrelating to a planned initial public offering) are seeking to raise significantoffering proceeds for investment in a broad range of property types, includingmultifamily communities.  As a result, we may be buying properties andother real estate-related investments at the same time as one or more of theother Behringer Harvard-sponsored programs managed by officers and employees ofour advisor and/or its affiliates, and these other Behringer Harvard-sponsored programsmay use investment strategies that are similar to ours.  Our executiveofficers and the executive officers of our advisor are also the executiveofficers of other Behringer Harvard-sponsored REITs and their advisors, thegeneral partners of Behringer Harvard-sponsored partnerships and/or theadvisors or fiduciaries of other Behringer Harvard-sponsored programs, andthese entities are and will be under common control.  There is a risk thatour advisor will choose a property that provides lower returns to us than aproperty purchased by another Behringer Harvard-sponsored program.  In theevent these conflicts arise, we cannot assure you that our best interests willbe met when officers and employees acting on behalf of our advisor and on behalfof advisors and managers of other Behringer Harvard-sponsored programs decidewhether to allocate any particular property to us or to another BehringerHarvard-sponsored program or affiliate of our advisor, which may have aninvestment strategy that is similar to ours.  In addition, we may acquireproperties in geographic areas where other Behringer Harvard-sponsored programsown properties.  Similar conflicts of interest may apply if our advisordetermines to make or purchase mortgage, bridge or mezzanine loans orparticipations in mortgage, bridge or mezzanine loans on our behalf, becauseother Behringer Harvard-sponsored programs may be competing with us for suchinvestments.  You will not have the opportunity to evaluate the manner inwhich these conflicts of interest are resolved before or after making yourinvestment.

 

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***Behringer Harvard Multifamily Advisors I LP and itsaffiliates, including all of our executive officers and some of our directorswill face conflicts of interest caused by their compensation arrangements withus, which could result in actions that are not in the long-term best interestsof our stockholders.***

 

Our advisor, BehringerHarvard Multifamily Advisors I LP and its affiliates, including our dealermanager and our property manager, are entitled to substantial fees from usunder the terms of the advisory management agreement, dealer manager agreementand property management agreement.  These fees could influence our advisor’sadvice to us as well as the judgment of affiliates of our advisor performingservices for us.  Among other matters, these compensation arrangementscould affect their judgment with respect to:

 

·                  the continuation, renewal or enforcementof our agreements with our advisor and its affiliates, including the advisorymanagement agreement, the dealer-manager agreement and the property managementagreement;

 

·                  public offerings of equity by us, whichentitle Behringer Securities to dealer-manager fees and will likely entitle ouradvisor to increased acquisition and asset management fees;

 

·                  property sales, which entitle our advisorto real estate commissions and the possible issuance to our advisor of sharesof our common stock through the conversion of our convertible stock;

 

·                  property acquisitions from otherBehringer Harvard-sponsored programs, which might entitle affiliates of ouradvisor to real estate commissions and possible success-based sale fees inconnection with its services for the seller;

 

·                  property acquisitions from third parties, whichentitle our advisor to acquisition fees and asset management fees;

 

·                  borrowings to acquire properties, which borrowingswill increase the acquisition and asset management fees payable to our advisor;

 

·                  whether we seek to internalize ourmanagement functions, which internalization could result in our retaining someof our advisor’s key officers and employees for compensation that is greaterthan that which they currently earn or which could require additional paymentsto affiliates of our advisor to purchase the assets and operations of ouradvisor;

 

·                  whether and when we seek to list ourcommon stock on a national securities exchange, which listing could entitle ouradvisor to the issuance of shares of our common stock through the conversion ofour convertible stock;

 

·                  whether and when we seek to sell ourassets, which sale could entitle our advisor to real estate commissions; and

 

·                  whether and when we have paiddistributions to common stockholders such that aggregate distributions areequal to 100% of the price at which we sold our outstanding shares of commonstock plus an amount sufficient to produce a 7% cumulative, non-compounded, annualreturn at that price, which distributions could entitle our advisor to theissuance of shares of our common stock through the conversion of ourconvertible stock.

 

The fees our advisorreceives in connection with transactions involving the purchase and managementof an asset are based on the cost of the investment, including the amountbudgeted for the development, construction, and improvement of each asset, andnot based on the quality of the investment or the quality of the servicesrendered to us. This may influence our advisor to recommend riskiertransactions to us.  Furthermore, the advisor will refund these fees tothe extent they are based on budgeted amounts that prove too high oncedevelopment, construction, or improvements are completed, but the fact thatthese fees are initially calculated in part based on budgeted amounts couldinfluence our advisor to overstate the estimated costs of development,construction, or improvements in order to accelerate the cash flow it receives.

 

In addition, the terms ofour convertible stock allow for its conversion into shares of common stock ifwe terminate the advisor prior to the listing of our shares for trading on anational securities exchange other than as a result of the advisor’s materialbreach of the advisory management agreement.  To avoid the additionalcosts of engaging a new advisor or internalizing advisory functions, ourindependent directors may decide against terminating the advisory managementagreement prior to the listing of our shares or disposition of our investmentseven if termination of the advisory management agreement would be in our bestinterest.  In addition, the conversion feature of our convertible stockcould cause us to make different investment or disposition decisions than we 

 

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would otherwise make, inorder to avoid the stock conversion.  Moreover, our advisor can influencewhether and when our common stock is listed for trading on a nationalsecurities exchange or our assets are liquidated, and its interest in ourconvertible stock could influence its judgment with respect to listing orliquidation.

 

***Our advisor will face conflicts of interest relating tojoint ventures, tenant-in-common investments or other co-ownership arrangementsthat we enter with other Behringer Harvard-sponsored programs, which couldresult in a disproportionate benefit to another Behringer Harvard-sponsored program.***

 

We may enter into jointventures, tenant-in-common investments or other co-ownership arrangements withother Behringer Harvard-sponsored programs, including Behringer HarvardOpportunity REIT I, Behringer Harvard Opportunity REIT II, Behringer HarvardShort-Term Opportunity Fund I, Behringer Harvard Mid-Term Value EnhancementFund I, Behringer Harvard REIT I and Behringer Harvard REIT II, for theacquisition, development or improvement of multifamily or other properties aswell as the acquisition of real estate-related investments.  The executiveofficers of our advisor are also the executive officers of other BehringerHarvard-sponsored REITs and their advisors, the general partners of otherBehringer Harvard-sponsored partnerships and/or the advisors or fiduciaries ofother Behringer Harvard-sponsored programs.  These executive officers willface conflicts of interest in determining which Behringer Harvard-sponsoredprogram should enter into any particular joint venture, tenant-in-common orco-ownership arrangement.  Further, the fiduciary obligation that ouradvisor or our board of directors may owe to a co-venturer, co-tenant orpartner affiliated with our sponsor or advisor may make it more difficult forus to enforce our rights.  These persons may also have a conflict instructuring the terms of the relationship between our interests and theinterests of the Behringer Harvard-sponsored co-venturer, co-tenant or partneras well as conflicts of interest in managing the joint venture.

 

In the event that weenter into a joint venture, tenant-in-common investment or other co-ownershiparrangements with another Behringer Harvard-sponsored program or joint venture,our advisor and its affiliates may have a conflict of interest when determiningwhen and whether to buy or sell a particular real estate property, and you mayface certain additional risks.  For example, it is anticipated thatBehringer Harvard Short-Term Opportunity Fund I will never have an activetrading market.  Therefore, if we become listed for trading on a nationalsecurities exchange, we may develop more divergent goals and objectives fromsuch joint venturer with respect to the sale of properties in the future. In addition, in the event we enter into a joint venture with a Behringer Harvard-sponsoredprogram that has a term shorter than ours, the joint venture may be required tosell its properties at the time of the other Behringer Harvard-sponsoredprogram’s liquidation.  We may not desire to sell the properties at suchtime.  Even if the terms of any joint venture agreement between us andanother Behringer Harvard-sponsored program grant us a right of first refusalto buy such properties, we may not have sufficient funds to exercise our rightof first refusal under these circumstances.

 

Because Mr. Behringerand his affiliates indirectly control our advisor and other BehringerHarvard-sponsored programs, agreements and transactions among the parties withrespect to any joint venture, tenant-in-common investment or other co-ownershiparrangement between or among such parties will not have the benefit of arm’s-lengthnegotiation of the type normally conducted between unrelatedco-venturers.  Under these joint ventures, neither co-venturer may havethe power to control the venture, and under certain circumstances, an impassecould be reached regarding matters pertaining to the co-ownership arrangement,which might have a negative influence on the joint venture and decreasepotential returns to you.  In the event that a co-venturer has a right offirst refusal to buy out the other co-venturer, it may be unable to financesuch buy-out at that time.  If our interest is subject to a buy/sellright, we may not have sufficient cash, available borrowing capacity or othercapital resources to allow us to elect to purchase an interest of a co-venturersubject to the buy/sell right, in which case we may be forced to sell ourinterest as the result of the exercise of such right when we would otherwiseprefer 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 such right.

 

***The sponsor’s master co-investment agreement, entered intoby a subsidiary of our sponsor with a Dutch Pension Foundation and itsaffiliates (“PGGM”), requires it to offer PGGM a right of first refusal toco-invest with our sponsor or its affiliates in multifamily developmentprojects that meet certain specified investment guidelines and fullyconstructed properties that have not yet reached a specific level ofstabilization, a significant majority of the type of investments for which weintend to acquire.***

 

Our sponsor has enteredinto a master co-investment agreement for multifamily-developmentprojects.  Under the agreement, our sponsor or one of its affiliateswill provide 55% of the capital for each investment, and our BHMP CO-JV, which is99% owned by PGGM and 1% indirectly wholly owned by our sponsor, will provide45% of the capital for each investment. Generally, our co-investment ownershipwith our Co-Investment Partner will incorporate a subsidiary REIT structure toacquire the multifamily development project investment.  PGGM hascommitted to invest up to $200 million under this arrangement and may increaseits commitment to $300 million at any time prior to November 9, 2011. As of December 31, 2008, PGGM had committed 

 

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approximately $85.2million under this arrangement to existing projects.  The masterco-investment arrangement is intended to allow for co-investments with anyBehringer Harvard-sponsored program; however, because of our investmentobjectives, we believe that we are the most likely Behringer Harvard-sponsoredprogram to co-invest with the Co-Investment Partner.  We have committed toinvest up to $247 million to projects approved by our board of directors andexpect that we will provide the 55% of capital for each such investment that isrequired from an affiliate of our sponsor.  In addition, we have agreed toincrease this commitment to $370 million if PGGM were to increase its capitalcommitment to the BHMP CO-JV to $300 million.  Until PGGM has reached its$200 million commitment, PGGM has a right of first refusal to co-invest inmultifamily-development investments of the type targeted by the masterco-investment arrangement that are made by our sponsor or its affiliates. This arrangement makes it unlikely that we will pursue on our ownmultifamily-development investment opportunities of the type targeted by themaster co-investment arrangement until the capital commitment of PGGM has beensubstantially invested.

 

***Our advisor’s executive officers and key personnel and theexecutive officers and key personnel of Behringer Harvard-affiliated entitiesthat conduct our day-to-day operations and this offering will face competingdemands on their time, and this may cause our investment returns to suffer.***

 

We rely upon theexecutive officers of our advisor and the executive officers and employees ofBehringer Harvard-affiliated entities to conduct our day-to-day operations andthis offering.  These persons also conduct the day-to-day operations ofother Behringer Harvard-sponsored programs, including (x) other publicprograms such as Behringer Harvard REIT I (which is also currently raisingcapital), Behringer Harvard Opportunity REIT I, Behringer Harvard OpportunityREIT II (which is also currently raising capital), Behringer Harvard Short-TermOpportunity Fund I, and Behringer Harvard Mid-Term Value Enhancement Fund I, (y) BehringerHarvard REIT II, a newly organized program that has filed a registrationstatement relating to an initial public offering, and (z) numerous privateprograms.  These persons may have other business interests as well. Because these persons have competing interests on their time and resources,they may have conflicts of interest in allocating their time between ourbusiness and these other activities.  Should our advisor inappropriatelydevote insufficient time or resources to our business, the returns on ourinvestments may suffer.

 

***Our officers face conflicts of interest related to thepositions they hold with entities affiliated with our advisor, which coulddiminish the value of the services they provide to us.***

 

All of our executiveofficers, including Mr. Aisner, who serves as our Chief Executive Officerand a director, are also officers of one or more other entities affiliated withour advisor, including our property manager, our dealer manager and theadvisors and fiduciaries to other Behringer Harvard-sponsored programs. As a result, these individuals owe fiduciary duties to these other entities andtheir investors, which may conflict with the fiduciary duties that they owe tous and our stockholders.  Their loyalties to these other entities andinvestors could result in action or inaction that is detrimental to ourbusiness, which could harm the implementation of our business strategy and ourinvestment and leasing opportunities.  Conflicts with our business andinterests are most likely to arise from involvement in activities related to: (1) allocationof new investments and management time and services between us and the otherentities; (2) the timing and terms of the investment in or sale of anasset; (3) development of our properties by affiliates of our advisor; (4) investmentswith affiliates of our advisor; (5) compensation and incentives to ouradvisor; and (6) our relationship with our dealer manager and propertymanager.  If we do not successfully implement our business strategy, wemay be unable to generate the cash needed to make distributions to you and tomaintain or increase the value of our assets.

 

***Your investment will be diluted upon conversion of theconvertible stock.***

 

Our advisor purchased1,000 shares of our convertible stock for an aggregate purchase price of$1,000.  Under limited circumstances, these shares may be converted intoshares of our common stock, resulting in dilution of our stockholders’ interestin us.  Our convertible stock will convert into shares of common stock onone of two events.  First, it will convert if we have paid distributionsto common stockholders such that aggregate distributions are equal to 100% ofthe price at which we sold our outstanding shares of common stock plus anamount sufficient to produce a 7% cumulative, non-compounded, annual return atthat price.  Alternatively, the convertible stock will convert if we listour shares of common stock on a national securities exchange and, on the 31sttrading day after listing, the value of our company based on the averagetrading price of our shares of common stock since the listing, plus priordistributions, combine to meet the same 7% return threshold for our commonstockholders.  Each of these two events is a “Triggering Event.” Upon a Triggering Event, our convertible stock will, unless our advisorymanagement agreement with our advisor has been terminated or not renewed onaccount of a material breach by our advisor, generally convert into shares ofcommon stock with a value equal to 15% of the excess of the value of thecompany plus the aggregate value of distributions paid to date on the thenoutstanding shares of our common stock over the aggregate issue price of thoseoutstanding shares plus a 7% cumulative, non-compounded, annual return on theissue price of those outstanding shares.  However, if our advisorymanagement agreement with our 

 

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advisor expires withoutrenewal or is terminated (other than because of a material breach by ouradvisor) prior to a Triggering Event, then upon a Triggering Event the holderof the convertible stock will be entitled to a prorated portion of the numberof shares of common stock determined by the foregoing calculation, where suchproration is based on the percentage of time that we were advised by ouradvisor.  As a result, following conversion, the holder of the convertiblestock will be entitled to a portion of amounts distributable to ourstockholders, which such amounts distributable to the holder could besignificant.  Our advisor and Mr. Behringer can influence whether andwhen our common stock is listed for trading on a national securities exchangeor our assets are liquidated, and their interest in our convertible stock couldinfluence their judgment with respect to listing or liquidation.

 

***Because we rely on affiliates of Behringer Harvard Holdings for theprovision of advisory, property management and dealer manager services, ifBehringer Harvard Holdings is unable to meet its obligations we may be requiredto find alternative providers of these services, which could result in asignificant and costly************disruption of our business.***

 

BehringerHarvard Holdings, through one or more of its subsidiaries, owns and controlsour advisor, our property manager and our dealer manager. The operations of ouradvisor, our property manager and our dealer manager rely substantially onBehringer Harvard Holdings. In light of the common ownership of these entitiesand their reliance on Behringer Harvard Holdings, we consider the financialcondition of Behringer Harvard Holdings when assessing the financial conditionof our advisor, our property manager and our dealer manager. In the eventthat Behringer Harvard Holdings becomes unable to meet its obligations as theybecome due, we might be required to find alternative service providers, whichcould result in a significant disruption of our business and would likelyadversely affect the value of your investment in us.

** **

**RisksRelated to Our Business in General**

 

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

 

Our charter, with certainexceptions, authorizes our directors to take such actions as are necessary anddesirable to preserve our qualification as a REIT.  Unless exempted by ourboard of directors, no person may own more than 9.8% of our outstanding sharesof common or preferred stock.  This restriction may have the effect ofdelaying, deferring or preventing a change in control of us, including anextraordinary transaction (such as a merger, tender offer or sale of all orsubstantially all of our assets) that might otherwise provide our stockholderswith the opportunity to receive a control premium for their shares.

 

***Our charter permits our board of directors to issue stockwith terms that may subordinate the rights of the holders of our current commonstock or discourage a third party from acquiring us.***

 

Our charter permits ourboard of directors to issue up to 1,000,000,000 shares of capital stock. Our board of directors, without any action by our stockholders, may:  (1) increaseor decrease the aggregate number of shares; (2) increase or decrease thenumber of shares of any class or series we have authority to issue; or (3) classifyor reclassify any unissued common stock or preferred stock and establish thepreferences, conversion or other rights, voting powers, restrictions,limitations as to distributions, qualifications or terms or conditions ofredemption of any such stock.  Thus, our board of directors couldauthorize the issuance of such stock with terms and conditions that couldsubordinate the rights of the holders of our current common stock or have theeffect of delaying, deferring or preventing a change in control of us,including an extraordinary transaction (such as a merger, tender offer or saleof all or substantially all of our assets) that might provide a premium pricefor holders of our common stock.

 

***Maryland law prohibits certain business combinations, whichmay make it more difficult for us to be acquired.***

 

Under Maryland law, “businesscombinations” between a Maryland corporation and an “interested stockholder” oran affiliate of an interested stockholder are prohibited for five years afterthe most recent date 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 assettransfer or issuance or reclassification of equity securities.  Aninterested stockholder is defined as:

 

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

 

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·                  an affiliate or associate of thecorporation who, at any time within the two-year period prior to the date inquestion, was the beneficial owner of 10% or more of the voting power of thethen outstanding voting stock of the corporation.

 

A person is not aninterested stockholder under the statute if the board of directors approved inadvance the transaction by which the person otherwise would have become aninterested stockholder.  However, in approving a transaction, the board ofdirectors may provide that its approval is subject to compliance, at or afterthe time of approval, with any terms and conditions determined by the board.

 

After the expiration ofthe five-year period described above, any business combination between theMaryland corporation and an interested stockholder must generally berecommended by the board of directors of the corporation and approved by theaffirmative 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 becast by holders of voting stock of the corporation other than shares held bythe interested 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 voterequirements do not apply if the corporation’s common stockholders receive aminimum price, as defined under Maryland law, for their shares in the form ofcash or other consideration in the same form as previously paid by theinterested stockholder for its shares.  Maryland law also permits variousexemptions from these provisions, including business combinations that areexempted by the board of directors before the time that the interestedstockholder becomes an interested stockholder.  The business combinationstatute may discourage others from trying to acquire control of us and increasethe difficulty of consummating any offer.

 

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

 

Maryland law provides asecond anti-takeover statute, the Control Share Acquisition Act, which providesthat “control shares” of a Maryland corporation acquired in a “control shareacquisition” have no voting rights except to the extent approved by thecorporation’s disinterested stockholders by a vote of two-thirds of the votesentitled to be cast on the matter.  Shares of stock owned by interestedstockholders, that is, by the acquirer, by officers or by directors who areemployees of the corporation, are excluded from the vote on whether to accordvoting rights to the control shares.  “Control shares” are voting sharesof stock that would entitle the acquirer to exercise voting power in electingdirectors within specified ranges of voting power.  Control shares do notinclude shares the acquiring person is then entitled to vote as a result ofhaving previously obtained stockholder approval.  A “control shareacquisition” means the acquisition of control shares.  The control shareacquisition statute does not apply (1) to shares acquired in a merger,consolidation or share exchange if the corporation is a party to thetransaction or (2) to acquisitions approved or exempted by a corporation’scharter or bylaws.  Our bylaws contain a provision exempting from theControl Share Acquisition Act any and all acquisitions by any person of sharesof our stock.  We can offer no assurance that this provision will not beamended or eliminated at any time in the future.  This statute could havethe effect of discouraging offers from third parties to acquire us andincreasing the difficulty of successfully completing this type of offer byanyone other than our affiliates or any of their affiliates.

 

***Our charter includes an anti-takeover provision that maydiscourage a stockholder from launching a tender offer for our shares.***

 

Our charter provides thatany tender offer made by a stockholder, including any “mini-tender” offer, mustcomply with most provisions of Regulation 14D of the Exchange Act.  Theoffering stockholder must provide our company notice of such tender offer atleast ten business days before initiating the tender offer.  If theoffering stockholder does not comply with these requirements, our company willhave the right to redeem that stockholder’s shares and any shares acquired insuch tender offer.  In addition, the noncomplying stockholder shall beresponsible for all of our company’s expenses in connection with thatstockholder’s noncompliance.  This provision of our charter may discouragea stockholder from initiating a tender offer for our shares and prevent youfrom receiving a premium price for your shares in such a transaction.

 

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

 

We are not registered asan investment company under the Investment Company Act of 1940, as amended (“InvestmentCompany Act”), based on exceptions that we believe are available to us. If we were obligated to register as an investment company, 

 

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we would have to complywith a variety of substantive requirements under the Investment Company Actimposing, among other things:

 

·                  limitations on capital structure;

 

·                  restrictions on specified investments;

 

·                  prohibitions on transactions withaffiliates; and

 

·                  compliance with reporting, recordkeeping, voting, proxy disclosure and other rules and regulations thatwould significantly change our operations.

 

In order to be excludedfrom regulation under the Investment Company Act, we intend to engage primarilyin the business of buying mortgages and other liens on or interests in realestate.  The position of the staff of the SEC’s Division of InvestmentManagement generally requires us to maintain at least 55% of our assetsdirectly in qualifying real estate interests in order for us to maintain ourexception to the Investment Company Act.  Generally, mezzanine loans,second mortgages, commercial mortgage-backed securities (“CMBS”),tenant-in-common interests (“TICs”) and interests in joint ventures that ownqualifying assets may constitute qualifying real estate interests under thisexception if certain conditions are met.  Our ownership of mezzanineloans, second mortgages, CMBS, TICs and real estate joint venture interests,therefore, will be limited by provisions of the Investment Company Act and SECstaff interpretations.  Generally, the SEC’s Division of InvestmentManagement has taken no formal position as to whether CMBS should be treated asqualifying assets and no recent formal position as to whether TICs should betreated as qualifying assets.

 

To maintain compliancewith our exception to the Investment Company Act, we may be unable to sellassets we would otherwise want to sell and may need to sell assets we wouldotherwise wish to retain.  In addition, we may have to acquire additionalincome- or loss-generating assets that we might not otherwise have acquired.

 

If we were required toregister as an investment company but failed to do so, we could be prohibitedfrom engaging in our business and criminal and civil actions could be broughtagainst us.  In addition, our contracts could be unenforceable, and acourt could appoint a receiver to take control of us and liquidate our business.

 

***Rapid changes in the values of potential investments in CMBSor other real estate-related investments may make it more difficult for us tomaintain our qualification as a REIT or exception from the Investment CompanyAct.***

 

If the market value orincome potential of our real estate-related investments, including potentialinvestments in CMBS, declines as a result of increased interest rates,prepayment rates or other factors, we may need to increase our real estateinvestments and income and/or liquidate our non-qualifying assets in order tomaintain our REIT qualification or our exception from registration under theInvestment Company Act.  If the decline in real estate asset values and/orincome occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of any non-realestate assets that we may own.  We may have to make investment decisionsthat we otherwise would not make absent REIT and Investment Company Actconsiderations.

 

***Stockholders have limited control over changes in ourpolicies and operations.***

 

Our board of directorsdetermines our major policies, including our policies regarding financing,growth, debt capitalization, REIT qualification and distributions.  Ourboard of directors may amend or revise these and other policies without a voteof the stockholders.  Our charter sets forth the stockholder voting rightsrequired to be set forth therein under the NASAA REIT Guidelines.  Underour charter and the Maryland General Corporation Law, our stockholderscurrently have a right to vote only on the following matters:

 

·                  the election or removal of directors;

 

·                  any amendment of our charter, except thatour board of directors may amend our charter without stockholder approval to:

 

·                  change our name;

 

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·                  increase or decrease the aggregate number of our shares;

 

·                  increase or decrease the number of our shares of any class or seriesthat we have the authority to issue;

 

·                  classify or reclassify any unissued shares by setting or changing thepreferences, conversion or other rights, restrictions, limitations as todistributions, qualifications or terms and conditions of redemption of suchshares;

 

·                  effect reverse stock splits; and

 

·                  after the listing of our shares of common stock on a nationalsecurities exchange, opting into any of the provisions of Subtitle 8 of Title 3of the Maryland General Corporation;

 

·                  a reorganization as provided in ourcharter;

 

·                  our liquidation and dissolution; and

 

·                  our being a party to any merger,consolidation, sale or other disposition of substantially all of our assets(notwithstanding that Maryland law may not require stockholder approval).

 

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

 

***Our board of directors may change our investment policiesand objectives generally and at the individual investment level withoutstockholder approval, which could alter the nature of your investment.***

 

Our charter requires thatour independent directors review our investment policies with sufficientfrequency and at least annually to determine that the policies we are followingare in the best interest of the stockholders.  In addition to ourinvestment policies and objectives, we may also change our stated strategy forany investment in an individual property.  These policies may change overtime.  The methods of implementing our investment policies may also vary,as new investment techniques are developed.  Our investment policies, themethods for their implementation, and our other objectives, policies andprocedures may be altered by our board of directors without the approval of ourstockholders.  As a result, the nature of your investment could changewithout your consent.

 

***You may not be able to sell your shares under the shareredemption program and, if you are able to sell your shares under the program,you may not be able to recover the amount of your investment in our shares.***

 

Our board of directorsapproved the share redemption program, but may amend, suspend or terminate ourshare redemption program at any time.  Our board of directors may rejectany request for redemption of shares.  Further, there are many limitationson your ability to sell your shares pursuant to the share redemptionprogram.  Any stockholder requesting repurchase of their shares pursuantto our share redemption program will be required to certify to us that suchstockholder acquired the shares by either (1) a purchase directly from usor (2) a transfer from the original investor by way of (i) a bonafide gift not for value to, or for the benefit of, a member of the stockholder’simmediate or extended family, (ii) a transfer to a custodian, trustee orother fiduciary for the account of the stockholder or his or her immediate orextended family in connection with an estate planning transaction, including bybequest or inheritance upon death or (iii) operation of law.

 

In addition, our shareredemption program contains other restrictions and limitations.  Shareswill be redeemed on a quarterly basis, pro rata among all stockholdersrequesting redemption in such quarter, with a priority given to redemptionsupon the death or qualifying disability of a stockholder or redemptions soughtupon a stockholder’s confinement to a long-term care facility; next, tostockholders who demonstrate, in the discretion of our board of directors,another involuntary, exigent circumstance, such as bankruptcy; next, tostockholders subject to a mandatory distribution requirement under suchstockholder’s IRA; and, finally, to other redemption requests.  You musthold your shares for at least one year prior to seeking redemption under theshare redemption program, except that our board of directors may waive thisone-year holding requirement with respect to redemptions sought upon thequalifying death or disability of a stockholder or redemptions sought upon astockholder’s confinement to a long-term care facility or for other exigentcircumstances and that if a stockholder is redeeming all of his or her sharesthe board of directors may waive the one-year holding requirement with respectto shares purchased pursuant to the distribution reinvestment plan. We will notredeem more than 5% of the weighted average number of shares outstanding duringthe twelve-month period immediately prior to the date of redemption.  Ourboard of directors will determine from time to time, and at least quarterly,whether we have sufficient excess cash to 

 

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repurchase shares. Generally, the cash available for redemption will be limited to proceeds fromour distribution reinvestment plan plus 1% of the operating cash flow from theprevious fiscal year (to the extent positive).

 

Further, our board ofdirectors reserves the right to reject any request for redemption or toterminate, suspend, or amend the share redemption program at any time. Therefore, in making a decision to purchase shares of our common stock, youshould not assume that you will be able to sell any of your shares back to uspursuant to our share redemption program.

 

***If you are able to resell your shares to us pursuant to ourshare redemption program, you will likely receive substantially less than theamount paid to acquire the shares from us or the fair market value of yourshares, depending upon how long you owned the shares.***

 

Other than redemptionsfollowing the death or qualifying disability of a stockholder or redemptionssought upon a stockholder’s confinement to a long-term care facility, thepurchase price for such shares we repurchase under our proposed redemptionprogram will equal (1) prior to the time we begin having appraisalsperformed by an independent third party, the amount by which (a) thelesser of (i) 90% of the average issue price for all of your shares (asadjusted for any stock dividends, combinations, splits, recapitalizations andthe like with respect to our common stock) or (ii) 90% of the offeringprice of shares in our most recent offering exceeds (b) the aggregateamount of net sale proceeds per share, if any, distributed to stockholdersprior to the redemption date as a result of the sale of one or more of ourinvestments; or (2) after we begin obtaining appraisals performed by anindependent third party, the lesser of (a) 100% of the average issue priceper share for all of your shares (as adjusted for any stock dividends,combinations, splits, recapitalizations and the like with respect to our commonstock) or (b) 90% of the net asset value per share, as determined by themost recent appraisal.  Accordingly, you may receive less by selling yourshares back to us than you would receive if our investments were sold for theirestimated values and such proceeds were distributed in our liquidation.

 

***We may not successfully implement our exit strategy, inwhich case you may have to hold your investment for an indefinite period.***

 

Depending uponthen-prevailing market conditions, we intend to begin to consider the processof liquidating and distributing cash or listing our shares on a nationalsecurities exchange within four to six years after the termination of thisprimary offering.  If we have not begun the process to list our shares fortrading on a national securities exchange or to liquidate at any time after thesixth anniversary of the termination of this primary offering, unless such dateis extended by our board of directors including a majority of our independentdirectors, we will furnish a proxy statement to stockholders to vote on aproposal for our orderly liquidation upon the written request of stockholdersowning 10% or more of our outstanding common stock.  The liquidationproposal would include information regarding appraisals of our portfolio. By proxy, stockholders holding a majority of our shares could vote to approveour liquidation.  If our stockholders did not approve the liquidationproposal, we would obtain new appraisals and resubmit the proposal by proxystatement to our stockholders up to once every two years upon the writtenrequest of stockholders owning 10% or more of our outstanding common stock.

 

Market conditions andother factors could cause us to delay the listing of our shares on a nationalsecurities exchange or to delay the commencement of our liquidation beyond sixyears from the termination of this primary offering.  If so, our board ofdirectors and our independent directors may conclude that it is not in our bestinterest for us to furnish a proxy statement to stockholders for the purpose ofvoting on a proposal for our orderly liquidation.  Our charter permits ourboard of directors, with the concurrence of a majority of our independentdirectors, to defer the furnishing of such a proxy indefinitely. Therefore, if we are not successful in implementing our exit strategy, yourshares may continue to be illiquid and you may, for an indefinite period oftime, be unable to convert your investment into cash easily and could sufferlosses on your investment.

 

***We may incur costs associated with changing our name if weare no longer permitted to use “Behringer Harvard” in our name.***

 

* *We entered into a service mark licenseagreement with Behringer Harvard Holdings for use of the name “BehringerHarvard.”  Pursuant to the agreement, when an affiliate of BehringerHarvard Holdings no longer serves as one of our officers or directors,Behringer Harvard Holdings may terminate our service mark license agreement andmay require us to change our name to eliminate the use of the words “BehringerHarvard.”  We will be required to pay any costs associated with changingour name.

 

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***We established the offering price for the shares on anarbitrary basis; as a result, the offering price of the shares is not relatedto any independent valuation.***

 

Our board of directorshas arbitrarily determined the offering price of the shares, and such pricebears no relationship to our book or asset values, or to any other establishedcriteria for valuing outstanding shares.  Because the offering price isnot based upon any independent valuation, the offering price may not beindicative of the proceeds that you would receive upon liquidation.

 

***Because the dealer manager is an affiliate of our advisor,investors will not have the benefit of an independent review of us or theprospectus, which are customarily performed in underwritten offerings.***

 

The dealer manager,Behringer Securities, is an affiliate of our advisor and will not make anindependent review of us or the offering.  Accordingly, you do not havethe benefit of an independent review of the terms of this offering. Further, the due diligence investigation of us by the dealer manager cannot beconsidered to be an independent review and, therefore, may not be as meaningfulas a review conducted by a broker-dealer or investment banker unaffiliated withour advisor.

 

***Your indirect interest in our operating partnership,Behringer Harvard Multifamily OP I, will be diluted if we or our operatingpartnership issues additional securities.***

 

Existing stockholders andnew investors purchasing shares of common stock in this offering do not havepreemptive rights to any shares issued by us in the future.  Our chartercurrently has authorized 1,000,000,000 shares of capital stock, of which875,000,000 shares are designated as common stock, 124,999,000 shares aredesignated as preferred stock and 1,000 shares are designated as convertiblestock.  Subject to any limitations set forth under Maryland law, our boardof directors may amend our charter to increase the number of authorized sharesof capital stock, or increase or decrease the number of shares of any class orseries of stock designated, and may classify or reclassify any unissued shareswithout the necessity of obtaining stockholder approval.  Shares will beissued in the discretion of our board of directors.  Investors purchasingshares in this offering will likely experience dilution of their equityinvestment in us in the event that we:  (1) sell shares in thisoffering or sell additional shares in the future, including those issuedpursuant to the distribution reinvestment plan; (2) sell securities thatare convertible into shares of our common stock; (3) issue shares of ourcommon stock in a private offering of securities to institutional investors; (4) issueshares of common stock upon the conversion of our convertible stock; (5) issueshares of common stock upon the exercise of any options granted to ourindependent directors or employees of our advisor and BHM Management, ourproperty manager and an affiliate of our advisor, or their duly licensedaffiliates; (6) issue restricted stock or other awards pursuant to ourIncentive Award Plan; (7) issue shares to our advisor, its successors orassigns, in payment of an outstanding fee obligation as set forth under ouradvisory management agreement; or (8) issue shares of our common stock tosellers of properties acquired by us in connection with an exchange of limitedpartnership interests of Behringer Harvard Multifamily OP I.  In addition,the partnership agreement for Behringer Harvard Multifamily OP I containsprovisions that allow, under certain circumstances, other entities, includingother Behringer Harvard-sponsored programs, to merge into or cause the exchangeor conversion of their interest for interests of Behringer Harvard MultifamilyOP I.  Because the limited partnership interests of Behringer HarvardMultifamily OP I may be exchanged for shares of our common stock, any merger,exchange or conversion between Behringer Harvard Multifamily OP I and another entityultimately could result in the issuance of a substantial number of shares ofour common stock, thereby diluting the percentage ownership interest of otherstockholders.  Because of these and other reasons described in this “RiskFactors” section, you should not expect to be able to own a significantpercentage of our shares.

 

***Payment of fees to our advisor and its affiliates willreduce cash available to us for investment and payment of distributions.***

 

Our advisor and itsaffiliates will perform services for us in connection with, among other things,the offer and sale of our shares, the selection and acquisition of ourproperties and real estate-related assets, the management of our properties,the servicing of our mortgage, bridge, mezzanine or other loans, theadministration of our other investments and the disposition of ourassets.  They will be paid substantial fees for these services. These fees will reduce the amount of cash available for investment ordistributions to stockholders.

 

***We may be restricted in our ability to replace our propertymanager under certain circumstances.***

 

Under the terms of ourproperty management agreement, we may terminate the agreement upon 30 days’notice in the event of, and only in the event of, a showing of willfulmisconduct, gross negligence or deliberate malfeasance by the property managerin performing its duties.  Our board of directors may find the performanceof our property manager to be unsatisfactory.  However, 

 

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unsatisfactoryperformance by the property manager may not constitute “willful misconduct,gross negligence or deliberate malfeasance.”  As a result, we may beunable to terminate the property management agreement at the desired time,which may have an adverse effect on the management and profitability of ourproperties.

 

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

 

There are many factorsthat can affect the availability and timing of cash distributions tostockholders.  Distributions generally will be based upon such factors asthe amount of cash available or anticipated to be available from real estateinvestments, mortgage, bridge or mezzanine loans and other investments, currentand projected cash requirements and tax considerations.  Because we mayreceive income from interest or rents at various times during our fiscal year,distributions paid may not reflect our income earned in that particulardistribution period.  The amount of cash available for distributions willbe affected by many factors, such as our ability to acquire properties and realestate-related assets as offering proceeds become available, the income fromthose investments and yields on securities of other real estate programs that weinvest in, as well as our operating expense levels and many othervariables.  Actual cash available for distribution may vary substantiallyfrom estimates.  We can give no assurance that we will be able to achieveour anticipated cash flow or that distributions will increase over time. Nor can we give any assurance that:  (1) rents from the propertieswill increase; (2) the securities we buy will increase in value or provideconstant or increased distributions over time; (3) the loans we make willbe repaid or paid on time; (4) loans will generate the interest paymentsthat we expect; or (5) future acquisitions of properties, mortgage, bridgeor mezzanine loans, other investments or our investments in securities willincrease our cash available for distributions to stockholders.  Our actualresults may differ significantly from the assumptions used by our board ofdirectors in establishing the distribution rates to stockholders.

 

Many of the factors thatcan affect the availability and timing of cash distributions to stockholdersare beyond our control, and a change in any one factor could adversely affectour ability to pay future distributions.  For instance:

 

·                  If a significant number of residents default orterminate on their leases, there could be a decrease or cessation of rentalpayments, which would mean less cash available for distributions.

 

·                  Any failure by a borrower under ourmortgage, bridge, mezzanine or other loans to repay the loans or interest onthe loans will reduce our income and distributions to stockholders.

 

·                  Cash available for distributions may bereduced if we are required to spend money to correct defects or to makeimprovements to properties.

 

·                  Cash available to make distributions maydecrease if the assets we acquire have lower yields than expected.

 

·                  There may be a delay between the sale ofthe common stock and our purchase of real properties.  During that time,we may invest in lower yielding short-term instruments, which could result in alower yield on your investment.

 

·                  If we lend money to others, such fundsmay not be repaid in accordance with the loan terms or at all, which couldreduce cash available for distributions.

 

·                  Federal income tax laws require REITs todistribute at least 90% of their REIT taxable income to stockholders eachyear.  This limits the earnings that we may retain for corporate growth,such as asset acquisition, development or expansion and makes us more dependentupon additional debt or equity financing than corporations that are not REITs. If we borrow more funds in the future, more of our operating cash will beneeded to make debt payments and cash available for distributions may decrease.

 

·                  In connection with future acquisitions,we may issue additional shares of common stock, operating partnership units orinterests in other entities that own our properties.  We cannot predictthe number of shares of common stock, units or interests that we may issue, orthe effect that these additional shares might have on cash available fordistribution to you.  If we issue additional shares, they could reduce thecash available for distribution to you.

 

·                  We make distributions to our stockholdersto comply with the distribution requirements of the Internal Revenue Code andto eliminate, or at least minimize, exposure to federal income taxes and thenondeductible REIT excise tax.  Differences in 

 

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timing between thereceipt of income and the payment of expenses, and the effect of required debtpayments, could require us to borrow funds on a short-term basis to meet thedistribution requirements that are necessary to achieve the tax benefitsassociated with qualifying as a REIT.

 

In addition, our board ofdirectors, in its discretion, may retain any portion of our cash on hand forcapital needs and capital improvements.  We cannot assure you thatsufficient cash will be available to make distributions to you.

 

***Until proceeds from this offering are invested andgenerating operating cash flow sufficient to make distributions to ourstockholders, we may make some or all of our distributions  from sourcesother than cash flow from operations, including the proceeds of this offering,cash advanced to us by our advisor, cash resulting from a deferral of assetmanagement fees and/or from borrowings (including  borrowings secured byour assets) in anticipation of future operating cash flow, which may reduce theamount of capital we ultimately invest and negatively impact the return on yourinvestment and the value of your investment.***

 

We expect that cashdistributions to our stockholders generally will be paid from cash available oranticipated from the cash flow from our investments in properties, real estatesecurities, mortgage, bridge or mezzanine loans and other real estate-relatedassets.  However, until proceeds from this offering are invested andgenerating operating cash flow sufficient to make distributions to ourstockholders, we may make some or all of our distributions from the proceeds ofthis offering, cash advanced to us by our advisor, cash resulting from a waiveror deferral of asset management fees, cash from the sale of our assets or aportion thereof and borrowings (including borrowings secured by our assets) inanticipation of future cash flow.  In addition, to the extent ourinvestments are in development or redevelopment projects, or in properties thathave significant capital requirements, our ability to make distributions may benegatively impacted, especially during our early period of operation. Once our development projects are completed and begin to generate income, weintend to use such increased income to make distributions to ourstockholders.  Accordingly, the amount of distributions paid at any timemay not reflect current cash flow from our operations.  To the extentdistributions are paid from the proceeds of this offering, cash advanced to usby our advisor, cash resulting from a deferral of asset management fees and/orfrom borrowings (including borrowings secured by our assets) in anticipation offuture cash flow, we will have less capital available to invest in propertiesand other real estate-related assets, which may negatively impact our abilityto make investments and substantially reduce current returns and capitalappreciation.  In that event, we may not be able to invest the anticipated91.1% of the gross proceeds raised in this offering (89.0% with respect togross proceeds from our primary offering and 100% with respect to grossproceeds from our distribution reinvestment plan) for investment in realestate, loans and other investments, paying acquisition fees and expensesincurred in making such investments and for any capital reserves we mayestablish until such time as we have sufficient cash flows from operations tofund fully our distributions.

 

***Our revenue and net income may vary significantly from oneperiod to another due to investments in opportunity-oriented properties andportfolio acquisitions, which could increase the variability of our cashavailable for distributions.***

 

We have made and maycontinue to make investments in opportunity-oriented properties in variousphases of development, redevelopment or repositioning and portfolioacquisitions, which may cause our revenues and net income to fluctuatesignificantly from one period to another.  Projects do not produce revenuewhile in development or redevelopment.  During any period when ourprojects in development or redevelopment or those with significant capitalrequirements increase without a corresponding increase in stablerevenue-producing properties, our revenues and net income will likelydecrease.  Many factors may have a negative impact on the level ofrevenues or net income produced by our portfolio of investments, includinghigher than expected construction costs, failure to complete projects on atimely basis, failure of the properties to perform at expected levels uponcompletion of development or redevelopment, and increased borrowings necessaryto fund higher than expected construction or other costs related to theproject.  Further, our net income and stockholders’ equity could benegatively affected during periods with large portfolio acquisitions, whichgenerally require large cash outlays and may require the incurrence ofadditional financing.  Any such reduction in our revenues and net incomeduring such periods could cause a resulting decrease in our cash available fordistributions during the same periods.

 

***Development projects in which we invest may not be completedsuccessfully or on time, and guarantors of the projects may not have thefinancial resources to perform their obligations under the guaranties theyprovide.***

 

We may make equityinvestments in, acquire options to purchase interests in or make mezzanineloans to the owners of real estate development projects.  Our return onthese investments is dependent upon the projects being completed successfully,on budget and on time.  To help ensure performance by the developers ofproperties that are under construction, completion of these properties isgenerally guaranteed either by a completion bond or performance bond.  Ouradvisor may rely upon the substantial net worth of the contractor or developeror a personal guarantee accompanied by financial statements showing asubstantial net worth provided by an affiliate of the entity entering into theconstruction or development contract as an alternative to a completion bond orperformance 

 

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bond.  For a particular investment, we may obtainguaranties that the project will be completed on time, on budget and inaccordance with the plans and specifications and that the mezzanine loan willbe repaid.  However, we may not obtain such guaranties and cannot ensurethat the guarantors will have the financial resources to perform theirobligations under the guaranties they provide.  We intend to manage theserisks by ensuring, to the best of our ability, that we invest in projects withreputable, experienced and resourceful developers.  If we are unable tomanage these risks effectively, our results of operations, financial conditionand ability to make distributions to you will be adversely affected.

 

***Our reliance on common developers/guarantors related tomultiple development projects in which we may invest may materially adverselyaffect our operations should a developer/guarantor become unable to meet itsobligations to us.  As of December 31, 2008, our interests in threeloans on three separate development projects with a common developer/guarantortotaled 28% of our total assets.***

 

We have made and maycontinue to make investments in multifamily development projects with commondevelopers/guarantors, which increases our risks should a developer/guarantorbecome unable to meet its obligations to us.  As of December 31,2008, three of our mezzanine loan investments on multifamily developmentprojects contained provisions that provide a limited safeguard against the riskof bankruptcy of the project owner and the failure to complete the developmentproject.  Under the terms of these three projects, a common developer,Fairfield Residential, LLC is: obligated to complete the projects should theproject owners fail to do so; liable for construction cost overruns in excessof the construction budgets; and has agreed to repay the loans should theproject owners become the subject of a bankruptcy proceeding to which our jointventure did not consent.  Our portion of the investments in the threeloans collectively was $29,980,382 (26% of our total assets) and $33,786,827(28% of our total assets) as of December 31, 2007 and 2008,respectively.  Should Fairfield Residential become unable to meet itsobligations to us, our operations may be adversely effected, which couldmaterially reduce the level of distributions to our stockholders.

 

***Under certain circumstances, a subsidiary REIT may berequired to sell its capital stock rather than its assets.***

 

Under certaincircumstances, a subsidiary REIT may be required to sell its capital stock ratherthan any assets held by that subsidiary REIT, which may limit the number ofpersons willing to acquire indirectly any assets held by that subsidiaryREIT.  As a result, we may not be able to realize a return on ourinvestment in a joint venture, such as a co-investment venture with ourCo-Investment Partner, at the time or on the terms we desire.

 

***Adverse economic conditions will negatively affect ourreturns and profitability.***

 

Our operating results maybe affected by many factors, including a continued or exacerbated generaleconomic slowdown experienced by the nation as a whole or by the localeconomies where our properties and properties underlying our other realestate-related investments are located.  These factors include:

 

·                  poor economic conditions may result in defaults byresidents of our multifamily communities and borrowers under our mortgage,bridge, mezzanine or other loans;

 

·                  job transfers and layoffs may causeresident vacancies at our multifamily communities to increase;

 

·                  increasing concessions, reduced rentalrates or capital improvements may be required to maintain occupancy levels;

 

·                  increased insurance premiums may reducefunds available for distribution or, to the extent these increases are passedthrough to residents, may lead to resident defaults.  Also, increasedinsurance premiums may make it difficult to increase rents on apartment unitsto residents on turnover, which may adversely affect our ability to increaseour returns; and

 

·                  the length and severity of any economicslowdown or downturn cannot be predicted.  Our operations could benegatively affected to the extent that an economic slowdown or downturn isprolonged or becomes more severe.

 

***The failure of any bank in which we deposit our funds couldreduce the amount of cash we have available to pay distributions and makeadditional investments.***

 

We invest our cashand cash equivalents between several banking institutions in an attempt tominimize exposure to any one of these entities.  However, the FDICgenerally only insures limited amounts per depositor per insured bank. Beginning October 3, 

 

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2008 through December 31,2009, the FDIC is insuring up to $250,000 per depositor per insured bank; on January 1,2010, the standard coverage limit will return to $100,000 for most depositcategories.  (Unlimited deposit insurance coverage will be available toour non-interest bearing transaction accounts held at those institutionsparticipating in FDIC’s Temporary Liquidity Guarantee Program through December 31,2009.)  As of December 31, 2008 and December 31, 2007, we hadcash and cash equivalents and restricted cash deposited in interest bearingtransaction accounts at certain financial institutions exceeding thesefederally insured levels.  If any of the banking institutions in which wehave deposited funds ultimately fails, we may lose our deposits over thefederally insured levels.  The loss of our deposits could reduce theamount of cash we have available to distribute or invest.

 

***We and the other public Behringer Harvard-sponsored programshave experienced losses in the past, and we may continue experiencing similarlosses in the future.***

 

Historically, the publicprograms sponsored by affiliates of our advisor have experienced losses duringthe early periods of their operation.  Many of these losses can beattributed to the initial start-up costs and operating expenses incurred priorto purchasing properties or making other investments that generaterevenue.  In addition, depreciation and amortization expensessubstantially reduce income.  We may face similar circumstances during theearly period of our operations.  We cannot assure you that, in the future,we will be profitable or that we will realize growth in the value of ourassets.

 

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

 

Substantially all of theproceeds of this offering will be used to make investments in real estate andreal estate-related assets and to pay various fees and expenses related to theoffering.  We will establish capital reserves on a property-by-propertybasis, as we deem appropriate.  In addition to any reserves we establish,a lender may require escrow of capital reserves in excess of our establishedreserves.  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.  Accordingly, in the event that we develop aneed for additional capital in the future for the improvement of our propertiesor for any other reason, we have not identified any sources for such funding,and we cannot assure you that such sources of funding will be available to usfor potential capital needs in the future.

 

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

 

We may 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 may include interestrate swap contracts, interest rate cap or floor contracts, futures or forwardcontracts, options or repurchase agreements.  Our actual hedging decisionswill be determined in light of the facts and circumstances existing at the timeof the hedge and may differ from time to time.

 

To the extent that we usederivative financial instruments to hedge against exchange rate and interestrate fluctuations, we will be exposed to financing, basis risk and legal enforceabilityrisks.  In this context, credit risk is the failure of the counterparty toperform under the terms of the derivative contract.  If the fair value ofa derivative contract is positive, the counterparty owes us, which createscredit risk for us.  We intend to manage credit risk by dealing only withmajor financial institutions that have high credit ratings.  Basis riskoccurs when the index upon which the contract is based is more or less variablethan the index upon which the hedged asset or liability is based, therebymaking the hedge less effective.  We intend to manage basis risk bymatching, to a reasonable extent, the contract index to the index upon whichthe hedged asset or liability is based.  Finally, legal enforceability risksencompass general contractual risks, including the risk that the counterpartywill breach the terms of, or fail to perform its obligations under, thederivative contract.  We intend to manage legal enforceability risks byensuring, to the best of our ability, that we contract with reputablecounterparties and that each counterparty complies with the terms andconditions of the derivative contract.  If we are unable to manage theserisks effectively, our results of operations, financial condition and ability tomake distributions to you will be adversely affected.

 

***Complying with REIT requirements may limit our ability tohedge risk effectively.***

 

The REIT provisions ofthe Internal Revenue Code may limit our ability to hedge the risks inherent toour operations.  From time to time, we may enter into hedging transactionswith respect to one or more of our assets or liabilities. Our hedgingactivities may include entering into interest rate swaps, caps and floors,options to purchase these items, and futures and forward contracts. Except to the extent provided by Treasury regulations, any income wederive from a hedging transaction which is clearly identified as such asspecified in the Internal Revenue Code, including gain from the sale ordisposition of such a transaction, will not constitute gross income forpurposes of the 95% gross income test, and therefore will be exempt from thistest, but only to the extent that the 

 

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transaction hedgesindebtedness incurred or to be incurred by us to acquire or carry real estateassets.  Income from any hedging transaction will, however, benonqualifying for purposes of the 75% gross income test.  The term “hedgingtransaction,” as used above, generally means any transaction we enter into inthe normal course of our business primarily to manage risk of interest rate orprice changes or currency fluctuations with respect to borrowings made or to bemade, or ordinary obligations incurred or to be incurred, by us to acquire orcarry real estate assets.  To the extent that we do not properly identifysuch transactions as hedges, hedge with other types of financial instruments,or hedge other types of indebtedness, the income from those transactions is notlikely to be treated as qualifying income for purposes of the gross incometests.  As a result of these rules, we may have to limit the use ofhedging techniques that might otherwise be advantageous, which could result ingreater risks associated with interest rate or other changes than we wouldotherwise incur.

 

### ****The State of Texashas enacted legislation that creates a “margin tax” and decreases stateproperty taxes.  This tax reform could resultin increased taxes on our operations in Texas that, when combined withdecreased property taxes, could reduce the net cash available for distributionto you.****

### ** **

                In May 2006, the State ofTexas enacted legislation that replaces the former Texas franchise tax with anew “margin tax,” which is effective for tax reports due on or after January 1,2008 and which will compute the tax based on business done in calendar yearsbeginning after December 31, 2006. The new legislation expands the number of entities covered by the formerTexas franchise tax, and specifically includes limited partnerships as subjectto the new margin tax.  The tax generallyis 1% of an entity’s taxable margin, which is the part of an entity’s totalrevenue less applicable deductions apportioned to Texas.  In May 2006, the State of Texas alsoenacted legislation that reduces the state property tax.  As a result of this Texas property taxlegislation, reimbursable expenses from tenants at the property level maydecrease due to decreased property taxes. We expect to hold significant assets in Texas.  As a consequence, the new margin tax, whencombined with the decreased property tax, could result in a net Texas state taxincrease in future years and reduce the amount of cash we have available fordistribution to you.

 

**GeneralRisks Related to Investments in Real Estate**

 

***The recent market disruptions may adversely affect ouroperating results and financial condition.***

 

The global financialmarkets are currently undergoing pervasive and fundamental disruptions. The continuation or intensification of such volatility has had and may continueto have an adverse impact on the availability of credit to businesses,generally, and has resulted in and could lead to further weakening of the U.S.and global economies.  The U.S. Department of Labor has acknowledged thatthe economic “slowdown” has developed into a recession, and many economistsbelieve that the recession may last several more quarters.  To the extentthat turmoil in the financial markets continues or intensifies, it has thepotential to materially affect:

 

1.               the value of our investments and theinvestments of our unconsolidated joint ventures;

 

2.               the availability or the terms offinancing that we and our unconsolidated joint ventures may anticipateutilizing or that may be utilized by the owners (the “Project Owners”) of themultifamily development projects in which we are an equity owner or juniorlender or both;

 

3.               our ability and that of the ProjectOwners to make principal and interest payments on, or refinance, anyoutstanding debt when due; and

 

4.               the ability of our current residents toenter into new leases or satisfy their current rental payment obligations underexisting leases and the ability of future residents to enter into leases duringthe lease-up stage of newly completed multifamily development projects.

 

The current marketdisruption could also affect our operating results and financial condition asfollows:

 

*Debtand Equity Markets. *The commercial real estate debt markets are currentlyexperiencing volatility as a result of certain factors, including thetightening of underwriting standards by lenders and credit rating agencies andthe significant inventory of unsold collateralized mortgage backed securitiesin the market.  Credit spreads for major sources of capital have widenedsignificantly as investors have demanded a higher risk premium.  This isresulting in lenders increasing the cost for debt financing.  Should theoverall 

 

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cost of borrowingsincrease, either by increases in the index rates or by increases in lenderspreads, we will need to factor such increases into the economics of ouracquisitions, developments and property contributions.  This may result inour investment operations generating lower overall economic returns and areduced level of cash flow, which could potentially impact our ability to makedistributions to our stockholders at current levels.  In addition, therecent dislocations in the debt markets have reduced the amount of capital thatis available to finance real estate, which, in turn: (1) leads to adecline in real estate values generally; (2) slows real estate transactionactivity; (3) reduces the loan to value upon which lenders are willing toextend debt; and (4) results in difficulty in refinancing debt as it becomes due, all of which may reasonably beexpected to have a material adverse impact on the value of real estateinvestments and the revenues, income or cash flow from the acquisition andoperations of real properties and mortgage loans.  In addition, thecurrent state of the debt markets has negatively impacted the ability to raiseequity capital.

 

If we or theprojects in which we have invested are unable to obtain debt financing onacceptable terms, or if lower levels of debt were available to us in respect ofour investments whether as a result of declining real estate values or lowerloan to value standards of lenders, or both, we may be forced to use a greaterproportion of our offering proceeds to fund additional equity to our existinginvestments and to finance our acquisitions, reducing the number of investmentswe could otherwise make or dispose of some of our assets.  If the currentdebt market environment persists, we may modify our investment strategies inorder to seek to optimize our portfolio performance.  Our strategies mayinclude, among other options, limiting or eliminating the use of debt andfocusing on those investments that do not require the use of leverage to meetour portfolio goals.  Such modifications to our investment strategiescould adversely affect our performance.

 

For each of ourcurrent multifamily development projects where we or our unconsolidated jointventures hold a mezzanine loan, there is a senior construction loan on theproject.  These construction loans will mature on or before the maturitydate of our mezzanine loans.  Upon maturity of the construction loans,such loans will need to be refinanced or otherwise satisfied.  Because ourequity or lending positions are subordinate to the construction loans withrespect to each of these development projects, higher borrowing costs ordifficulty in obtaining financing as the senior construction loans become duecould result in a partial or total loss of the value of any such investment.

 

*GovernmentIntervention.* The pervasive and fundamental disruptions that the global financial markets arecurrently undergoing have led to extensive and unprecedented governmentalintervention.  Such intervention has in certain cases been implemented onan “emergency” basis, suddenly and substantially eliminating marketparticipants’ ability to continue to implement certain strategies or manage therisk of their outstanding positions.  In addition, these interventionshave typically been unclear in scope and application, resulting in confusionand uncertainty, which in itself has been materially detrimental to the efficientfunctioning of the markets as well as previously successful investmentstrategies.  Among measures proposed by legislators, especially as toresidential mortgage loans, have been moratoriums on loan payments, limits onthe ability of lenders to enforce loan provisions, including the collection ofinterest at rates agreed in the loan documents, and involuntary modification ofloan agreements.  If these or other regulations adverse to lenders areimplemented and applied to loans we have made, they could adversely impact ouroperations.  It is impossible to predict what, if any, additional interimor permanent governmental restrictions may be imposed or the effect of suchrestrictions on us and our results of operations.  There is likely to beincreased regulation of the financial markets that could have a material impacton our operating results and financial condition.

 

***Capitalization rates in major U.S. markets for multifamilycommunities have risen and many economists predict they are likely to continueto rise during 2009.  As a result, the value of investments we have madeprior to 2009 may have declined in this environment.***

 

In connection withthe recent credit market disruptions and economic slowdown, there is evidencethat capitalization rates in major U.S. markets for multifamily communitieshave risen in 2008 and many economists believe they are likely to continue torise during 2009.  Increases in capitalization rates (the rate of returnimmediately expected upon investment in a real estate asset) reflect declinesin the pricing of those assets upon sale.  As a result of capitalizationincreases, we expect that if we were required to sell our existing investmentsinto the current market, we may experience a substantial decrease in the valueof those investments and those of our unconsolidated joint ventures.  As aresult, to the extent we may be required to test the current market, we may notbe able to recover the carrying amount of our investments or the investments inour unconsolidated joint ventures.  Apart from the potential for suchresults on any such sale, we may also be required to recognize an impairmentcharge in earnings in respect of assets we currently own.

 

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***Increases in unemployment caused by a recessionary economycould adversely affect multifamily property occupancy and rental rates withhigh quality multifamily communities suffering even more severely.***

 

Rising levels ofunemployment in our multifamily markets could significantly decrease occupancyand rental rates.  In times of increasing unemployment, multifamilyoccupancy and rental rates have historically been adversely affected by:

 

·                  rental residents deciding to share rentalunits and therefore rent fewer units;

 

·                  potential residents moving back intofamily homes or delaying leaving family homes;

 

·                  a reduced demand for higher-rent units,such as those of high quality multifamily communities;

 

·                  a decline in household formation;

 

·                  persons enrolled in college delayingleaving college or choosing to proceed to or return to graduate school in theabsence of available employment; and

 

·                  the inability or unwillingness ofresidents to pay rent increases.

 

***Current credit market disruptions and recent economic trendsmay increase the likelihood of a commercial developer defaulting on itsobligations with respect to our or our unconsolidated joint ventures’ projectsor becoming bankrupt or insolvent, which could adversely impact us and thoseprojects.***

 

Current creditmarket disruptions and recent economic trends have caused an increase indeveloper failures.  The developers of the projects in which we haveinvested are exposed to risks not only with respect to our projects, but alsoother projects in which they are involved.  A default by a developer inrespect of one of our multifamily development project investments, or thebankruptcy, insolvency or other failure of a developer for one of suchprojects, may require that we determine whether we want to assume the seniorloan, take over development of the project, find another developer for theproject, or sell our interest in the project.  Such developer failurescould delay efforts to complete or sell the development project and couldultimately preclude us from full realization of our anticipated returns. Such events could cause a decrease in the value of our assets and compel us toseek additional sources of liquidity, which may or may not be available, inorder to hold and complete the development project through stabilization.

 

Generally, underbankruptcy law and our bankruptcy guarantees with our joint venture developmentpartners, we may seek recourse from the developer-guarantor to complete ourdevelopment project with a substitute developer partner.  However, in theevent of a bankruptcy by the developer-guarantor, we cannot assure you that thedeveloper or its trustee will continue or otherwise satisfy itsobligations.  The bankruptcy of any developer and the rejection of itsdevelopment obligations would likely cause us to have to complete thedevelopment on our own or find a replacement developer, which could result indelays and increased costs.  We cannot assure you that we would be able tocomplete the development on terms as favorable as when we first entered intothe project.

 

***Recent disruptions in the financial markets could adverselyaffect the multifamily property sector’s ability to obtain financing and creditenhancement from Fannie Mae and Freddie Mac, which could adversely impact us.***

 

Fannie Mae andFreddie Mac are major sources of financing for the multifamily sector. Fannie Mae reported a $25.2 billion loss for the fourth quarter of 2008bringing its total losses for 2008 to $58.7 billion.  Freddie Mac has alsoexperienced significant losses in the first three quarters of 2008, withadditional losses also expected for the fourth quarter.  These lossescoupled with the credit market’s poor perception of Fannie Mae and Freddie Mac,add to the considerable uncertainty surrounding the capital structure of bothFannie Mae and Freddie Mac.  Pursuant to legislation enacted in 2008, theU.S. government has already placed both Fannie Mae and Freddie Mac under itsconservatorship.  Despite recent additional funding for bothgovernment-sponsored entities, their portfolio limitations are required to bereduced on a phased-in basis beginning in 2010.  If new U.S. governmentregulations heighten Fannie Mae’s and Freddie Mac’s underwriting standards,adversely affect interest rates and reduce the amount of capital they can makeavailable to the multifamily sector, it could have a material adverse effect onboth the multifamily sector and us because many private alternative sources offunding have been reduced or are unavailable.  Any potential reduction inloans, guarantees and credit-enhancement arrangements from Fannie Mae andFreddie Mac could jeopardize the effectiveness of the multifamily sector’sderivative securities market, potentially causing breaches in loan covenants,and through reduced loan availability, impact the value of multifamily assets,which could impair the value of a significant portion of multifamilycommunities.  Specifically, the potential for a decrease in liquidity madeavailable to the multifamily sector by Fannie Mae and Freddie Mac could: (1) makeit more difficult for us to secure new takeout financing for currentmultifamily development projects; (2) hinder our ability to refinancecompleted 

 

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multifamily assets; and (3) decreasethe amount of available liquidity and credit that could be used to furtherdiversify our portfolio of multifamily assets.

 

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

 

Our operating resultswill be subject to risks generally incident to the ownership of real estate,including:

 

·                  changes in general economic or local conditions;

 

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

 

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

 

·                  the illiquidity of real estate investments generally;

 

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

 

·                  periods of high interest rates and tight money supply;

 

·                  residents’ perceptions of the safety, convenience, andattractiveness of our properties and the neighborhoods where they are located;and

 

·                  our ability to provide adequate management,maintenance, and insurance.

 

In addition, localconditions in the markets in which we own or intend to own multifamily andmultifamily communities or in which the collateral securing our loans islocated may significantly affect occupancy or rental rates at suchproperties.  The risks that may adversely affect conditions in thosemarkets include the following:

 

·                  layoffs, plant closings, relocations of significantlocal employers and other events negatively impacting local employment ratesand the local economy;

 

·                  an oversupply of, or a lack of demand for, apartments;

 

·                  a decline in household formation;

 

·                  the inability or unwillingness of residents to payrent increases; and

 

·                  rent control or rent stabilization laws or otherhousing laws, which could prevent us from raising rents.

 

For these and otherreasons, we cannot assure you that we will be profitable or that we will realizegrowth in the value of our real estate properties.

 

***If we have limited diversification of the geographiclocations of our properties, our operating results will be affected by economicchanges that have an adverse impact on the real estate market in those areas.***

 

In the event that most ofour properties are located in a single geographic area, our operating resultsand ability to make distributions are likely to be impacted by economic changesaffecting the real estate markets in that area.  Your investment will besubject to greater risk to the extent that we lack a geographically diversifiedportfolio.

 

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***Our failure to integrate acquired communities and newpersonnel could create inefficiencies and reduce the return of your investment.***

 

To grow successfully, wemust be able to apply our experience in managing real estate to a larger numberof properties.  In addition, we must be able to integrate new managementand operations personnel as our organization grows in size andcomplexity.  Failures in either area will result in inefficiencies thatcould adversely affect our expected return on our investments and our overallprofitability.

 

***Short-term multifamily and apartment leases expose us to theeffects of declining market rent, which could adversely impact our ability tomake cash distributions to our stockholders.***

 

We expect thatsubstantially all of our apartment leases will be for a term of one year orless.  Because these leases generally permit the residents to leave at theend of the lease term without penalty, our rental revenues may be impacted bydeclines in market rents more quickly than if our leases were for longer terms.

 

***Any student-housing properties that we acquire will besubject to an annual leasing cycle, short lease-up period, seasonal cash flows,changing university admission and housing policies, and other risks inherent inthe student-housing industry, any of which could have a negative impact on yourinvestment.***

 

Student-housingproperties generally have short-term leases of 12 months, ten months, ninemonths, or shorter.  As a result, we may experience significantly reducedcash flows during the summer months from student-housing properties while moststudents are on vacation.  Furthermore, student-housing properties must bealmost entirely re-leased each year, exposing us to increased leasingrisk.  Student-housing properties are also typically leased during alimited leasing season that usually begins in January and ends in August ofeach year. We would, therefore, be highly dependent on the effectiveness of ourmarketing and leasing efforts and personnel during this season.

 

Changes in universityadmission policies could also adversely affect us. For example, if a universityreduces the number of student admissions or requires that a certain class ofstudents, such as freshman, live in a university-owned facility, the demand forunits at our student-housing properties may be reduced and our occupancy ratesmay decline.  We rely on our relationships with colleges and universitiesfor referrals of prospective student residents or for mailing lists ofprospective student residents and their parents. Many of these colleges anduniversities own and operate their own competing on-campus facilities. Anyfailure to maintain good relationships with these colleges and universitiescould therefore have a material adverse effect on our ability to market ourproperties to students and their families.

 

Federal and state lawsrequire colleges to publish and distribute reports of on-campus crimestatistics, which may result in negative publicity and media coverageassociated with crimes occurring on or in the vicinity of any student-housingproperties. Reports of crime or other negative publicity regarding the safetyof the students residing on, or near, our student-housing properties may havean adverse effect on our business.

 

***We may face significant competition from university-ownedstudent housing and from other residential properties that are in closeproximity to any student-housing properties we may acquire, which could have anegative impact on our results of operations.***

 

On-campus student housinghas certain inherent advantages over off-campus student housing in terms ofphysical proximity to the university campus and integration of on-campusfacilities into the academic community. Colleges and universities can generallyavoid real estate taxes and borrow funds at lower interest rates than us.

 

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

 

A property may incurvacancies either by the continued default of residents under their leases orthe expiration of leases.  If vacancies continue for a long period oftime, we may suffer reduced revenues resulting in decreased distributions toour stockholders.  In addition, the resale value of the property could bediminished because the market value of a particular property will dependprincipally upon the value of the leases of such property.

 

***Many of our investments will be dependent on residents forrevenue, and lease terminations could reduce our ability to make distributionsto stockholders.***

 

The success of our realproperty investments often will be materially dependent on the financialstability of our residents.  Lease payment defaults by residents couldcause us to reduce the amount of distributions to stockholders.  A defaultby a significant number of residents on his or her lease payments to us wouldcause us to lose the revenue associated with such lease and cause us to 

 

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have to find analternative source of revenue to meet mortgage payments and prevent aforeclosure if the property is subject to a mortgage.  In the event of alease default, we may experience delays in enforcing our rights as landlord andmay incur substantial costs in protecting our investment and re-letting ourproperty.  If a substantial number of leases are terminated, we cannotassure you that we will be able to lease the property for the rent previouslyreceived or sell the property without incurring a loss.  Additionally,loans that we make generally will relate to real estate.  As a result, theborrower’s ability to repay the loan may be dependent on the financialstability of our residents leasing the related real estate.

 

***We may be unable to secure funds for future capitalimprovements, which could adversely impact our ability to make cashdistributions to our stockholders.***

 

When residents do notrenew their leases or otherwise vacate their space, in order to attract replacementresidents, we may be required to expend funds for capital improvements to thevacated apartment units.  In addition, we may require substantial funds torenovate an apartment community in order to sell it, upgrade it or repositionit in the market.  If we have insufficient capital reserves, we will haveto obtain financing from other sources.  We intend to establish capitalreserves in an amount we, in our discretion, believe is necessary.  Alender also may require escrow of capital reserves in excess of any establishedreserves.  If these reserves or any reserves otherwise established aredesignated for other uses or are insufficient to meet our cash needs, we mayhave to obtain financing from either affiliated or unaffiliated sources to fundour cash requirements.  We cannot assure you that sufficient financingwill be available or, if available, will be available on economically feasibleterms or on terms acceptable to us.  Moreover, certain reserves requiredby lenders may be designated for specific uses and may not be available forcapital purposes such as future capital improvements.  Additionalborrowing for capital needs and capital improvements will increase our interestexpense, and therefore our financial condition and our ability to make cashdistributions to our stockholders may be adversely affected.

 

***We may be unable to sell a property or real estate-relatedasset if or when we decide to do so, which could adversely impact our abilityto make cash distributions to our stockholders.***

 

We intend to hold thevarious real properties and real estate-related assets in which we invest untilsuch time as our advisor determines that a sale or other disposition appears tobe advantageous to achieve our investment objectives or until it appears thatthese objectives will not be met.  Otherwise, our advisor, subject toapproval of our board of directors, may exercise its discretion as to whetherand when to sell a property, and we will have no obligation to sell propertiesat any particular time, except upon our liquidation.  If we have not begunthe process to list our shares for trading on a national securities exchange orto liquidate at any time after the sixth anniversary of the termination of thisprimary offering, unless such date is extended by our board of directorsincluding a majority of our independent directors, we will furnish a proxystatement to stockholders to vote on a proposal for our orderly liquidationupon the written request of stockholders owning 10% or more of our outstandingcommon stock.  The liquidation proposal would include informationregarding appraisals of our portfolio.  By proxy, stockholders holding amajority of our shares could vote to approve our liquidation.  If ourstockholders did not approve the liquidation proposal, we would obtain newappraisals and resubmit the proposal by proxy statement to our stockholders upto once every two years upon the written request of stockholders owning 10% ormore of our outstanding common stock.

 

The real estate market isaffected, as discussed above, by many factors, such as general economicconditions, availability of financing, interest rates and other factors,including supply and demand, that are beyond our control.  We cannotpredict whether we will be able to sell any asset for the price or on the termsset by us, or whether any price or other terms offered by a prospectivepurchaser would be acceptable to us.  We cannot predict the length of timeneeded to find a willing purchaser and to close the sale of a property or realestate-related asset.  If we are unable to sell a property or realestate-related asset when we determine to do so, it could have a significantadverse effect on our cash flow and results of operations.

 

***Our co-venture partners, co-tenants or other partners inco-ownership arrangements could take actions that decrease the value of aninvestment to us and lower your overall return.***

 

We may enter into jointventures, tenant-in-common investments or other co-ownership arrangements withother Behringer Harvard-sponsored programs or third parties having investmentobjectives similar to ours for the acquisition, development or improvement ofproperties as well as the acquisition of real estate-related investments. We may also purchase and develop properties in joint ventures or inpartnerships, co-tenancies or other co-ownership arrangements with the sellersof the properties, affiliates of the sellers, developers or otherpersons.  Such investments may involve risks not otherwise present withother forms of real estate investment, including, for example:

 

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

 

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·                  the possibility that a co-venturer, co-tenant orpartner in an investment might breach a loan agreement or other agreement orotherwise, by action or inaction, act in a way detrimental to us or theinvestment;

 

·                  that such co-venturer, co-tenant or partner may at anytime have economic or business interests or goals that are or that becomeinconsistent with our business interests or goals;

 

·                  the possibility that we may incur liabilities as theresult of the action taken by our partner or co-investor; or

 

·                  that such co-venturer, co-tenant or partner may be ina position to take action contrary to our instructions or requests or contraryto our policies or objectives, including our policy with respect to qualifyingand maintaining our qualification as a REIT.

 

Any of the above mightsubject a property to liabilities in excess of those contemplated and thusreduce our returns on that investment.

 

***Uninsured losses relating to real property or excessivelyexpensive premiums for insurance coverage may adversely affect your returns.***

 

Our advisor will attemptto ensure that all of our properties are adequately insured to cover casualtylosses.  The nature of the activities at certain properties we mayacquire, such as age-restricted communities or student housing, may expose usand our operators to potential liability for personal injuries and propertydamage claims.  In addition, there are types of losses, generallycatastrophic in nature, such as losses due to wars, acts of terrorism,earthquakes, floods, hurricanes, pollution or environmental matters that areuninsurable or not economically insurable, or may be insured subject tolimitations, such as large deductibles or co-payments.  Insurance risksassociated with potential terrorist acts could sharply increase the premiums wepay for coverage against property and casualty claims.  Mortgage lendersgenerally insist that specific coverage against terrorism be purchased byproperty owners as a condition for providing mortgage, bridge or mezzanineloans.  It is uncertain whether such insurance policies will continue tobe available, or be available at reasonable cost, which could inhibit ourability to finance or refinance our properties.  In such instances, we maybe required to provide other financial support, either through financialassurances or self-insurance, to cover potential losses.  We cannot assureyou that we will have adequate coverage for such losses.  In the eventthat any of our properties incurs a casualty loss that is not fully covered byinsurance, the value of our assets will be reduced by the amount of any suchuninsured loss.  In addition, other than any potential capital reserve orother reserves we may establish, we have no source of funding to repair orreconstruct any uninsured damaged property, and we cannot assure you that anysuch sources of funding will be available to us for such purposes in thefuture.  Also, to the extent we must pay unexpectedly large amounts forinsurance, we could suffer reduced earnings that would result in decreaseddistributions to stockholders.

 

***Our operating results may be negatively affected bypotential development and construction delays and result in increased costs andrisks, which could diminish the return on your investment.***

 

We may use some or all ofthe offering proceeds available to us to acquire, develop and/or redevelopproperties upon which we will develop multifamily communities and constructimprovements.  We will be subject to risks relating to uncertaintiesassociated with rezoning for development and environmental concerns ofgovernmental entities and/or community groups and our developer’s ability tocontrol construction costs or to build in conformity with plans, specificationsand timetables.  The developer’s failure to perform may necessitate legalaction by us to rescind the purchase or the construction contract or to compelperformance.  Performance may also be affected or delayed by conditionsbeyond the developer’s control.  Delays in completion of a multifamilycommunity also could give residents the right to terminate preconstructionleases for apartment units at a newly developed project.  We may incuradditional risks when we make periodic progress payments or other advances tosuch developers prior to completion of construction.  These and other suchfactors can result in increased costs of a project or loss of ourinvestment.  In addition, we will be subject to normal lease-up risksrelating to newly constructed projects.  Furthermore, we must rely uponprojections of rental income and expenses and estimates of the fair marketvalue of property upon completion of construction when agreeing upon a price tobe paid for the property at the time of acquisition of the property.  Ifour projections are inaccurate, we may pay too much for a property, and thereturn on our investment could suffer.

 

In addition, we mayinvest in unimproved real property (which we define as property not acquiredfor the purpose of producing rental or other operating income, has nodevelopment or construction in process at the time of acquisition and nodevelopment or construction is planned to commence within one year of theacquisition) or mortgage loans on unimproved property.  

 

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Returns from developmentof unimproved properties are also subject to risks and uncertainties associatedwith rezoning the land for development and environmental concerns ofgovernmental entities and/or community groups.  Although our intention isto limit any investment in unimproved property to property we intend todevelop, your investment nevertheless is subject to the risks associated withinvestments in unimproved real property.

 

***Our plan to reposition certain commercial properties throughdemolition, conversion and redevelopment into new multifamily communities maynever commence after we make an investment in the property, be delayed or neverreach completion, which could diminish the return on your investment.***

 

We may make investmentsin a wide variety of commercial properties, including, without limitation,office buildings, shopping centers, business and industrial parks,manufacturing facilities, warehouses and distribution facilities and motel andhotel properties for purposes of repositioning these properties intomultifamily communities.  After we make an investment, we or thedeveloper, as applicable, may be unable to commence conversion of theseproperties and therefore may be required to continue operating the propertiesunder their current purpose, which would include other than multifamilycommunity uses.  In addition, we may also be unable to complete thedemolition, conversion or redevelopment of these commercial properties and maybe forced to hold or sell these properties at a loss.  Although we intendto focus on multifamily communities and limit any investment in commercialproperties for repositioning into multifamily communities, your investment issubject to the risks associated with these commercial properties andtraditional construction risks associated with this repositioning plan.

 

*** If we contract with Behringer Development Company LPor its affiliates for newly developed property, we cannot guarantee that anyearnest money deposit we make to Behringer Development Company LP or itsaffiliates will be fully refunded.***

 

We may enter into one ormore contracts, either directly or indirectly through joint ventures,tenant-in-common investments or other co-ownership arrangements, with affiliatesof our advisor or others, to acquire real property from Behringer DevelopmentCompany LP (“Behringer Development”), an affiliate of our advisor. Properties acquired from Behringer Development or its affiliates may beexisting income-producing properties, properties to be developed or propertiesunder development.  We anticipate that we will be obligated to pay asubstantial earnest money deposit at the time of contracting to acquire suchproperties.  In the case of properties to be developed by BehringerDevelopment or its affiliates, we anticipate that we will be required to closethe purchase of the property upon completion of the development of the propertyby Behringer Development or its affiliates.  At the time of contractingand the payment of the earnest money deposit by us, Behringer Development orits affiliates typically will not have acquired title to any realproperty.  Typically, Behringer Development or its affiliates will onlyhave a contract to acquire land and a development agreement to develop abuilding on the land.  We may enter into such a contract with BehringerDevelopment or its affiliates even if at the time of contracting we have notyet raised sufficient proceeds in our offering to enable us to close thepurchase of such property.  However, we will not be required to close apurchase from Behringer Development or its affiliates, and will be entitled toa refund of our earnest money, in the following circumstances:

 

·                  Behringer Development or its affiliates fail todevelop the property;

 

·                  a significant portion of the pre-leased residents of anew or recently redeveloped apartment community fail to take possession undertheir leases for any reason;****or

 

·                  we are unable to raise sufficient proceeds from ouroffering to pay the purchase price at closing.

 

The obligation ofBehringer Development or its affiliates to refund our earnest money will beunsecured, and no assurance can be made that we would be able to obtain a refundof such earnest money deposit from it under these circumstances since BehringerDevelopment is an entity without substantial assets or operations.

 

***We will face competition from third parties, including othermultifamily communities, which may limit our profitability and the return onyour investment.***

 

The residential apartmentcommunity industry is highly competitive.  This competition could reduceoccupancy levels and revenues at our multifamily communities, which wouldadversely affect our operations.  We compete with many other entitiesengaged in real estate investment activities, including individuals, corporations,bank and insurance company investment accounts, other REITs, real estatelimited partnerships, and other entities engaged in real estate investmentactivities, many of which have greater resources than we do.  Larger realestate programs may enjoy significant competitive advantages that result from,among other things, a lower cost of capital and enhanced operatingefficiencies.  Our competitors include other multifamily communities bothin 

 

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the immediate vicinityand the broader geographic market where our multifamily communities will belocated.  Overbuilding of multifamily communities may occur.  If so,this will increase the number of apartment units available and may decreaseoccupancy and apartment rental rates.  In addition, increases in operatingcosts due to inflation may not be offset by increased apartment rentalrates.  We may be required to expend substantial sums to attract newresidents.

 

***In connection with the recentcredit market disruptions and economic slowdown, we may face increasedcompetition from single-family homes and condominiums for rent, which couldlimit our ability to retain residents, lease apartment units or increase ormaintain rents.***

 

Any multifamilycommunities we invest in may compete with numerous housing alternatives inattracting residents, including single-family homes and condominiums availablefor rent.  Such competitive housing alternatives may become more prevalentin a particular area because of the tightening of mortgage lending underwritingcriteria, homeowner foreclosures, the decline in single-family home andcondominium sales and the lack of available credit.  The number ofsingle-family homes and condominiums for rent in a particular areacould limit our ability to retain residents, lease apartment units orincrease or maintain rents.

 

***If PGGM does not honor its commitments, our portfolio maynot be as diverse and our investments may suffer.***

 

Under arrangementsmanaged by a subsidiary of our sponsor, we have entered into, and it isintended that we will continue to enter into, joint venture investments withPGGM in to-be-developed multifamily communities or newly constructedmultifamily communities that have not yet reached stabilization.  As of December 31,2008, we have made joint venture investments with PGGM in all of the propertiesand development projects in which we have invested.  PGGM has committed toour sponsor to invest up to $200 million in such joint ventures (withapproximately $85.2 million committed to currently existing properties andprojects) and PGGM has recently indicated that it expects to increase itscommitment to invest with us to $300 million.  As such, we expect asubstantial portion of our future investments will be made through such jointventures.  We expect this investment strategy to increase the number ofinvestments we make and the diversification of our investment portfolio. However, if PGGM does not honor its current commitment to invest up to $200million in such joint ventures, or does not increase its commitment to $300million or more, our portfolio will not consist of as many investments or be asdiverse as it otherwise would.

 

In addition, underthe joint venture arrangements into which we have entered, and expect tocontinue to enter, with PGGM, we may in certain situations call for capitalcontributions to be made by PGGM.  This has typically been the case in thedevelopment projects in which we have co-invested with PGGM; as the developmentprogresses, it is generally required that both we and PGGM contributeadditional capital to the project.  If PGGM were unwilling or unable tocontribute this capital when required, the project and our investment thereincould suffer due to lack of funding or delays in funding.  In addition, wecould, through our interest in the joint venture with PGGM, be in breach of ourobligations to the other parties investing in the development project unless wewere to fund PGGM’s portion on its behalf or obtain alternative sources offunding.  If we were to fund PGGM’s portion on its behalf, we would haveless capital to invest in other assets and the diversification of our portfoliowould suffer.  If we were unable to fund the portion of any project thatPGGM is expected to, but does not, fund in accordance with the joint ventureagreement, the joint venture may be unable to meet its funding obligations tothe project and the value of our interest in the project may be reduced oreliminated.

 

PGGM is a Dutchpension fund subject to supervision and regulation by the Dutch centralbank.  In its quarterly report for the fourth quarter of 2008, PGGMreported a 13.1% loss on its investments as a result of the current globalrecession.  This loss resulted in a cover ratio (i.e. assets divided byliabilities) of 92% at the end of the fourth quarter, compared with a coverratio of 125% at the end of the third quarter.  It is our understanding thatnegative performance by PGGM, including deficits in its cover ratio, couldcause the Dutch central bank to intervene in its investment decisions,including those with respect to our co-investments.

 

***A concentration of our investments in the multifamily sectormay leave our profitability vulnerable to a downturn or slowdown in suchsector.***

 

At any one time, asignificant portion of our investments are likely to be in the multifamilysector.  As a result, we will be subject to risks inherent in investmentsin a single type of property.  If our investments are substantially in themultifamily sector, then the potential effects on our revenues, and as aresult, on cash available for distribution to our stockholders, resulting froma downturn or slowdown in the multifamily sector could be more pronounced thanif we had more fully diversified our investments.

 

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***Failure to succeed in new markets or in new property classesmay have adverse consequences on our performance.***

 

We may from time to timecommence development activity or make acquisitions outside of our existingmarket areas or the property classes of our primary focus if appropriateopportunities arise.  Our historical experience in our existing markets indeveloping, owning and operating certain classes of property does not ensurethat we will be able to operate successfully in new markets, should we chooseto enter them, or that we will be successful in new property classes.  Wemay be exposed to a variety of risks if we choose to enter new markets, includingan inability to evaluate accurately local market conditions, to obtain land fordevelopment or to identify appropriate acquisition opportunities, to hire andretain key personnel, and a lack of familiarity with local governmental andpermitting procedures.  In addition, we may abandon opportunities to enternew markets or acquire new classes of property that we have begun to explorefor any reason and may, as a result, fail to recover expenses already incurred.

 

***Acquiring or attempting to acquire multiple properties in asingle transaction may adversely affect our operations.***

 

From time to time, we mayattempt to acquire multiple properties in a single transaction.  Portfolioacquisitions are more complex and expensive than single-property acquisitions,and the risk that a multiple-property acquisition does not close may be greaterthan in a single-property acquisition.  Portfolio acquisitions may alsoresult in us owning investments in geographically dispersed markets, placingadditional demands on our ability to manage the properties in theportfolio.  In addition, a seller may require that a group of propertiesbe purchased as a package even though we may not want to purchase one or moreproperties in the portfolio.  In these situations, if we are unable to identifyanother person or entity to acquire the unwanted properties, we may be requiredto operate or attempt to dispose of these properties.  To acquire multipleproperties in a single transaction we may be required to accumulate a largeamount of cash.  We would expect the returns that we can earn on such cashto be less than the ultimate returns in real property and therefore,accumulating such cash could reduce the funds available fordistributions.  Any of the foregoing events may have an adverse effect onour operations.

 

***If we set aside insufficient capital reserves, we may berequired to defer necessary capital improvements.***

 

If we do not have enoughreserves for capital to supply needed funds for capital improvements throughoutthe life of the investment in a property and there is insufficient cashavailable from our operations, 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 residents being attracted tothe property.  If this happens, we may not be able to maintain projectedrental rates for affected properties, and our results of operations may benegatively impacted.

 

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

 

All real property and theoperations conducted on real property are subject to federal, state and locallaws and regulations relating to environmental protection and human health andsafety.  These laws and regulations generally govern wastewaterdischarges, air emissions, the operation and removal of underground andabove-ground storage tanks, the use, storage, treatment, transportation anddisposal of solid and hazardous materials, and the remediation of contaminationassociated with disposals.  Some of these laws and regulations may imposejoint and several liability on residents, owners or operators for the costs ofinvestigation or remediation of contaminated properties, regardless of fault orthe legality of the original disposal.  In addition, the presence of thesesubstances, or the failure to properly remediate these substances, mayadversely affect our ability to sell or rent the property or to use theproperty as collateral for future borrowing.

 

Compliance with new ormore stringent laws or regulations or stricter interpretation of existing lawsmay require material expenditures by us.  We cannot assure you that futurelaws, ordinances or regulations will not impose any material environmentalliability, or that the current environmental condition of our properties willnot be affected by the operations of residents, by the existing condition ofthe land, by operations in the vicinity of the properties, such as the presenceof underground storage tanks, or by the activities of unrelated thirdparties.  In addition, there are various local, state and federal fire,health, life-safety and similar regulations that we may be required to complywith, and that may subject us to liability in the form of fines or damages fornoncompliance.  Any foreign investments we make will be subject to similarlaws in the jurisdictions where they are located.

 

***Discovery of previously undetected environmentally hazardousconditions may adversely affect our operating results.***

 

Under various federal,state and local environmental laws, ordinances and regulations (including thoseof foreign jurisdictions), a current or previous owner or operator of realproperty may be liable for the cost of removal or remediation of 

 

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hazardous or toxicsubstances on, under or in such property.  The costs of removal orremediation could be substantial.  These laws often impose liabilitywhether or not the owner or operator knew of, or was responsible for, thepresence of the hazardous or toxic substances.

 

Environmental laws alsomay impose restrictions on the manner in which property may be used orbusinesses may be operated, and these restrictions may require substantialexpenditures.  Environmental laws provide for sanctions in the event ofnoncompliance and may be enforced by governmental agencies or, in certaincircumstances, by private parties.  Certain environmental laws and commonlaw principles govern the presence, maintenance, removal and disposal ofcertain building materials, including asbestos and lead-based paint.  Suchhazardous substances could be released into the air and third parties may seekrecovery from owners or operators of real properties for personal injury orproperty damage associated with exposure to released hazardous substances.

 

In addition, whenexcessive moisture accumulates in buildings or on building materials, moldgrowth may occur, particularly if the moisture problem remains undiscovered oris not addressed over a period of time.  Some molds may produce airbornetoxins or irritants.  Concern about indoor exposure to mold has beenincreasing, as exposure to mold may cause a variety of adverse health effectsand symptoms, including allergic or other reactions. As a result, the presence ofsignificant mold at any of our projects could require us to undertake a costlyremediation program to contain or remove the mold from the affected property ordevelopment project, which would reduce our operating results.

 

The cost of defendingagainst such claims of liability, of compliance with environmental regulatoryrequirements, of remediating any contaminated property, or of paying personalinjury claims could materially adversely affect our business, assets or resultsof operations and, consequently, amounts available for distribution to you.

 

***Our costs associated with and the risk of failing to complywith the Americans with Disabilities Act and the Fair Housing Act may affectcash available for distributions.***

 

Our properties aregenerally expected to be subject to the Americans with Disabilities Act of1990, as amended (“Disabilities Act”), or similar laws of foreignjurisdictions.  Under the Disabilities Act, all places of publicaccommodation are required to comply with federal requirements related toaccess and use by disabled persons.  The Disabilities Act has separatecompliance requirements for “public accommodations” and “commercial facilities”that generally require that buildings and services be made accessible andavailable to people with disabilities.  The Disabilities Act’srequirements could require removal of access barriers and could result in theimposition of injunctive relief, monetary penalties or, in some cases, an awardof damages.  We will attempt to acquire properties that comply with theDisabilities Act or similar laws of foreign jurisdictions or place the burdenon the seller or other third party to ensure compliance with such laws. However, we cannot assure you that we will be able to acquire properties orallocate responsibilities in this manner.  If we cannot, our funds usedfor compliance with these laws may affect cash available for distributions andthe amount of distributions to you.

 

The multifamilycommunities we acquire must comply with Title III of the Disabilities Act, tothe extent that such properties are “public accommodations” and/or “commercialfacilities” as defined by the Disabilities Act.  Compliance with theDisabilities Act could require removal of structural barriers to handicappedaccess in certain public areas of our multifamily communities where suchremoval is readily achievable.  The Disabilities Act does not, however,consider residential properties, such as multifamily communities to be publicaccommodations or commercial facilities, except to the extent portions of suchfacilities, such as the leasing office, are open to the public.

 

We also must comply withthe Fair Housing Amendment Act of 1988 (“FHAA”), which requires thatmultifamily communities first occupied after March 13, 1991 be accessibleto handicapped residents and visitors.  Compliance with the FHAA couldrequire removal of structural barriers to handicapped access in a community,including the interiors of apartment units covered under the FHAA. Recently there has been heightened scrutiny of multifamily housing communitiesfor compliance with the requirements of the FHAA and Disabilities Act and anincreasing number of substantial enforcement actions and private lawsuits havebeen brought against multifamily communities to ensure compliance with theserequirements.  Noncompliance with the FHAA and Disabilities Act couldresult in the imposition of fines, awards of damages to private litigants,payment of attorneys’ fees and other costs to plaintiffs, substantiallitigation costs and substantial costs of remediation.

 

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***By owning age-restricted communities, we may incur liabilityby failing to comply with the FHAA, the Housing for Older Persons Act orcertain state regulations, which may affect cash available for distributions.***

 

Any age-restrictedcommunities we acquire must comply with the FHAA and the Housing for OlderPersons Act (“HOPA”).  The FHAA prohibits housing discrimination basedupon familial status, which is commonly referred to as age-baseddiscrimination.  However, there are exceptions for housing developmentsthat qualify as housing for older persons.  The HOPA provides the legalrequirements for such housing developments.  In order for housing toqualify as housing for older persons, the HOPA requires (i) all residentsof such developments to be 62 years of age or older or (ii) that at least80% of the occupied units are occupied by at least one person who is 55 yearsof age or older and that the housing community publish and adhere to policiesand procedures that demonstrate this required intent and comply with rules issuedby the United States Department of Housing and Urban Development forverification of occupancy.  In addition, certain states require thatage-restricted housing communities register with the state.  Noncompliancewith the FHAA, HOPA and state registration requirements could result in theimposition of fines, awards of damages to private litigants, payment ofattorneys’ fees and other costs to plaintiffs, substantial litigation costs andsubstantial costs of remediation.

 

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

 

If we decide to sell anyof our properties, we intend to use commercially reasonable efforts to sellthem for cash or in exchange for other property.  However, in someinstances we may sell our properties by providing financing topurchasers.  If we provide financing to purchasers, we will bear the riskof default by the purchaser and will be subject to remedies provided by law,which could negatively impact distributions to our stockholders.  Thereare no limitations or restrictions on our ability to take purchase moneyobligations.  We may, therefore, take a purchase money obligation securedby a mortgage as partial payment for the purchase price of a property. The terms of payment to us generally will be affected by custom in the areawhere the property being sold is located and the then-prevailing economicconditions.  If we receive promissory notes or other property in lieu ofcash from property sales, the distribution of the proceeds of sales to ourstockholders, or their reinvestment in other assets, will be delayed until thepromissory notes or other property are actually paid, sold or refinanced or wehave otherwise disposed of such promissory notes or other property.  Insome cases, we may receive initial down payments in cash and other property inthe year of sale in an amount less than the selling price and subsequentpayments will be spread over a number of years.  If any purchaser defaultsunder a financing arrangement with us, it could negatively impact our abilityto make distributions to our stockholders.

 

**RisksAssociated with Debt Financing**

 

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

 

We anticipate that wewill acquire additional properties and other real estate-related assets byusing either existing financing or borrowing new funds.  In addition, wemay incur or increase our mortgage debt by obtaining loans secured by some orall of our real properties to obtain funds to acquire additional properties andother investments and for payment of distributions to stockholders.  Wealso may borrow funds if necessary to satisfy the requirement that wedistribute to stockholders at least 90% of our annual REIT taxable income, orotherwise as is necessary or advisable to assure that we maintain ourqualification as a REIT for federal income tax purposes.

 

There is no limitation onthe amount we may invest in any single property or other asset or on the amountwe can borrow for the purchase of any individual property or otherinvestment.  Under our charter, the maximum amount of our indebtednessshall not exceed 300% of our “net assets” (as defined by the NASAA REITGuidelines) as of the date of any borrowing; however, we may exceed that limitif approved by a majority of our independent directors.

 

In addition to ourcharter limitation, our board of directors has adopted a policy to generallylimit our aggregate borrowings to approximately 75% of the aggregate value ofour assets unless substantial justification exists that borrowing a greateramount is in our best interests.  Our policy limitation, however, does notapply to individual real estate assets and only will apply once we have ceasedraising capital under this or any subsequent offering and investedsubstantially all of our capital.  As a result, we expect to borrow morethan 75% of the contract purchase price of each real estate asset we acquire tothe extent our board of directors determines that borrowing these amounts isprudent.

 

We do not intend to incurmortgage debt on a particular real property unless we believe the property’sprojected cash flow is sufficient to service the mortgage debt.  However,if there is a shortfall in cash flow, then the amount available fordistributions to stockholders may be affected.  In addition, incurringmortgage debt increases the risk of loss because defaults on indebtednesssecured 

 

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by a property may resultin foreclosure actions initiated by lenders and our loss of the propertysecuring the loan that is in default.  For tax purposes, a foreclosure ofany of our properties would be treated as a sale of the property for a purchaseprice equal to the outstanding balance of the debt secured by themortgage.  If the outstanding balance of the debt secured by the mortgageexceeds our tax basis in the property, we would recognize taxable income onforeclosure, but would not receive any cash proceeds from theforeclosure.  We may give full or partial guarantees to lenders ofmortgage debt to the entities that own our properties.  When we give aguaranty on behalf of an entity that owns one of our properties, we will beresponsible to our lender for satisfaction of the debt if it is not paid bysuch entity.  If any mortgages contain cross-collateralization orcross-default provisions, there is a risk that more than one real property maybe affected by a default.  If any of our properties are foreclosed upon dueto a default, our ability to make distributions to our stockholders will beadversely affected.  In addition, since we intend to begin to consider theprocess of liquidating and distributing cash or listing our shares on anational securities exchange within four to six years after the termination ofthis primary offering, our approach to investing in properties utilizingleverage in order to accomplish our investment objectives over this period oftime may present more risks to our stockholders than comparable real estateprograms that have a longer intended duration and that do not utilize borrowingto the same degree.

 

***If mortgage debt is unavailable at reasonable rates, we maynot be able to finance the multifamily communities, which could reduce the numberof properties we can acquire and the amount of cash distributions we can make.***

 

When we place mortgagedebt on multifamily communities, we run the risk of being unable to refinancethe properties when the loans come due, or of being unable to refinance onfavorable terms.  If interest rates are higher when the properties arerefinanced, we may not be able to finance the properties at reasonable ratesand our income could be reduced.  If this occurs, it would reduce cashavailable for distribution to our stockholders, and it may prevent us fromborrowing more money.

 

***Lenders may require us to enter into restrictive covenantsrelating to our operations, which could limit our ability to make distributionsto our stockholders.***

 

In connection withobtaining financing, a lender could impose restrictions on us that affect ourability to incur additional debt and our distribution and operating policies.In general, we expect our loan agreements to restrict our ability to encumberor otherwise transfer our interest in the respective property without the priorconsent of the lender. Loan documents we enter into may contain other negativecovenants that may limit our ability to further mortgage the property,discontinue insurance coverage, replace Behringer Harvard Multifamily AdvisorsI as our advisor or impose other limitations. Any such restriction orlimitation may have an adverse effect on our operations and our ability to makedistributions to you.

 

***Our ability to obtain financing on reasonable terms could beimpacted by negative capital market conditions.***

 

Recently,domestic financial markets have experienced unusual volatility and uncertainty.Although this condition has occurred most visibly within the “subprime”single-family mortgage lending sector of the credit market, liquidity hastightened in overall domestic financial markets, including the investment gradedebt and equity capital markets. Consequently, there is greater uncertaintyregarding our ability to access the credit market in order to attract financingon reasonable terms. Investment returns on our assets and our ability to makeacquisitions could be adversely affected by our inability to secure financingon reasonable terms, if at all.

 

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

 

We may finance ourproperty acquisitions using interest-only mortgage indebtedness. During theinterest- only period, the amount of each scheduled payment will be less thanthat of a traditional amortizing mortgage loan. The principal balance of themortgage loan will not be reduced (except in the case of prepayments) becausethere are no scheduled monthly payments of principal during this period. Afterthe interest-only period, we will be required either to make scheduled paymentsof amortized principal and interest or to make a lump-sum or “balloon” paymentat maturity. These required principal or balloon payments will increase theamount of our scheduled payments and may increase our risk of default under therelated mortgage loan. If the mortgage loan has an adjustable interest rate,the amount of our scheduled payments also may increase at a time of risinginterest rates. Increased payments and substantial principal or balloonmaturity payments will reduce the funds available for distribution to ourstockholders because cash otherwise available for distribution will be requiredto pay principal and interest associated with these mortgage loans.

 

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***Increases in interest rates could increase the amount of ourdebt payments and adversely affect our ability to make distributions to ourstockholders.***

 

We may incur indebtednessthat bears interest at a variable rate. In addition, from time to time we maypay mortgage loans or finance and refinance our properties in a rising interestrate environment. Accordingly, increases in interest rates could increase ourinterest costs, which could have an adverse effect on our operating cash flowand our ability to make distributions to you. In addition, if rising interestrates cause us to need additional capital to repay indebtedness in accordancewith its terms or otherwise, we may need to liquidate one or more of ourinvestments at times that may not permit realization of the maximum return onthese investments.

 

***If we enter into financing arrangements involving balloonpayment obligations, it may adversely affect our ability to make distributions.***

 

Some of our financingarrangements may require us to make a lump-sum or “balloon” payment atmaturity. Our ability to make a balloon payment at maturity is uncertain andmay depend upon our ability to obtain additional financing or our ability tosell the property. At the time the balloon payment is due, we may or may not beable to refinance the balloon payment on terms as favorable as the originalloan or sell the property at a price sufficient to make the balloon payment.The effect of a refinancing or sale could affect the rate of return tostockholders and the projected time of disposition of our assets. In addition,payments of principal and interest made to service our debts may leave us withinsufficient cash to pay the distributions that we are required to pay tomaintain our qualification as a REIT. Any of these results would have asignificant, negative impact on your investment.

 

***We have broad authority to incur debt, and high debt levelscould hinder our ability to make distributions and could decrease the return onyour investment and the value of your investment.***

 

Our board of directorshas adopted a policy to generally limit our aggregate borrowings toapproximately 75% of the aggregate value of our assets, but we may exceed thislimit under some circumstances. Such debt may be at a level that is higher thanreal estate investment trusts with similar investment objectives or criteria.High debt levels would cause us to incur higher interest charges, would resultin higher debt service payments, and could be accompanied by restrictivecovenants. These factors could limit the amount of cash we have available todistribute and could result in a decline in the value of your investment.

 

**RisksRelated to Investments in Real Estate-Related Assets**

 

***We have relatively less experience investing in mortgage,bridge, mezzanine or other loans as compared to investing directly in realproperty, which could adversely affect our return on loan investments.***

 

The experience of ouradvisor and its affiliates with respect to investing in mortgage, bridge,mezzanine or other loans relating to multifamily communities is not asextensive as it is with respect to investments directly in real properties.However, we have made and may continue to make such loan investments to theextent our advisor determines that it is advantageous to us due to the state ofthe real estate market or in order to diversify our investment portfolio. Ourless extensive experience with respect to mortgage, bridge, mezzanine or otherloans could adversely affect our return on loan investments.

 

***The bridge loans in which we may invest involve greaterrisks of loss than conventional mortgage loans.***

 

We may provide or investin bridge loans secured by first lien mortgages on a multifamily property toborrowers who are typically seeking short-term capital to be used in anacquisition or refinancing of real estate. We may also provide or invest inbridge loans secured by a pledge of the ownership interests of either theentity owning the real property or the entity that owns the interest in theentity owning the real property. The borrower has usually identified anundervalued multifamily asset that has been undermanaged or is located in arecovering market. If the market in which the asset is located fails to recoveraccording to the borrower’s projections, or if the borrower fails to improvethe quality of the asset’s management or the value of the asset, the borrowermay not receive a sufficient return on the asset to satisfy the bridge loan,and we may not recover some or all of our investment.

 

In addition, ownersusually borrow funds under a conventional mortgage loan to repay a bridge loan.We may therefore be dependent on a borrower’s ability to obtain permanentfinancing to repay our bridge loan, which could depend on market conditions andother factors.  Bridge loans are also subject to risks of borrowerdefaults, bankruptcies, fraud, losses and special hazard losses that are notcovered by standard hazard insurance.  In the event of any default underbridge loans held by us, we bear the risk of loss of principal and nonpaymentof interest and fees to the extent of any deficiency between the value of themortgage collateral and the 

 

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principal amount of thebridge loan.  To the extent we suffer such losses with respect to ourinvestments in bridge loans, the value of our company and the price of ourcommon stock may be adversely affected.

 

***The mezzanine loans in which we invest involve greater risksof loss than senior loans secured by income-producing real properties.***

 

We have and will continueto invest in mezzanine loans that take the form of subordinated loans securedby second mortgages on the underlying real property or loans secured by apledge of the ownership interests of either the entity owning the real propertyor the entity that owns the interest in the entity owning the real property.These types of investments involve a higher degree of risk than long-termsenior mortgage lending secured by income-producing real property because theinvestment may become unsecured as a result of foreclosure by the seniorlender. In the event of a bankruptcy of the entity providing the pledge of itsownership interests as security, we may not have full recourse to the assets ofthe entity, or the assets of the entity may not be sufficient to satisfy ourmezzanine loan. If a borrower defaults on our mezzanine loan or debt senior toour loan, or in the event of a borrower bankruptcy, our mezzanine loan will besatisfied only after the senior debt. As a result, we may not recover some orall of our investment, which could have a negative impact on our ability tomake distributions.

 

***The construction loans in which we may invest involvegreater risks of loss of investment and reduction of return than conventionalmortgage loans.***

 

If we decide to invest inconstruction loans secured by multifamily or other types of underlyingproperties, the nature of these loans pose a greater risk of loss thantraditional mortgages. Since construction loans are madegenerally for the express purpose ofeither the original development or redevelopment of a property, the risk ofloss is greater than a conventional mortgage because the underlying propertiessubject to construction loans are generally unable to generate income duringthe period of the loan. Construction loans may also be subordinate to the firstlien mortgages. Any delays in completing the development or redevelopmentmultifamily project may increase the risk of default or credit risk of theborrower which may increase the risk of loss or risk of a lower than expected returnto our portfolio.

 

***Our mortgage, bridge, mezzanine or other loans may beimpacted by unfavorable real estate market conditions, which could decrease thevalue of our loan investments.***

 

If we make or invest inmortgage, bridge, mezzanine or other loans, we will be at risk of defaults onthose loans caused by many conditions beyond our control, including local andother economic conditions affecting real estate values and interest ratelevels. We do not know whether the values of the property securing the loanswill remain at the levels existing on the dates of origination of the loans. Ifthe values of the underlying properties drop, our risk will increase and thevalues of our interests may decrease.

 

***Our mortgage, bridge, mezzanine or other loans will besubject to interest rate fluctuations, which could reduce our returns ascompared to market interest rates.***

 

If we invest infixed-rate, long-term mortgage, bridge, mezzanine or other loans and interestrates rise, the loans could yield a return lower than then-current marketrates. If interest rates decrease, we will be adversely affected to the extentthat mortgage, bridge, mezzanine or other loans are prepaid, because we may notbe able to make new loans at the previously higher interest rate.

 

***Delays in liquidating defaulted mortgage, bridge, mezzanineor other loans could reduce our investment returns.***

 

If there are defaultsunder our loans, we may not be able to repossess and quickly sell theproperties securing such loans. The resulting time delay could reduce the valueof our investment in the defaulted loans. An action to foreclose on a propertysecuring a loan is regulated by state statutes and rules and is subject tothe delays and expenses of any lawsuit brought in connection with the foreclosureif the defendant raises defenses or counterclaims. In the event of default by amortgagor, these restrictions, among other things, may impede our ability toforeclose on or sell the mortgaged property or to obtain proceeds sufficient torepay all amounts due to us on the loan.

 

***Returns on our mortgage, bridge, mezzanine or other loansmay be limited by regulations.***

 

The mortgage, bridge ormezzanine loans in which we invest, or that we may make, may be subject toregulation by federal, state and local authorities (including those of foreignjurisdictions) and subject to various laws and judicial and administrativedecisions. We may determine not to make mortgage, bridge, mezzanine or otherloans in any jurisdiction in which we believe we have 

 

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not complied in allmaterial respects with applicable requirements. If we decide not to makemortgage, bridge, mezzanine or other loans in several jurisdictions, it couldreduce the amount of income we would otherwise receive.

 

***Foreclosures create additional ownership risks that couldadversely impact our returns on loan investments.***

 

If we acquire property byforeclosure following defaults under our mortgage, bridge, mezzanine or otherloans, we will have the economic and liability risks as the owner of thatproperty. See “—General Risks Related to Investments in Real Estate.”

 

***The liquidation of our assets may be delayed as a result ofour investment in mortgage, bridge, mezzanine or other loans, which could delaydistributions to our stockholders.***

 

The mezzanine and bridgeloans we may purchase will be particularly illiquid investments due to theirshort life, their unsuitability for securitization and the greater difficultyof recoupment in the event of a borrower’s default. If our advisor determinesthat it is in our best interest to make or invest in mortgage, bridge,mezzanine or other loans, any intended liquidation of us may be delayed beyondthe time of the sale of all of our properties until all mortgage, bridge ormezzanine loans expire or are sold, because we may enter into mortgage, bridge,mezzanine or other loans with terms that expire after the date we intend tohave sold all of our properties.

 

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

 

We may invest in realestate-related securities of both publicly traded and private real estatecompanies. Our investments in real estate-related securities will involvespecial risks relating to the particular issuer of the real estate-relatedsecurities, including the financial condition and business outlook of theissuer. Issuers of real estate-related equity securities generally invest inreal estate or real estate-related assets and are subject to the inherent risksassociated with real estate-related investments, including risks relating torising interest rates.

 

Real estate-relatedsecurities are often unsecured and also may be subordinated to otherobligations of the issuer. As a result, investments in real estate-relatedsecurities are subject to risks of:  (1) limited liquidity in thesecondary trading 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 priorclaims of banks and other senior lenders to the issuer; (4) the operationof mandatory sinking fund or call/redemption provisions during periods ofdeclining interest rates that could cause the issuer to reinvest redemptionproceeds in lower yielding assets; (5) the possibility that earnings ofthe issuer may be insufficient to meet its debt service and distributionobligations; and (6) the declining creditworthiness and potential forinsolvency of the issuer during periods of rising interest rates and economicslowdown or downturn. These risks may adversely affect the value of outstandingreal estate-related securities and the ability of the issuers thereof to repayprincipal and interest or make distribution payments.

 

***Investments in real estate-related preferred equitysecurities involve a greater risk of loss than traditional debt financing.***

 

We may invest in realestate-related preferred equity securities, which may involve a higher degree ofrisk than traditional debt financing due to a variety of factors, includingthat such investments are subordinate to traditional loans and are not securedby property underlying the investment. Furthermore, should the issuer defaulton our investment, we would be able to proceed only against the entity in whichwe have an interest, and not the property owned by such entity and underlyingour investment. As a result, we may not recover some or all of our investment.

 

***We may make investments in non-U.S. dollar denominated realproperty and real estate-related securities, which will be subject to currencyrates exposure and the uncertainty of foreign laws and markets.***

 

We may purchase realproperty or real estate-related securities denominated in foreign currencies. Achange in foreign currency exchange rates may have an adverse impact on returnson our non-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.

 

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

 

Certain of the realestate-related securities that we may purchase in connection with privatelynegotiated transactions will not be registered under applicable securitieslaws, resulting in a prohibition against their transfer, sale, pledge or otherdisposition except in a transaction that is exempt from the registrationrequirements of, or is otherwise in accordance with, those laws. As a result,our ability to vary our portfolio in response to changes in economic and otherconditions may be relatively limited. The mezzanine and bridge loans we maypurchase will be 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.

 

***Interest rate and related risks may cause the value of ourreal estate-related securities to be reduced.***

 

Interest rate risk is therisk that prevailing market interest rates change relative to the current yieldon fixed income securities such as preferred and debt securities, and to alesser extent dividend paying common stock. Generally, when market interestrates rise, 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 ratesrise, issuers are more likely to maintain theirexisting preferred and debt securities. As a result, repurchases decrease,thereby extending the average maturity of the securities. We intend to manageinterest rate risk by purchasing preferred and debt securities with maturitiesand repurchase provisions that are designed to match our investment objectives.If we are unable to manage these risks effectively, our results of operations,financial condition and ability to make distributions to you will be adverselyaffected.

 

***We have relatively less experience investing in realestate-related securities than investing in real property as of December 31,2008, which could adversely affect our return on such investments.***

 

Aside from investments inreal estate, we are permitted to invest in real estate-related securities,including securities issued by other real estate companies, collateralizedmortgage-backed securities, mortgage, bridge, mezzanine or other loans and Section 1031tenant-in-common interests. As of December 31, 2008, we own directly orthrough joint venture arrangements a limited number of mezzanine loans made tothe owners of various development projects. In cases where our advisordetermines that it is advantageous to us to make the types of investments inwhich our advisor or its affiliates have relatively less experience than inother areas, such as with respect to domestic real property, our advisor mayemploy persons, engage consultants or partner with third parties that have, inour advisor’s opinion, the relevant expertise necessary to assist our advisorin evaluating, making and administering such investments.

 

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

 

We may acquire realestate-related securities through tender offers, negotiated or otherwise, inwhich we solicit a target company’s stockholders to purchase their securities.The acquisition of these securities could require us to spend significantamounts of money that otherwise could be allocated to our operations.Additionally, in order to acquire the securities, the employees of our advisorlikely will need to devote a substantial portion of their time to pursuing thetender offer — time that otherwise could be allocated to managing our business.These consequences could adversely affect our operations and reduce the cashavailable for distribution to our stockholders.

 

***The CMBS in which we may invest are subject to all of therisks of the underlying mortgage loans and the risks of the securitizationprocess.***

 

Commercialmortgage-backed securities (“CMBS”) are securities that evidence interests in,or are secured by, a single commercial mortgage loan or a pool of commercialmortgage loans.  Accordingly, these securities are subject to all of therisks of the underlying mortgage loans.

 

In a rising interest rateenvironment, the value of CMBS may be adversely affected when payments onunderlying mortgages do not occur as anticipated, resulting in the extension ofthe security’s effective maturity and the related increase in interest ratesensitivity of a longer-term instrument.  The value of CMBS may alsochange due to shifts in the market’s perception of issuers and regulatory ortax changes adversely affecting the mortgage securities market as a whole. In addition, CMBS are subject to the credit risk associated with theperformance of the underlying mortgage properties.  In certain instances,third-party guarantees or other forms of credit support can reduce the creditrisk.

 

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CMBS are also subject toseveral risks created through the securitization process.  SubordinateCMBS are paid interest only to the extent that there are funds available tomake payments.  To the extent the collateral pool includes delinquentloans, there is a risk that interest payment on subordinate CMBS will not befully paid. Subordinate CMBS are also subject to greater credit risk than thoseCMBS that are more highly rated.

 

***If we use leverage in connection with any potentialinvestments in CMBS, the risk of loss associated with this type of investmentwill increase.***

 

We may use leverage inconnection with our investment in CMBS.  Although the use of leverage mayenhance returns and increase the number of investments that can be made, it mayalso substantially increase the risk of loss.  There can be no assurancethat leveraged financing will be available to us on favorable terms or that,among other factors, the terms of such financing will parallel the maturitiesof the underlying securities acquired.  Therefore, such financing maymature prior to the maturity of the CMBS acquired by us.  If alternativefinancing is not available, we may have to liquidate assets at unfavorableprices to pay off such financing. We may utilize repurchase agreements as acomponent of our financing strategy.  Repurchase agreements economicallyresemble short-term, variable-rate financing and usually require themaintenance of specific loan-to-collateral value ratios.  Ifthe market value of the CMBS subject to arepurchase agreement decline, we may be required to provide additionalcollateral or make cash payments to maintain the loan to collateral valueratio.  If we are unable to provide such collateral or cash repayments, wemay lose our economic interest in the underlying CMBS.

 

***We may have increased exposure to liabilities fromlitigation as a result of any participation by us in Section 1031Tenant-in-Common transactions.***

 

Behringer Development, anaffiliate of our advisor, or its affiliates (“Behringer Harvard ExchangeEntities”) regularly enter into transactions that qualify for like-kindexchange treatment under Section 1031 of the Internal Revenue Code. Section 1031tenant-in-common transactions (“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 InternalRevenue Code (“1031 Participants”). We may provide accommodation in support ofor otherwise be involved in such Section 1031 TIC Transactions.Specifically, at the closing of certain properties acquired by a BehringerHarvard Exchange Entity, we may enter into a contractual arrangement with suchentity providing:  (1) in the event that the Behringer HarvardExchange Entity is unable to sell all of the co-tenancy interests in thatproperty 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 tenant-in-common interests are to be sold; and/or (3) wewill provide security for the guarantee of such bridge loans. Although ourparticipation in Section 1031 TIC Transactions may have certain benefitsto our business, including enabling us to invest capital more readily and overa more diversified portfolio and allowing us to acquire interests in propertiesthat we would be unable to acquire using our own capital resources, there aresignificant tax and securities disclosure risks associated with the relatedofferings of co-tenancy interests to 1031 Participants. Changes in tax laws maynegatively impact the tax benefits of like-kind exchanges or cause suchtransactions not to achieve their intended value. In certain Section 1031TIC Transactions it is anticipated that we would receive fees in connection withour provision of accommodation in support of the transaction and, as such, eventhough we do not sponsor these Section 1031 TIC Transactions, we may benamed in or otherwise required to defend against any lawsuits brought by 1031Participants because of our affiliation with sponsors of such transactions.Furthermore, in the event that the Internal Revenue Service conducts an auditof the purchasers of co-tenancy interests and successfully challenges thequalification of the transaction as a like-kind exchange, purchasers ofco-tenancy interests may file a lawsuit against the entity offering theco-tenancy interests, its sponsors, and/or us. We may be involved in one ormore such offerings and could therefore be named in or otherwise required todefend against lawsuits brought by 1031 Participants. Any amounts we arerequired to expend defending any such claims will reduce the amount of fundsavailable to us for investment by us in properties or other investments and mayreduce the amount of funds available for distribution to our stockholders. Inaddition, disclosure of any such litigation may adversely affect our ability toraise additional capital in the future through the sale of stock.

 

***We may have increased business and litigation risks as aresult of any direct sales by us of tenant-in-common interests in Section 1031Tenant-in-Common transactions.***

 

We may directly selltenant-in-common interests in our properties to 1031 Participants, which mayexpose us to significant tax and securities disclosure risks. Changes in taxlaws may negatively impact the tax benefits of like-kind exchanges or causesuch transactions not to achieve their intended value.  Furthermore, theInternal Revenue Service may determine that the sale of tenant-in-common interestsis a “prohibited transaction” under the Internal Revenue Code, which wouldcause all of the gain we realize from any such sale to be payable as a tax tothe Internal Revenue Service, with none of such gain available for distributionto our 

 

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stockholders. TheInternal Revenue Service may conduct an audit of the purchasers oftenant-in-common interests and successfully challenge the qualification of thetransaction as a like-kind exchange. We may be named in or otherwise requiredto defend against any lawsuits brought by stockholders or 1031 Participants inconnection with Section 1031 TIC Transactions in which we directly selltenant-in-common interests. In addition, as a seller of tenant-in-commoninterests, we will be required to comply with applicable federal and statesecurities laws and to provide fair and adequate disclosure to 1031Participants relating to the respective Section 1031 TIC Transaction. Anyalleged failure by us to comply with these requirements could expose us torisks of litigation. Any amounts we are required to expend in defending claimsbrought against us will reduce the amount of funds available for us to investin properties or other investments and may reduce the amount of funds availablefor distribution to our stockholders. In addition,disclosure of any such litigation may adversely affectour ability to raise additional capital in the future through the sale ofstock.

 

***A portion of the properties we acquire may be in the form oftenant-in-common or other co-tenancy arrangements. We will be subject to risksassociated with such co-tenancy arrangements that otherwise may not be presentin non-co-tenancy real estate investments.***

 

We may enter intenant-in-common or other co-tenancy arrangements with respect to a portion ofthe properties we acquire. Whether acquired as a planned co-tenancy or as theresult of an accommodation or other arrangement disclosed above, ownership ofco-tenancy interests involves risks generally not otherwise present with aninvestment in real estate, including the following:

 

·                  the risk that a co-tenant may at any timehave economic or business interests or goals that are or become inconsistentwith 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 mightnot have adequate liquid assets to make cash advances that may be required inorder to fund operations, maintenance and other expenses related to theproperty, which could result in the loss of current or prospective tenants andmay otherwise adversely affect the operation and maintenance of the property,and could cause a default under the mortgage loan financing documentsapplicable to the property and may result in late charges, penalties andinterest, and may lead to the exercise of foreclosure and other remedies by thelender;

 

·                  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.

 

***Actions by a co-tenant might have the result of subjectingthe property to liabilities in excess of those contemplated and may have theeffect of reducing your returns.***

 

In the event that ourinterests become adverse to those of the other co-tenants in a Section 1031TIC Transaction, we may not have the contractual right to purchase theco-tenancy interests from the other co-tenants. Even if we are given theopportunity to purchase such co-tenancy interests in the future, we cannotguarantee that we will have sufficient funds available at the time to purchasesuch co-tenancy interests.  In addition, we may desire to sell ourco-tenancy interests in a given property at a time when the other co-tenants insuch property do not desire to sell their interests. Therefore, we may not beable to sell our interest in a property at the time we would like to sell.Finally, it is anticipated that it will be much more difficult to find awilling buyer for our co-tenancy interests in a property than it would be tofind a buyer for a property we owned outright.

 

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

 

Section 1031 TICTransaction agreements we may enter that contain obligations to acquire unsoldco-tenancy interests in properties may be viewed by institutional lenders as acontingent liability against our cash or other assets, which may limit ourability to borrow funds in the future. Furthermore, such obligations may beviewed by our lenders in such a manner as to limit our ability to borrow fundsbased on regulatory restrictions on lenders limiting the amount of loans theycan make to any one borrower.

 

***Our operating results will be negatively affected if ourinvestments, including investments in tenant-in-common interests promoted byaffiliates of our advisor, do not meet projected distribution levels.***

 

Behringer HarvardHoldings and its affiliates have promoted a number of tenant-in-common realestate projects. Some of these projects have not met the distribution levelsanticipated in the projections produced by Behringer Harvard Holdings and itsaffiliates. In addition, certain other projects have not achieved the leasingand operational thresholds projected by Behringer Harvard Holdings and itsaffiliates. If projections related to our investments, including anytenant-in-common interests in which we invest, are inaccurate, we may pay toomuch for an investment and our return on our investment could suffer.

 

Specifically, severaltenant-in-common investment programs have not benefited from expected leasingimprovements. Behringer Harvard Holdings has provided support for some of theseprograms in the form of leases for vacant space and other payments. Inaddition, the Beau Terre Office Park tenant-in-common program is currentlyunderperforming relative to projections that were based on sellerrepresentations that Behringer Harvard Holdings now believes to be false. Withrespect to this program, Behringer Harvard Holdings has completed a settlementwith the investors to support their returns and is pursuing a claim against theformer on-site property manager and others on behalf of the stockholders anditself. In addition, in November 2007, Behringer Harvard Holdings and theinvestors completed a settlement with the seller and its agent.

 

**FederalIncome Tax Risks**

 

***Failure to qualify as a REIT would adversely affect ouroperations and our ability to make distributions.***

 

DLA Piper US LLP hasrendered an opinion to us that we will be organized in conformity with therequirements for qualification and taxation as a REIT under the InternalRevenue Code for our taxable year ending December 31, 2007 and that ourproposed method of operations will enable us to meet the requirements forqualification and taxation as a REIT beginning with our taxable year ending December 31,2007. This opinion is based upon, among other things, our representations as tothe manner in which we are and will be owned and the manner in which we willinvest in and operate assets. However, our qualification as a REIT will dependupon our ability to meet requirements regarding our organization and ownership,distributions of our income, the nature and diversification of our income andassets and other tests imposed by the Internal Revenue Code. DLA Piper US LLPwill not review our compliance with the REIT qualification standards on anongoing basis, and we may fail to satisfy the REIT requirements in the future.Also, this opinion represents DLA Piper US LLP’s legal judgment based on thelaw in effect as of the date of this prospectus. DLA Piper US LLP’s opinion isnot binding on the Internal Revenue Service or the courts. Future legislative,judicial or administrative changes to the federal income tax laws could beapplied retroactively, which could result in our disqualification as a REIT.

 

If we fail to qualify asa REIT for any taxable year, we will be subject to federal income tax on ourtaxable income for that year at corporate rates. In addition, we wouldgenerally be disqualified from treatment as a REIT for the four taxable yearsfollowing the year of losing our REIT status. Losing our REIT status wouldreduce our net earnings available for investment or distribution tostockholders because of the additional tax liability. In addition,distributions to stockholders would no longer qualify for thedistributions paid deduction, and we would no longer be required to makedistributions. If this occurs, we might be required to borrow funds orliquidate some investments in order to pay the applicable tax. Our failure toqualify as a REIT would adversely affect the return on your investment.

 

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

 

It is possible that oneor more sales of our properties may be “prohibited transactions” underprovisions of the Internal Revenue Code. If we are deemed to have engaged in a “prohibitedtransaction” (i.e., we sell a property held by us primarily for sale in 

 

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the ordinary course ofour trade or business) all income that we derive from such sale would besubject to a 100%penalty tax. The Internal Revenue Code sets forth a safe harbor forREITs that wish to sell property without risking the imposition of the 100%penalty tax. A principal requirement of the safe harbor is that the REIT musthold the applicable property for not less than two years prior to its sale.

 

If we desire to sell aproperty pursuant to a transaction that does not fall within the safe harbor,we may be able to avoid the 100% penalty tax if we acquired the propertythrough a taxable REIT subsidiary (“TRS”), or acquired the property andtransferred it to a TRS for a non-tax business purpose prior to the sale (i.e.,for a reason other than the avoidance of taxes). However, there may becircumstances that prevent us from using a TRS in a transaction that does notqualify for the safe harbor. Additionally, even if it is possible to effect aproperty disposition through a TRS, we may decide to forgo the use of a TRS ina transaction that does not meet the safe harbor requirements based on our owninternal analysis, the opinion of counsel or the opinion of other tax advisersthat the disposition should not be subject to the 100% penalty tax. In caseswhere a property disposition is not effected through a TRS, the InternalRevenue Service could successfully assert that the disposition constitutes aprohibited transaction, in which event all of the net income from the sale ofsuch property will be payable as a tax and none of the proceeds from such salewill be distributable by us to our stockholders or available for investment byus.

 

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 aproperty directly or indirectly through an entity other than a TRS, we maycontribute the property to a TRS if there is another, non-tax related businesspurpose for the contribution of such property to the TRS. Following thetransfer of the property to a TRS, the TRS will operate the property and maysell such property and distribute the net proceeds from such sale to us, and wemay distribute the net proceeds distributed to us by the TRS to ourstockholders. Though a sale of the property by a TRS likely would eliminate thedanger of the application of the 100% penalty tax, the TRS itself would besubject to a tax at the federal level, and potentially at the state and locallevels, on the gain realized by it from the sale of the property as well as onthe income earned while the property is operated by the TRS. This taxobligation would diminish the amount of the proceeds from the sale of suchproperty that would be distributable to our stockholders. As a result, theamount available for distribution to our stockholders would be substantiallyless than if the REIT had not operated and sold such property through the TRS andsuch transaction was not successfully characterized as a prohibitedtransaction. The maximum federal corporate income tax rate currently is 35%.Federal, state and local corporate income tax rates may be increased in thefuture, and any such increase would reduce the amount of the net proceedsavailable for distribution by us to our stockholders from the sale of propertythrough a TRS after the effective date of any increase in such tax rates.

 

As a REIT, the value ofthe non-mortgage securities we hold in TRSs may not exceed 20% (25% for our2009 taxable year and beyond) of the value of all of our assets at the end ofany calendar quarter. If the Internal Revenue Service were to determine thatthe 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 itto be in our best interests to own a substantial number of our propertiesthrough one or more TRSs, then it is possible that the Internal Revenue Servicemay conclude that the value of our interests in our TRSs exceeds 20% (25% forour 2009 taxable year and beyond) of the value of our total assets at the endof any calendar quarter and therefore cause us to fail to qualify as a REIT.Additionally, as a REIT, no more than 25% of our gross income with respect toany year may, in general, be from sources other than real estate-relatedassets. Distributions paid to us from a TRS are typically considered to benon-real estate income. Therefore, we may fail to qualify as a REIT ifdistributions from TRSs, when aggregated with all other non-real estate incomewith respect to any one year, are more than 25% of our gross income withrespect to such year. We will use all reasonable efforts to structure ouractivities in a manner intended to satisfy the requirements for our continuedqualification as a REIT. Our failure to qualify as a REIT would adverselyaffect the return on your investment.

 

***Certain fees paid to us may affect our REIT status.***

 

Income received in thenature of rental subsidies or rent guarantees, in some cases, may not qualifyas rental income and could be characterized by the Internal Revenue Service asnon-qualifying income for purposes of satisfying the “income tests” requiredfor REIT qualification. In addition, in connection with our Section 1031TIC Transactions, we or one of our affiliates may enter into a number ofcontractual arrangements with BehringerHarvard Exchange Entities whereby we will guarantee or effectively guaranteethe sale of the co-tenancy interests being offered by any Behringer HarvardExchange Entity. In consideration for entering into these agreements, we willbe paid fees that could be characterized by the Internal Revenue Service asnon-qualifying income for purposes of satisfying the “income tests” requiredfor REIT qualification. If this fee income were, in fact, treated asnon-qualifying, and if the aggregate of such fee income and any othernon-qualifying income in any taxable year ever exceeded 5% of our grossrevenues for such year, we could lose our REIT status for that taxable year andthe four taxable years following the year of losing our 

 

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REIT status. We will usecommercially reasonable efforts to structure our activities in a mannerintended to satisfy the requirements for our continued qualification as a REIT.Our failure to qualify as a REIT would adversely affect the return on yourinvestment.

 

***Equity participation in mortgage, bridge, and mezzanineloans may result in taxable income and gains from these properties, which couldadversely impact our REIT status.***

 

If we participate under aloan in any appreciation of the properties securing the loan or its cash flowand the Internal Revenue Service characterizes this participation as “equity,”we might have to recognize income, gains and other items from the property forfederal income tax purposes. This could affect our ability to qualify as aREIT.

 

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

 

In the event that theInternal Revenue Service were to recharacterize the Section 1031 TICTransactions such that we, rather than the Behringer Harvard Exchange Entity,are treated as the bona fide owner, for tax purposes, of properties acquiredand resold by the Behringer Harvard Exchange Entity in connection with the Section 1031TIC Transactions, such characterization could result in the fees paid to us bythe Behringer Harvard Exchange Entity as being deemed income from a prohibitedtransaction, in which event the fee income paid to us in connection with the Section 1031TIC Transactions would be subject to the 100% penalty tax. If this occurs, ourability to make cash distributions to our stockholders will be adverselyaffected.

 

***You may have current tax liability on distributions youelect to reinvest in our common stock.***

 

If you participate in ourdistribution reinvestment plan, you will be deemed to have received, and forincome tax purposes will be taxed on, the amount reinvested in shares of ourcommon stock to the extent the amount reinvested was not a tax-free return ofcapital. In addition, you will be treated for tax purposes as having receivedan additional distribution to the extent the shares are purchased at a discountto fair market value. As a result, unless you are a tax-exempt entity, you mayhave to use funds from other sources to pay your tax liability on the value ofthe shares of common stock received.

 

***If our operating partnership fails to maintain its status asa partnership or other flow-through entity for tax purposes, its income may besubject to taxation, which would reduce the cash available to us fordistribution to our stockholders.***

 

We intend to maintain thestatus of Behringer Harvard Multifamily OP I, our operating partnership, as apartnership (or other flow-through entity) for federal income tax purposes.However, if the Internal Revenue Service were to successfully challenge thestatus of the operating partnership as an entity taxable as a partnership,Behringer Harvard Multifamily OP I would be taxable as a corporation. In such event,this would reduce the amount of distributions that the operating partnershipcould make to us. This could also result in our losing REIT status, andbecoming subject to a corporate level tax on our income. This wouldsubstantially reduce the cash available to us to make distributions and thereturn on your investment. In addition, if any of the partnerships or limitedliability companies through which the operating partnership owns itsproperties, in whole or in part, loses its characterization as a partnershipfor federal income tax purposes, it would be subject to taxation as acorporation, thereby reducing distributions to the operating partnership. Sucha recharacterization of an underlying property owner could also threaten ourability to maintain REIT status.

 

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

 

Even if we qualify andmaintain our status as a REIT, we may become subject to federal income taxesand related state taxes. For example, if we have net income from a “prohibitedtransaction,” such income will be subject to the 100% penalty tax. We may notbe able to make sufficient distributions to avoid excise taxes applicable toREITs. We may also decide to retainincome we earn from the sale or other disposition of our assets and pay incometax directly on such income. In that event, our stockholders would be treatedas if they earned that income and paid the tax on it directly. We may also besubject to state and local taxes on our income or property, either directly orat the level of the operating partnership or at the level of the othercompanies through which we indirectly own our assets. Any federal or statetaxes paid by us will reduce the cash available to us for distribution to our stockholders.

 

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***We may be disqualified from treatment as a REIT if a joint ventureentity elects to qualify as a REIT and is later disqualified from treatment asa REIT.***

 

As part of our jointventures, such as our joint ventures with our Co-Investment Partner or futurejoint ventures with another Behringer Harvard-sponsored program, we have and wemay in the future form subsidiary REITs that will acquire and hold assets, suchas a co-investment project owned through a joint venture with our Co-InvestmentPartner. In order to qualify as a REIT, among numerous other requirements, eachsubsidiary REIT must have at least 100 persons as beneficial owners after thefirst taxable year for which it makes an election to be taxed as a REIT andsatisfy all of the other requirements for REITs under the Internal RevenueCode. We may be unable to satisfy these requirements for the subsidiary REITscreated in our joint ventures with PGGM or other joint ventures. In the eventthat a subsidiary REIT is disqualified from treatment as a REIT for whateverreason, we will be disqualified from treatment as a REIT as well, which wouldhave a negative impact on our operations and our stockholders’ investment inus.

 

***A subsidiary REIT may become subject to state taxation.***

 

Certain states arecurrently considering whether to tax captive REITs, such as the subsidiaryREITs. If any subsidiary REIT becomes subject to state taxation, thatsubsidiary REIT’s results of operations could be negatively affected.

 

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

 

We may acquire realproperty located outside the United States and may invest in stock or othersecurities of entities owning real property located outside the United States.As a result, we may be subject to foreign (i.e., non-U.S.) income taxes, stamptaxes, real property conveyance taxes, withholding taxes, and other foreigntaxes or similar impositions in connection with our ownership of foreign realproperty or foreign securities. The country in which the real property islocated may impose such taxes regardless of whether we are profitable and inaddition to any U.S. income tax or other U.S. taxes imposed on profits from ourinvestments in such real property or securities. If a foreign country imposesincome taxes on profits from our investment in foreign real property or foreignsecurities, you will not be eligible to claim a tax credit on your U.S. federalincome tax returns to offset the income taxes paid to the foreign country, andthe imposition of any foreign taxes in connection with our ownership andoperation of foreign real property or our investment in securities of foreignentities will reduce the amounts distributable to you. Similarly, theimposition of withholding taxes by a foreign country will reduce the amountsdistributable to you. We expect the organizational costs associated withnon-U.S. investments, including costs to structure the investments so as tominimize the impact of foreign taxes, will be higher than those associated withU.S. investments. Moreover, we may be required to file income tax or otherinformation returns in foreign jurisdictions as a result of our investmentsmade outside of the United States. Any organizational costs and reportingrequirements will increase our administrative expenses and reduce the amount ofcash available for distribution to you. You are urged to consult with your owntax advisers with respect to the impact of applicable non-U.S. taxes and taxwithholding requirements on an investment in our common stock.

 

***Our foreign investments will be subject to changes inforeign tax or other laws, as well as to changes in U.S. tax laws, and suchchanges could negatively impact our returns from any particular investment.***

 

We may make investmentsin real estate located outside of the United States. Such investments willtypically be structured to minimize non-U.S. taxes, and generally include theuse of holding companies. Our ownership, operation and disposition strategywith respect to non-U.S. investments will take into account foreign taxconsiderations. For example, it is typically advantageous from a taxperspective in non-U.S. jurisdictions to sell interests in a holding companythat owns real estate rather than the real estate itself. Buyers of suchentities, however, will often discount their purchase price by any inherent orexpected tax in such entity. Additionally, the pool of buyers for interests insuch holding companies is typically more limited than buyers of directinterests in real estate, and we may be forced to dispose of real estatedirectly, thus potentially incurring higher foreign taxes and negativelyeffecting the return on the investment.

 

We will also capitalizeour holding companies with debt and equity to reduce foreign income andwithholding taxes as appropriate and with consultation with local counsel ineach jurisdiction.  Such capitalization structures are complex andpotentially subject to challenge by foreign and domestic taxing authorities.

 

We may use certainholding structures for our non-U.S. investments to accommodate the needs of oneclass of investors which reduce the after-tax returns to other classes ofinvestors.  For example, if we interpose an entity treated as acorporation for United States tax purposes in our chain of ownership withrespect to any particular investment, U.S. tax-exempt investors will 

 

 

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generally benefit as suchinvestment will no longer generate unrelated business taxable income. However, if a corporate entity is interposed in a non-U.S. investment holdingstructure, this would prevent individual investors from claiming a foreign taxcredit for any non-U.S. income taxes incurred by the corporate entity or itssubsidiaries.

 

Foreign investments aresubject to changes in foreign tax or other laws.  Any such law changes mayrequire us to modify or abandon a particular holding structure.  Suchchanges may also lead to higher tax rates on our foreign investments than weanticipated, regardless of structuring modifications.  Additionally, U.S.tax laws with respect to foreign investments are subject to change, and suchchanges could negatively impact our returns from any particular investment.

 

***Legislative or regulatory action could adversely affect thereturns to our investors.***

 

In recent years, numerouslegislative, judicial and administrative changes have been made in theprovisions of the federal income tax laws applicable to investments similar toan investment in shares of our common stock.  Additional changes to thetax laws are likely to continue to occur, and we cannot assure you that anysuch changes will not adversely affect the taxation of a stockholder.  Anysuch changes could have an adverse effect on an investment in our shares or onthe market value or the resale potential of our assets.  You are urged toconsult with your own tax adviser 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.  You also should note that ourcounsel’s tax opinion was based upon existing law and Treasury Regulations,applicable as of the date of its opinion, all of which will be subject tochange, either prospectively or retroactively.

 

Congress passed majorfederal tax legislation in 2003, with modifications to that legislation in2005.  One of the changes effected by that legislation generally reducedthe tax rate on dividends paid by corporations to individuals to a maximum of15% prior to 2011.  REIT distributions generally do not qualify for thisreduced rate.  The tax changes did not, however, reduce the corporate taxrates.  Therefore, the maximum corporate tax rate of 35% has not beenaffected.  However, as a REIT, we generally would not be subject tofederal or state corporate income taxes on that portion of our ordinary incomeor capital gain that we distribute currently to our stockholders, and we thusexpect to avoid the “double taxation” to which other corporations are typicallysubject.

 

Although REITs continueto receive substantially better tax treatment than entities taxed ascorporations, it is possible that future legislation would result in a REIThaving fewer tax advantages, and it could become more advantageous for acompany that invests in real estate to elect to be taxed for federal income taxpurposes as a corporation.  As a result, our charter provides our board ofdirectors with the power, under certain circumstances, to revoke or otherwiseterminate our REIT election and cause us to be taxed as a corporation, withoutthe vote of our stockholders.  Our board of directors has fiduciary dutiesto us and our stockholders and could only cause such changes in our tax treatmentif it determines in good faith that such changes are in the best interest ofour stockholders.

 

**RisksRelated to Investments by Tax-Exempt Entities and Benefit Plans Subject toERISA**

 

***If you fail to meet the fiduciary and other standards underERISA or the Internal Revenue Code as a result of an investment in our stock,you could be subject to criminal and civil penalties.***

 

There are specialconsiderations that apply to employee benefit plans subject to ERISA (such asprofit sharing, section 401(k) or pension plans) and other retirementplans or accounts subject to Section 4975 of the Internal Revenue Code(such as an IRA) that are investing in our shares.  If you are investingthe assets of such a plan or account in our common stock, you should satisfyyourself that:

 

·                  your investment is consistent with your fiduciaryobligations under ERISA and the Internal Revenue Code;

 

·                  your investment is made in accordancewith the documents and instruments governing your plan or IRA, including yourplan’s or account’s investment policy;

 

·                  your investment satisfies the prudenceand diversification requirements of Sections 404(a)(1)(B) and 404(a)(1)(C) ofERISA and other applicable provisions of ERISA and the Internal Revenue Code;

 

·                  your investment will not impair theliquidity of the plan or IRA;

 

 

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·                  your investment will not produce “unrelatedbusiness taxable income” for the plan or IRA;

 

·                  you will be able to value the assets ofthe plan annually in accordance with ERISA requirements and applicableprovisions of the plan or IRA; and

 

·                  your investment will not constitute aprohibited transaction under Section 406 of ERISA or Section 4975 ofthe Internal Revenue Code.

 

Failure to satisfy thefiduciary standards of conduct and other applicable requirements of ERISA andthe Internal Revenue Code may result in the imposition of civil and criminalpenalties and could subject the fiduciary to equitable remedies.  Inaddition, if an investment in our shares constitutes a prohibited transactionunder ERISA or the Internal Revenue Code, the fiduciary who authorized ordirected the investment may be subject to the imposition of excise taxes with respectto the amount invested.

 

**Item 1B.    UnresolvedStaff Comments**

 

None.

 

**Item 2.    Properties**

 

***Description of Properties and Real Estate-Related Assets***

 

Substantially allof our current investments have been made through BHMP CO-JVs.  We, through an indirect wholly ownedsubsidiary, are the manager of each of the BHMP CO-JVs, but the operations ofeach of the BHMP CO-JVs are conducted in accordance with operating plansprepared by us and approved by us and PGGM. In addition, without the consent ofall members of the BHMP CO-JV, we may not approve or disapprove on behalf ofthe BHMP CO-JV certain major decisions affecting the BHMP CO-JV, such as (i) sellingor otherwise disposing of the investment or any other property having a valuein excess of $100,000, (ii) selling any additional interests in the BHMPCO-JV or its subsidiary REIT (with limited exceptions relating to thesubsidiary REIT maintaining its status as a real estate investment trust or thesale of an interest to the developer of the project) or (iii) incurring ormaterially modifying any indebtedness of the BHMP CO-JV or the subsidiary REIT.As of December 31, 2008, each BHMP CO-JV has two members, and each BHMPCO-JV member possesses equal substantive participating rights to make decisionswhich constitute routine occurrences in each BHMP CO-JV’s ordinary course ofbusiness. These decisions include the requirement to approve initial and annualoperating plans, initial and annual capital expenditures, any sales ordispositions of investments, and, any method of refinancing or raisingadditional debt or equity capital. Investments in other Co-Investment Ventures may be on other terms.

 

EachBHMP CO-JV has been and any new Co-Investment Ventures will be evaluated underFIN 46R. If the venture is determined to not be a variable interest entityunder FIN 46R, then the venture is evaluated for consolidation under theAmerican Institute of Certified Public Accountants’ (“AICPA”) Statement ofPosition (“SOP”) 78-9, “Accounting for Investments in Real Estate Ventures,”and by Emerging Issues Task Force (“EITF”) 04-5, “Determining Whether a GeneralPartner, or the General Partners as a Group, Controls a Limited Partnership orSimilar Entity When the Limited Partners Have Certain Rights.”  With respect to our existing BHMP CO-JVs, as aresult of the equal substantive participating rights possessed by each partner,no single party controls each BHMP CO-JV. Accordingly, we account for each BHMPCO-JV using the equity method of accounting pursuant to SOP 78-9. The equitymethod of accounting requires these investments to be initially recorded atcost and subsequently increased (decreased) for our share of net income (loss),including eliminations for our share of inter-company transactions and reducedwhen distributions are received.

 

As of December 31,2008, through our BHMP CO-JVs we have made real estate investments in oneoperating property and nine development projects. As of December 31, 2008,through our BHMP CO-JVs we entered into ten mezzanine or mortgage loans made tothe Property Entitiesof nine development projects.  Through our BHMP CO-JVs we havealso acquired separate equity investments and purchase options in nineprojects.  Through a BHMP CO-JV, we have also made an equity investment inone operating property.

 

As of December 31,2008 our wholly owned investments are not significant.

 

 

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The following tables present summary information of the propertiesunderlying our investments in BHMP CO-JVsand certain information for the Property Entitiesas of December 31,2008 (please note throughout this Annual Report on Form 10-K that we havechanged the name of Lovers Lane Townhomes project to the Grand Reserve projectand the name of Alexan Russell Lofts project to The Venue):

 

***BHMPCO-JV— Operating Properties***

*** ***
| **Name of Underlying Property** | ** ** | **Location**       | ** ** | **No. of Units** | ** ** | **Date Acquired** | ** ** | **Occupancy Rate** | ** ** |
|---------------------------------|------------|--------------------|------------|-----------------------|------------|-------------------|------------|--------------------|------------|
| The Reserve at Johns Creek      |       | Fulton  County, GA |       | 210                   |       | August 2007  |       | 90                 | %          |

 

***BHMPCO-JV******— Development Properties*********

 
| **Name of Underlying Property** | ** ** | **Location**         | ** ** | **No. of Units** | ** ** | **Construction Commencement Date (or Estimated Commencement Date)  (1)(2)** | ** ** | **Estimated Construction Completion Date  (1)** | ** ** |
|---------------------------------|------------|----------------------|------------|-----------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| The Eclipse                     |       | Houston, TX          |       | 330                   |       | 2nd Quarter 2007                                                       |       | 2nd Quarter 2009                           |       |
| Tower 55 Hundred                |       | Arlington County, VA |       | 234                   |       | 3rd Quarter 2007                                                       |       | 3rd Quarter 2009                           |       |
| Fairfield at Baileys Crossing   |       | Fairfax County, VA   |       | 414                   |       | 3rd Quarter 2007                                                       |       | 1st Quarter 2010                           |       |
| Satori                          |       | Broward County, FL   |       | 279                   |       | 4th Quarter 2007                                                       |       | 3rd Quarter 2009                           |       |
| Fairfield at Cameron House      |       | Silver Spring, MD    |       | 325                   |       | 1st Quarter 2008                                                       |       | 1st Quarter 2010                           |       |
| Alexan Prospect                 |       | Denver, CO           |       | 400                   |       | 2nd Quarter 2008                                                       |       | 3rd Quarter 2010                           |       |
| The Venue                       |       | Clark County, NV     |       | 168                   |       | 3rd Quarter 2008                                                       |       | 4th Quarter 2009                           |       |
| Grand Reserve                   |       | Dallas, TX           |       | 149                   |       | 3rd Quarter 2008                                                       |       | 1st Quarter 2010                           |       |
| Alexan St. Rose                 |       | Henderson, NV        |       | 430                   |       | 1st Quarter 2009                                                       |       | 2nd Quarter 2011                           |       |
|                            |       |                 |       | 2,729                 |       |                                                                        |       |                                            |       |

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(1)   The above estimated completion andcommencement of project construction dates, other than The Reserve at JohnsCreek, which is an operating property, are based solely on current marketconditions and construction estimates and are accurate only as of the date ofthis Annual Report on Form 10-K.  These estimates are subject tochange at any time based on these and other factors.

 

(2)   Commencement dates subsequent to the date ofthis Annual Report are estimated, while those prior to the date of this AnnualReport are actual.

 

In the ordinarycourse of our business, we and the BHMP CO-JVs contract with unaffiliatedmultifamily developers and provide equity and/or loans for a particularProperty Entity (our “Project Commitments”). We fund an initial amount underour Project Commitments at contract inception and fund additional amounts asconstruction progresses, typically spanning one to three years. Estimatedremaining payments on our share of Project Commitments for 2009 areapproximately $8.2 million and are expected to be funded from current cashbalances.

 

The following is asummary description of our portfolio of investments as of December 31,2008 with information concerning our direct, wholly owned investments and aseparate table showing BHMP CO-JVs investments in Property Entities.  The BHMP CO-JV tables are broken out betweeninvestments in loans and equity investments further separated betweendevelopments and operating properties (dollar amounts in millions):

 

 

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***Wholly Owned Investment — Loans***

*** ***
| **Multifamily Developments**    | ** ** | **Our Company Investment Information (1)** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| **Name of Underlying Property** | ** ** | **Maximum  Advance**                       | ** ** | **Amount  Advanced** | ** ** | **Interest  Rate** | ** ** | **Maturity  Date** | ** ** | **Equity Option** | ** ** |
| Grand Reserve                   |       | $                                          | 2.2        |   | $ | — |   | 10.0 | % | 4/2012 |   | (2) |   |
|                                 |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

***BHMPCO-JV**********Investments —Loans***

** **
| **Multifamily Developments**           | ** ** | **BHMP CO-JV Investment Information (1)** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|
| **Name of Underlying Property**        | ** ** | **Maximum  Advance**                      | ** ** | **Amount  Advanced** | ** ** | **Interest  Rate** | ** ** | **Maturity  Date** | ** ** | **Equity Option** | ** ** |
| Grand Reserve                          |       | $                                         | 7.5        |   | $ | 7.1 |   | 10.0 | % | 4/2012 |   | (2) |   |
| The Eclipse                            |       | 8.1                                       |       | 8.1 |   | 9.5 | % | 4/2012 |   | (2) |   |
| Fairfield at Baileys Crossing          |       | 22.1                                      |       | 22.1 |   | 9.5 | % | 7/2012 |   | (2) |   |
| Alexan St. Rose (3)                    |       | 21.0                                      |       | 14.7 |   | 13.0 | % | 12/2013 |   | (2) |   |
| Tower 55 Hundred                       |       | 20.0                                      |       | 20.0 |   | 9.5 | % | 10/2012 |   | (2) |   |
| Satori                                 |       | 14.8                                      |       | 14.8 |   | 10.0 | % | 10/2012 |   | (2) |   |
| Fairfield at Cameron House             |       | 19.3                                      |       | 19.3 |   | 9.5 | % | 12/2012 |   | (2) |   |
| Alexan Prospect                        |       | 14.8                                      |       | 10.6 |   | 10.0 | % | 4/2013 |   | (2) |   |
| The Venue                              |       | 5.8                                       |       | 5.8 |   | 10.0 | % | 6/2013 |   | — |   |
| Total BHMP CO-JV Loans to Developments |       | $                                         | 133.4      |   | $ | 122.5 |   |   |   |   |   |   |   |

 

***BHMPCO-JV**********Investments —Equity***

** **
| **Multifamily Developments**                         | ** ** | **BHMP CO-JV Investment Information (1)** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------|------------|
| **Name of Underlying Property**                      | ** ** | **Investment Amount**                     | ** ** | **Property Entity Ownership (7)** | ** ** | **Preferred Return (8)** | ** ** |
| The Eclipse                                          |       | $                                         | 3.5        |   | 50.1 | % | 9.5 | % |
| Tower 55 Hundred (5)                                 |       | 3.5                                       |       | 50.1 | % | 9.5 | % |
| Alexan St. Rose (6)                                  |       | 5.2                                       |       | 60.0 | % | 9.5 | % |
| Satori                                               |       | 7.4                                       |       | 50.0 | % | 9.5 | % |
| Alexan Prospect                                      |       | 7.3                                       |       | 50.1 | % | 9.5 | % |
| The Venue                                            |       | 2.9                                       |       | 50.1 | % | 9.5 | % |
| Total BHMP  CO-JV Equity Investments in Developments |       | $                                         | 29.8       |   |   |   |   |   |

** **
| **Multifamily Operating**                               | ** ** | **BHMP CO-JV Investment Information (1)** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------|------------|
| **Name of Property**                                    | ** ** | **Investment Amount**                     | ** ** | **Property Entity Ownership (7)** | ** ** | **Preferred Return (8)** | ** ** |
| The Reserve at Johns Creek (4)                          |       | $                                         | 6.7        |   | 80.0 | % | 5.0 | % |
| Total BHMP  CO-JV Equity Investments                    |       | $                                         | 36.5       |   |   |   |   |   |
| Total BHMP  CO-JV Loans Advanced and Equity Investments |       | $                                         | 159.0      |   |   |   |   |   |

 

 

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(1)          We hold a 55% ownership interest in each BHMP CO-JVand PGGM owns the remaining 45% ownership interest, expect for The Reserve atJohns Creek Walk BHMP CO-JV, in which we hold a 64% ownership interest in theBHMP CO-JV and PGGM owns the remaining 36%.

 

(2)          The BHMP CO-JVs acquired options to purchase a certainpercentage ownership interest in the Property Entity, or to convert intoequity. Options are generally exercisable for a period ranging from 60-90 daysafter project completion.

 

(3)          The mezzanine loan investment made to the owner of theAlexan St. Rose project was made in the form of a senior mezzanine loan and ajunior mezzanine loan, but they are referred to collectively as a singlemezzanine loan.

 

(4)          This property is managed by a party that is affiliatedwith the other equity investors in the Property Entity.

 

(5)          BHMP CO-JV has a right to 50.1% of net proceeds afterall other required distributions are made by the Property Entity.  In addition, our contributed capital isentitled to a preferred return.  In orderto maintain our share of the back end interest (the residual profit after allother required distributions are made) and maintain the priority level of ourcapital, we must contribute 70% if certain capital is required by the PropertyEntity.

 

(6)          BHMP CO JV has a right to 60% of net proceeds after allother required distributions are made by the Property Entity.  In addition, our contributed capital isentitled to a preferred return.  In orderto maintain the priority level of our capital, we must contribute 50% ifcertain capital is required by the Property Entity.

 

(7)          Property Entity ownership refers to the BHMP CO-JVs’back end interest. Additional capital contributions may have differentallocation percentages.

 

(8)          Preferred Return refers to the rate of return on BHMPCO-JV’s invested capital which has a higher priority than certain otherdistributions to equity owners.

 

**Item 3.    Legal Proceedings**

 

Weare not party to, and none of our properties are subject to, any materialpending legal proceeding.

 

**Item 4.    Submission of Mattersto a Vote of Security Holders**

 

Nomatters were submitted to a vote of security holders during the fourth quarterof 2008.

 

 

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**PART II**

 

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

 

**MarketInformation**

 

There is noestablished public trading market for our common stock. Therefore, there is arisk that a stockholder may not be able to sell our stock at a time or priceacceptable to the stockholder. Pursuant to the Initial Public Offering, we areselling shares of our common stock to the public at a price of $10.00 per shareand at a price of $9.50 per share pursuant to our distribution reinvestmentplan. Unless and until our shares are listed on a national securities exchange,it is not expected that a public market for the shares will develop.

 

To assist the Financial Industry Regulatory Authority(“FINRA”) members and their associated persons that participated in the InitialPublic Offering, pursuant to FINRA Rule 5110, we disclose in each annual reportdistributed to investors a per share estimated value of the shares, the methodby which it was developed and the date of the data used to develop theestimated value. In addition, we prepare annual statements of estimated sharevalues to assist fiduciaries of retirement plans subject to the annualreporting requirements of ERISA in the preparation of their reports relating toan investment in our shares. For these purposes, the value of a share of ourcommon stock is estimated to be $10.00 per share. The basis for this valuationis the fact that the price paid to acquire a share in the Initial PublicOffering is $10.00.  Although thisestimated value is the price paid to acquire a share in our Initial PublicOffering, this estimated value is not likely to reflect the proceeds you wouldreceive upon our liquidation or upon the sale of your shares because (i) theseestimates are not designed to reflect the price at which properties and otherassets can be sold; (ii) no public market for our shares exists or is likely todevelop; and (iii) the per share valuation method is not designed to arrive ata valuation that is related to any individual or aggregated value estimates orappraisals of the value of our assets.

 

For up to threefull fiscal years after the Initial Public Offering or any subsequent offeringof our shares (other than offerings related to a distribution reinvestmentplan, employee benefit plan or the redemption of interests in our operatingpartnership), we may use the offering price of shares in our most recentoffering as the estimated value of a share of our common stock (unless we havesold assets and made special distributions to stockholders of net proceeds fromsuch sales, in which case the estimated value of a share of our common stockwill equal the offering price less the amount of those special distributionsconstituting a return of capital.) Notwithstanding the foregoing, in February 2009, FINRA releasedRegulatory Notice 09-09.  This noticeconfirms that the National Association of Securities Dealers (“NASD”) Rule2340(c)(2) prohibits broker-dealers that are required to report an estimatedvalue per share for non-traded REITs from using a per share estimated valuedeveloped from data that is more than 18 months old.  This would mean that broker-dealers thatparticipate in a public offering of our shares could not use the last pricepaid to acquire a share in an offering as the estimated value per share of ourcommon stock beyond 18 months after termination of the most recentoffering.  We are currently evaluatinghow we will assist broker-dealers with this requirement.

 

**Holders**

 

As of March 13,2009, we had approximately 19.0 million shares of common stock outstanding heldby a total of approximately 3,600 stockholders.

 

**Distributions**

 

Until we generatesufficient cash flow from operations or FFO to fully fund the payment ofdistributions, some or all of our distributions will be paid from othersources.  We may generate cash to paydistributions from financing activities, components of which may includeborrowings (including borrowings secured by our assets) in anticipation offuture operating cash flow and proceeds of this offering.  In addition, from time to time, ouradvisor and its affiliates may agree to waive or defer all, or a portion, ofthe acquisition, asset management or other fees or other incentives due tothem, enter into lease agreements for unleased space, pay generaladministrative expenses or otherwise supplement investor returns in order toincrease the amount of cash available to make distributions to ourstockholders.  In addition, to the extent we invest in development or redevelopmentprojects or in properties that have significant capital requirements, theseproperties may not immediately generate cash flow from operations or FFO. Thus, our ability to make distributions may be negatively impacted, especiallyduring our early periods of operation.

 

We expect our board ofdirectors to declare distributions on a quarterly basis and to paydistributions to our stockholders on a monthly basis.  We intend to calculate these monthlydistributions based on daily record dates so our investors will become eligiblefor distributions immediately upon purchasing shares.  Distributions willbe paid to stockholders as of the record dates selected by the directors.

 

 

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We are required to makedistributions sufficient to satisfy the requirements for qualification as aREIT for tax purposes.  Generally, distributed income will not be taxableto us under the Internal Revenue Code if we distribute at least 90% of our REITtaxable income.

 

Distributions will beauthorized at the discretion of our board of directors, based on its analysisof our earnings, cash flow, anticipated cash flow, capital expenditure requirements,general financial condition or other factors that our board of directors deemrelevant.  The board’s discretion will beinfluenced, in substantial part, by its obligation to cause us to comply withthe REIT requirements.  Because we may receive income from interest orrents at various times during our fiscal year, distributions may not reflectour income earned in that particular distribution period but may be paid inanticipation of cash flow that we expect to receive during a later period or ofreceiving funds in an attempt to make distributions relatively uniform.

 

Many of the factors thatcan affect the availability and timing of cash distributions to stockholdersare beyond our control, and a change in any one factor could adversely affectour ability to pay future distributions.  There can be no assurance thatfuture cash flow will support distributions at the rate that such distributionsare paid in any particular distribution period.  See “Item 1.A. RiskFactors — Risks Related to Our Business in General — Distributions may bepaid from capital and there can be no assurance that we will be able togenerate the cash flows necessary to continue to pay initially establisheddistributions or maintain distributions at any particular level, or to increasedistributions over time.”

 

We are not prohibitedfrom distributing our own securities in lieu of making cash distributions tostockholders.  We may issue securities as stock dividends in the future.

 

The distributions declared and paid during the years ended December 31,2008 and 2007 exceeded FFO for the years ended December 31, 2008 and 2007by approximately $2.7 million and $0.6 million, respectively.  Accordingly, for the years ended December 31,2008 and 2007, approximately 58% and 32% of the distributions were funded fromFFO.  Cash amounts distributed tostockholders in excess of FFO were funded from our offering proceeds.

 

Distributions as of December 31, 2008 and December 31,2007 were as follows:

 
| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2008**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** | **Per Share** | ** ** |
| Fourth Quarter |       | $                 | 2,394,437  |   | $ | 1,996,413 |   | 0.164 |   |
| Third Quarter  |       | 1,330,495         |       | 1,330,539 |   | 0.093 |   |
| Second Quarter |       | 1,330,847         |       | 1,330,802 |   | 0.092 |   |
| First Quarter  |       | 1,301,225         |       | 1,279,428 |   | 0.092 |   |
|           |       | $                 | 6,357,004  |   | $ | 5,937,182 |   | $ | 0.441 |   |
|                |            |                   |            |  |  |  |  |  |  |  |

 
|           | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2007**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** | **Per  Share** | ** ** |
| Fourth Quarter |       | $                 | 730,682    |   | $ | 396,450 |   | 0.092 |   |
| Third Quarter  |       | 196,590           |       | 118,764 |   | 0.091 |   |
| Second Quarter |       | —            |       | — |   | — |   |
| First Quarter  |       | —            |       | — |   | — |   |
|           |       | $                 | 927,272    |   | $ | 515,214 |   | $ | 0.183 |   |
|                |            |                   |            |  |  |  |  |  |  |  |

 

Over the long-term, we expect that a greater percentage ofour distributions will be paid from cash flow from investments and operations(except with respect to distributions related to sales of our assets). However, operating performance cannot be accurately predicted due to numerousfactors, including our ability to raise and invest capital at favorable yields,the financial performance of our investments in the current real estateenvironment, the types and mix of investments in our portfolio and theaccounting treatment of our investments in accordance with our accountingpolicies.  In addition, effective on March 2009, our board ofdirectors increased our distribution rate for an annual effective rate of 6.5%to 7.0%. As a result, future distributions declared and paid may continue toexceed FFO.  FFO is a non-GAAP financialmeasure that is widely recognized as a measure of REIT operatingperformance.  See “Funds from Operations”section below for a reconciliation of FFO to our net income.

 

 

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**RecentSales of Unregistered Securities**

 

In connection with our initial capitalization, on August 4,2006, we issued 1,249 shares of our common stock to Behringer Harvard Holdingsfor $8.01 per share.  In addition, on November 28,2007, we issued 23,720 additional shares of our common stock to BehringerHarvard Holdings for $8.01 per share and 1,000 shares of our convertible stockto the Advisor for $1 per share.  Theconvertible stock generally is convertible into shares of common stock with avalue equal to 15% of the amount by which (1) our enterprise value at thetime of conversion, including the total amount of distributions paid to ourstockholders, exceeds (2) the sum of the aggregate capital invested by ourstockholders plus a 7% cumulative, non-compounded, annual return on suchcapital at the time of conversion, on a cash-on-cash basis.  We issued these shares of common stock andconvertible stock in private transactions exempt from the registrationrequirements under the Securities Act of 1933, as amended (the “Securities Act”),pursuant to Section 4(2) of the Securities Act.

 

We also commenceda private offering to accredited investors on November 22, 2006 andterminated that offering on December 28, 2007.  In connection with the private offering, weissued an aggregate of approximately 14.2 million shares of its common stockfor an aggregate purchase price of approximately $127.3 million in the privateoffering.  The Registrant issued theseshares of common stock in private transactions exempt from the registrationrequirements under the Securities Act, pursuant to Section 4(2) ofthe Securities Act and Rule 506 promulgated thereunder.

 

**Use ofProceeds from Registered Securities**

 

Pursuant to aRegistration Statement on Form S-11 (SEC Registration No. 333-148414)filed under the Securities Act and declared effective by the SEC on September 2,2008, we are offering for sale to the public on a “best efforts” basis (1) amaximum of 200,000,000 shares of our common stock at a price of $10.00 pershare and (2) up to 50,000,000 additional shares pursuant to adistribution reinvestment plan pursuant to which our stockholders could electto have their distributions reinvested in additional shares of our common stockat a price of up to $9.50 per share, for a total aggregate offering price ofapproximately $2.5 billion. As of December 31, 2008, we hadsold approximately 1.1 million shares ofour common stock on a best efforts basis pursuant to the Initial PublicOffering for aggregate gross offering proceeds of approximately $10.9 million.

 

The above-statednumber of shares sold and the gross offering proceeds received from such salesdoes not include 24,969 shares of common stock purchased by Behringer HarvardHoldings in a private placement in 2006 or the 14.2 million shares from ourPrivate Offering.

 

From thecommencement of the Initial Public Offering through December 31, 2008, weincurred $5.6 million for O&O expenses in connection with the issuance anddistribution of the registered securities pursuant to the Initial PublicOffering.

 

From thecommencement of the offerings through December 31, 2008, the net offeringproceeds to us from the offerings, after deducting the total expenses incurreddescribed above, were $123.7 million. From the commencement of the offeringsthrough December 31, 2008, we have invested $96.5 million of such netproceeds to invest primarily in BHMP CO-JVs. Of the amount used for the purchase of these investments, $4.4 millionwas paid to Behringer Multifamily Advisors, as acquisition and advisory feesand acquisition expense reimbursement.

 

**ShareRedemption Program**

 

Ourboard of directors has adopted a share redemption program that permits ourstockholders to sell their shares to us in limited circumstances after theyhave held them for at least one year, subject to certain conditions andlimitations.  The purchase price for the redeemed shares is set forth inthe prospectus for the Initial Public Offering of our common stock, assupplemented from time to time.  Our board of directors reserves the rightin its sole discretion at any time, and from time to time, to (1) waivethe one-year holding period in the event of other exigent circumstancesaffecting a stockholder such as bankruptcy or a mandatory distributionrequirement under the stockholder’s IRA, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) otherwiseamend the terms for the share redemption program.  Under the terms of theprogram, we will not redeem in excess of 5% of the weighted-average number ofshares outstanding during the twelve-month period immediately prior to the dateof redemption.  In addition, our board of directors will determine at leastquarterly whether we have sufficient cash to repurchase shares, and suchpurchases will generally be limited to proceeds from the DRIP plus 1% ofoperating cash flow for the previous fiscal year.

 

 

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During the fourth quarterended December 31, 2008, we redeemed shares as follows:

 
| **2008** | ** ** | **Total Number of Shares Redeemed** | ** ** | **Average Price Paid Per Share** | ** ** | **Total Number of Shares Purchased as Part of Publicly Announced Plans or  Programs** | ** ** | **Maximum Number of Shares That May Be Purchased Under the Plans or Programs** | ** ** |
|----------|------------|-------------------------------------|------------|----------------------------------|------------|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------|------------|
| October  |       | —                              |       | $                                | —     |                                                                                  | —     |                                                                           | (1)        |   |
| November |       | 16,667                              |       | $                                | 8.40       |                                                                                  | 16,667     |                                                                           | (1)        |   |
| December |       | —                              |       | $                                | —     |                                                                                  | —     |                                                                           | (1)        |   |
|     |       | 16,667                              |       | $                                | 8.40       |                                                                                  | 16,667     |                                                                           |       |   |

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

 

**Stock-BasedCompensation**

 

We have adopted astock-based incentive award plan for our directors and consultants and foremployees, directors and consultants of our affiliates, and our advisor and itsaffiliates.  We account for this planunder the modified prospective method of Financial Accounting Standards Board (“FASB”)SFAS No. 123(R), “Share-Based Payment.”  In the modified prospective method,compensation cost is recognized for all share-based payments granted after theeffective date and for all unvested awards granted prior to the effective date.In accordance with SFAS No. 123(R), prior period amounts were notrestated. SFAS No. 123(R) also requires the tax benefits associated withthese share-based payments to be classified as financing activities in theConsolidated Statements of Cash Flows, rather than operating cash flows asrequired under previous regulations. We have issued a total of 6,000 shares ofrestricted stock to our independent directors as of December 31, 2008.

 

**Convertible Stock**

 

Our authorized capital stock includes 1,000 shares ofconvertible stock, par value $0.0001 per share.  We have issued all ofsuch shares to our advisor.  No additional consideration is due upon theconversion of the convertible stock.  There will be no distributions paidon shares of convertible stock.  The conversion of the convertible stockinto common shares will result in dilution of the stockholders’ interests.

 

With certain limited exceptions, shares of convertiblestock shall not be entitled to vote on any matter, or to receive notice of, orto participate in, any meeting of stockholders of the company at which they arenot entitled to vote.  However, the affirmative vote of the holders ofmore than two-thirds of the outstanding shares of convertible stock is requiredfor the adoption of any amendment, alteration or repeal of a provision of thecharter that adversely changes the preferences, limitations or relative rightsof the shares of convertible stock.

 

Upon the occurrence of (A) our making totaldistributions on the then outstanding shares of our common stock equal to theissue price of those shares (that is, the price paid for those shares) plus a7% cumulative, non-compounded, annual return on the issue price of thoseoutstanding shares; or (B) the listing of the shares of common stock fortrading on a national securities exchange, each outstanding share of ourconvertible stock will convert into the number of shares of our common stockdescribed below.  Before we will be able to pay distributions to ourstockholders equal to the aggregate issue price of our then outstanding sharesplus a 7% cumulative, non-compounded, annual return on the issue price of thoseoutstanding shares, we will need to sell a portion of our assets.  Thus,the sale of one or more assets will be a practical prerequisite for conversionunder clause (A) above.

 

Upon the occurrence of either such triggering event,each share of convertible stock shall, unless our advisory management agreementwith Behringer Harvard Multifamily Advisors I has been terminated or notrenewed on account of a material breach by our advisor, generally be convertedinto a number of shares of common stock equal to 1/1000 of the quotient of(A) 15% of the amount, if any, by which (1) the value of the company(determined in accordance with the provisions of the charter and summarized inthe following paragraph) as of the date of the event triggering the conversionplus the total distributions paid to our stockholders through such date on thethen outstanding shares of our common stock exceeds (2) the sum of theaggregate issue price of those outstanding shares plus a 7% cumulative,non-compounded, annual return on the issue price of those outstanding shares asof the date of the event triggering the conversion, divided by (B) thevalue of the company divided by the number of outstanding shares of commonstock, in each case, as of the date of the event triggering theconversion.  In the case of conversion upon the listing of our shares, theconversion of the convertible stock will not occur until the 31st trading dayafter the date of such listing.  However, if our advisory managementagreement with Behringer Harvard Multifamily Advisors I expires without renewalor is terminated (other than because of a material breach by our advisor) priorto either such triggering event described in the foregoing paragraph (an“advisory management agreement termination”), then upon either such triggeringevent the holder of the convertible stock will be entitled to a proratedportion of the number of shares of common stock determined by the foregoingcalculation, where such proration is based on the percentage of time that wewere advised by Behringer Harvard Multifamily Advisors I. 

 

Our board of directorswill oversee the conversion of the convertible stock to ensure that any sharesof common stock issuable in connection with the conversion is calculated inaccordance with the terms of our charter and to evaluate the impact of theconversion on our REIT status.  If, in the good faith judgment of ourboard, full conversion of the convertible stock would jeopardize our status asa REIT, then only such number of shares of convertible stock (or fraction of ashare thereof) shall be converted into a number of shares of common stock suchthat our REIT status would not be jeopardized.  The conversion of theremaining shares of convertible stock will be deferred until the earliest dateafter our board of directors determines that such conversion will notjeopardize our qualification as a real estate investment trust.  Any suchdeferral will not otherwise alter the terms of the convertible stock.

 

**Item 6.    Selected Financial Data**

 

Wewere formed on August 4, 2006. Through December 31, 2008, all of our Co-Investment Ventures were BHMP CO-JVs.  As of December 31, 2008, we and our BHMP CO-JVs had investments in nineproperties under development and one operating apartment community.   As of December 31, 2007, we and our BHMP CO-JVs had investments in sevenproperties under development and one operating apartment community.  As of December 31, 2006, we owned noproperties.  Accordingly, the followingselected financial data for each fiscal year presented below reflectssignificant increases in all categories. The following data should be read inconjunction with our consolidated financial statements and the notes thereto and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations” appearing elsewhere in this Annual Report on Form 10-K.  The selected financial data presented belowhas been derived from our audited consolidated financial statements (inthousands, except per share amounts).

 
| ** **                                               | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|
| **Balance Sheet Data:**                                  | ** ** | **2008**                    | ** ** | **2007** | ** ** | **2006** | ** ** |
| Cash and cash equivalents                                |       | $                           | 23,771     |   | $ | 53,378 |   | $ | 20 |   |
| Investments in unconsolidated real estate joint ventures |       | 96,505                      |       | 60,069 |   | — |   |
| Total assets                                             |       | 120,894                     |       | 115,442 |   | 20 |   |
| Long term obligations                                    |       | —                      |       | — |   | — |   |
| Total liabilities                                        |       | 8,500                       |       | 2,022 |   | 11 |   |
| Minority interest                                        |       | —                      |       | — |   | 10 |   |
| Stockholders’ equity                                |       | 112,394                     |       | 113,420 |   | (1 | ) |
|                                                          |            |                             |            |  |  |  |  |  |  |  |

 

 

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| ** **                                                                  | ** ** | **For Year Ended** | ** ** | **For the period from  August 4, 2006  (date of inception)  through** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|-----------------------------------------------------------------------|------------|
| **Operating Data:**                                                         | ** ** | **2008**           | ** ** | **2007**                                                              | ** ** | **December 31, 2006** | ** ** |
| Equity in earnings of unconsolidated real estate joint venture  investments |       | $                  | 4,276      |                                                                  | $          | 793 |   | $ | — |   |
| Interest income                                                             |       | 885                |       | 343                                                                   |       | — |   |
| Net income (loss)                                                           |       | 2,630              |       | (207                                                                  | )          | (14 | ) |
| Basic and diluted earnings (loss) per share                                 |       | 0.18               |       | (0.08                                                                 | )          | (11.25 | ) |
| Distributions declared per share — basic and diluted (1)               |       | 0.44               |       | 0.34                                                                  |       | — |   |
|                                                                             |            |                    |            |                                                                       |            |  |  |  |  |  |

----

(1)          We paid our first distribution in July 2007.

 
| ** **                                 | ** ** | **For Year Ended** | ** ** | **For the period from  August 4, 2006  (date of inception)  through** | ** ** |
|--------------------------------------------|------------|--------------------|------------|-----------------------------------------------------------------------|------------|
| **Cash Flow Data:**                        | ** ** | **2008**           | ** ** | **2007**                                                              | ** ** | **December 31, 2006** | ** ** |
| Cash Flow provided by operating activities |       | $                  | 2,383      |                                                                  | $          | 245 |   | $ | — |   |
|                                       |       |               |       |                                                                  |       |   |   |
| Cash Flow used in investing activities     |       | $                  | (35,420    | )                                                                     | $          | (60,792 | ) | $ | — |   |
|                                       |       |               |       |                                                                  |       |   |   |
| Cash Flow provided by financing activities |       | $                  | 3,430      |                                                                  | $          | 113,904 | ** ** | $ | 20 | ** ** |

 

**Item 7.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

The followingdiscussion and analysis should be read in conjunction with the accompanyingconsolidated financial statements and the notes thereto:

 

**Overview**

 

Wewere incorporated on August 4, 2006 as a Maryland corporation and operateas a REIT for federal and state income tax purposes. We make investments in andoperate high-quality multifamily communities. In particular, we were organizedto invest in and operate high-quality multifamily communities that we believehave desirable locations, personalized amenities, and high qualityconstruction. We began acquiring interests in multifamily communities in April 2007.As of December 31, 2008, all of our investments have been in high-qualitydevelopment and operating multifamily communities located in the top 50metropolitan statistical areas (“MSAs”) in the United States. Substantially allof our real estate investments are unconsolidated joint venture investments in BHMP CO-JVs. As of December 31,2008, we have made ten separate investments in multifamily BHMP CO-JVs. Nine of the ten Property Entities are indevelopment and one is an operating property. As of December 31, 2008, theBHMP CO-JVs have made tenmezzanine loans related to the development projects and seven equityinvestments in PropertyEntities, with equity purchase options for all Property Entities. The development propertiesare located in Texas, Virginia, Florida, Colorado, Nevada, Maryland, and anequity investment in a PropertyEntity with one operating property located in Georgia.

 

Our investmentstrategy is designed to provide our stockholders with a diversified portfolioand our management and board of directors have extensive experience ininvesting in numerous types of real estate, loans and other investments toexecute this strategy. We intend to primarily invest in, acquire and operatemultifamily communities, with a particular focus on using multiple strategiesto acquire investments in high quality multifamily communities that producestabilized rental income. We will invest in and acquire a blended portfolioconsisting of core, stabilized income generating assets, assets that maybenefit from enhancement or repositioning and development assets forstabilization to retain as core assetsgenerating income with potential capital appreciation. Further, we may investin commercial real estate, including office buildings, shopping centers,business and industrial parks, manufacturing facilities, warehouses anddistribution facilities and motel and hotel properties. We intend to makeinvestments on our 

 

 

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own or throughCo-Investment Ventures. Directly or through Co-Investment Ventures, we mayinvest in real estate-related securities, including securities issued by otherreal estate companies, either for investment or in change of controltransactions completed on a negotiated basis or otherwise. We also mayoriginate or invest in commercial mortgage-backed securities, mortgage, bridge,mezzanine or other loans and Section 1031 tenant-in-common interests(including those issued by programs sponsored by Behringer Harvard Holdings),or in entities that make investments similar to the foregoing. Although weintend to primarily invest in real estate assets located in the United States,in the future, we may make investments in real estate assets located outsidethe United States. As of December 31, 2008, we have not made anyinternational investments. We will not make international investments until allof our non-independent directors and one of our independent directors have atleast three years of relevant experience acquiring and managing suchinternational investments.

 

ThroughDecember 31, 2008, we have primarily executed our strategy throughCo-Investment Ventures with PGGM. We believe our BHMP CO-JV program will allow us toincrease the number of our investments, thereby increasing our riskdiversification, and to participate with greater economic interest in larger ormore selective real estate investments, thereby providing greater access tohigh quality investments. As of December 31, 2008, these BHMP CO-JV investments have includedmezzanine and mortgage loans, equity interests and options to acquire equityinterests. We intend to continue to invest in BHMP CO-JVs that will own these typesof investments and that focus on multifamily operating communities,to-be-developed multifamily communities or newly constructed multifamily communitiesthat have not yet stabilized, other than residential properties for assistedliving, student housing or senior housing. However, we are not limited toco-investments with PGGM and may pursue other Co-Investment Ventures if theyprovide greater diversification or investment opportunities. We may also pursuedirect investments consistent with our investment policies.

 

Throughour arrangements with PGGM, we have received commitments from them to invest$200 million in approved BHMP CO-JV co-investments. PGGM has indicated its willingnessto increase its commitment to $300 million. Generally PGGM will co-invest at45% and we will contribute 55% of the investment requirements. We intend tofund our portion from proceeds of our Initial Public Offering. Our strategy isto utilize these combined funds to invest in Property Entities with other third parties,generally developers investing in multifamily communities. The partners tothese PropertyEntities will then be a BHMPCO-JV and the developer partner, although there could be other third-partyparticipants.

 

EachProperty Entity agreement isunique and heavily negotiated, but we will generally seek the followingprovisions:

 

Fordevelopment stage investments:

 

·                  *CompletionGuarantees* — The developer provides us with a guarantee ofcompletion and costs from a dedicated entity with cash, real estate and/orsecurities.  This entity is typically notthe developer entity or the Property Entity, but what is referred to as “the guarantee entity.”  We believe that this guarantee is animportant mitigant to guarantee completion of developments at budgeted costs.

 

·                  *DeveloperFee Subordination* — We negotiate fee deferrals at variouslevels.  The fees, usually developer feesfor managing the development, are deferred and only received by the developerafter we have recouped certain of our investments, which may include ourmezzanine loan and any accrued and unpaid interest, equity investment andpreferred return.

 

·                  *CostOverrun Protection* — Generally, we will seek to mandate that any costoverruns, including those due to delayed completions, be borne by the developeror other capital partners, which essentially reduces their share of net profitfrom development to the extent of any such overrun.  Because this is a significant compensation tothe developer, the developer is highly motivated to remain on budget.

 

For operating and development stage investments:

 

·                  *EquitySubordination* — We will seek to require the other partners toprovide an equity investment that is subordinate to our investment.  In these instances, some or all of ourreturns will take priority to the other partner equity.

 

·                  *HurdleReturns* — We will seek to receive certain minimum returns before the otherpartners participate in operating cash flow or residual profits from a sale orother capital events. In these instances we may receive a preferred return onour capital investment or require that our capital investment earn a minimumrequired internal rate of return.

 

 

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·                  *JointFunding Protection* — Although our structures do not require that anyof the partners fund capital calls for development or operating deficits, weseek to include higher preferred returns on these types of capitalcontributions. As we may have more incentive to keep the project funded, if theother partners do not contribute pro-rata with us, then these higher preferredreturns, which are generally the first allocation of distributable cash, wouldsignificantly dilute non-contributing partners.

 

Not all of these provisions may be included in each Property Entity agreements, orif our investment is initially a loan, some of these provisions may only beeffective if we elect to make an equity investment. We believe these provisionswill help us achieve our return requirements and help mitigate certain of thereal estate project risks; however, there is no assurance we will achieve thoseobjectives.

 

We believe thateconomic conditions in the major metropolitan markets of the United States willcontinue to provide adequate demand for properly positioned multifamilycommunities; such conditions include an assessment of job and salary growth,lifestyle trends, as well as single-family home pricing and availability ofcredit. Our multifamily asset acquisition strategy concentrates on multifamilycommunities located in the top 50 MSAs across the United States. The****U.S. Census population estimates are usedto determine the largest MSAs. Our top 50 MSA strategy will focus on acquiringproperties and other real estate assets that provide us with broad geographicdiversity. Investments in multifamily communities have benefited from thechanging demographic trends of the last ten years. These trends includecontinued growth in non-traditional households, the echo-boomer generationcoming of age and entering the housing market, low rates of inflation, andincreased immigration. Changes in domestic financial markets (discussed below)can affect the stability and direction of these historical trends and canadversely affect our strategy. Multifamily community demand is also affected bychanges in credit market liquidity and repricing of risk affects the cost andavailability of financing for purchase of single family homes.Based on projected economic and creditmarket conditions for the United States in 2008, as published by prominent realestate and economic advisory firms, we expect the national pace of real estateacquisitions to be slower in 2009 than in recent years.

 

Recently,domestic financial and real estate markets have experienced unusual volatilityand uncertainty. Liquidity has tightened in most financial markets, includinginvestment grade debt, commercial and construction real estate financing andequity capital markets. Multifamily fundamentals are also beginning to exhibitsigns of softenening. These include an increase in unemployment and supply,particularly so-called shadow rental alternatives from unsold condominiums andsingle-family residences. These factors are contributing to lower rental rates,lower occupancy levels and lower valuations in many multifamily markets. Withour strategy of investing in high quality projects in fundamentally sound long-termmarkets, we believe our existing portfolio is well positioned to perform overthe life of the project. However, we may experience a decrease in net operatingincome in the interim, which may affect certain investment values and cashflow. On the other hand, if multifamily prices decline and cap rates increase,any new investments we may make may generate higher returns and cash flows.

 

Thedeterioration of the capital markets has also affected the liquidity andpricing of mezzanine loans, currently our primary investment type. Spreads onthese loans have widened dramatically with limited secondary markets. Webelieve this market condition has not materially affected our mezzanineportfolio due to our strategy of investing in mezzanine loans based on thequality of the underlying real estate, the security and collateral backing theloans, our investment structures (which allow us the option to convert our loaninvestments into equity ownership) and our intent and ability to hold theseloans to maturity. Further, government-sponsoredentities such as ****FannieMae and Freddie Mac have and**** may continue toprovide needed financing, refinancing and credit enhancement to the multifamilysector.

 

Weevaluate our mezzanine investments and other real estate investments forimpairment based on general and market specific factors. See “CriticalAccounting Policies and Estimates” discussed below.

 

As discussed furtherbelow, we expect to meet our short-term liquidity requirements through the netcash raised from our prior private offering, our Initial Public Offering andcash flow from the operations of our current and future investments. Forpurposes of our long-term liquidity requirements, we expect that the net cashfrom our Initial Public Offering and from our current and future investmentswill generate sufficient cash flow to cover operating expenses and our monthlydistribution.

 

We actively searchfor real estate opportunities and routinely evaluate making investments inpotential operating properties and development projects. We expect to use theproceeds from our Initial Public Offering to substantially increase the numberand amount of our investments in operating properties and potential developmentprojects.  As of December 31, 2008,we sold a total of 

 

 

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approximately 1.1 millionshares of common stock and raised a total of $10.9 million in gross proceeds inour Initial Public Offering.  Inaddition, we commenced the Private Offering to accredited investors on November 22,2006 and terminated that offering on December 28, 2007. We sold a total ofapproximately 14.2 million shares of common stock and raised a total ofapproximately $127.3 million in gross offering proceeds in the PrivateOffering.

 

**PropertyPortfolio**

 

Thefollowing is a summary description of our investments as of December 31,2008 and 2007 (amounts in millions). The information separates our wholly ownedinvestments and investments in unconsolidated real estate joint ventures.  The increased balance on our investments inunconsolidated real estate joint ventures in 2008 is largely due to theaddition of two new investments  in BHMP CO-JVs for approximately $15.6million and advances on existing notes receivable for approximately $18.0million.

 
| ** **                                                          | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                          | ** ** | **2008**              | ** ** | **2007** | ** ** |
| **Wholly Owned Investment**                                         |       |                  |       |   |   |
| *Loan — Multifamily Development*                               |       |                  |       |   |   |
| Grand Reserve                                                       |       | $                     | —     |   | $ | — |   |
| ** **                                                          | ** ** | ** **            | ** ** | ** ** | ** ** |
| **Investments in Unconsolidated  Real Estate Joint Ventures**       | ** ** | ** **            | ** ** | ** ** | ** ** |
| *Multifamily Operating*                                             |       |                  |       |   |   |
| The Reserve at Johns Creek                                          |       | 4.8                   |       | 5.9 |   |
|                                                                |       |                  |       |   |   |
| *Multifamily Developments*                                          |       |                  |       |   |   |
| Grand Reserve                                                       |       | 4.3                   |       | 1.9 |   |
| The Eclipse                                                         |       | 7.0                   |       | 4.5 |   |
| Alexan St. Rose                                                     |       | 14.4                  |       | 2.8 |   |
| Fairfield at Baileys Crossing                                       |       | 12.6                  |       | 12.7 |   |
| Tower 55 Hundred                                                    |       | 13.9                  |       | 13.7 |   |
| Fairfield at Cameron House                                          |       | 10.9                  |       | 7.0 |   |
| Satori                                                              |       | 13.0                  |       | 11.6 |   |
| Alexan Prospect                                                     |       | 10.6                  |       | — |   |
| The Venue                                                           |       | 5.0                   |       | — |   |
| Total - Development                                                 |       | 91.7                  |       | 54.2 |   |
|                                                                |       |                  |       |   |   |
| **Total Investments in Unconsolidated Real Estate  Joint Ventures** |       | $                     | 96.5       |   | $ | 60.1 |   |

 

*For additional informationconcerning our investments, refer to “Item 2. Properties.”*

 

**Critical Accounting Policies andEstimates**

** **

The following critical accounting policies andestimates apply to both us and our Co-Investment Ventures, respectively.

 

Management’s discussion and analysis of financialcondition and results of operations is based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America. The preparation of thesefinancial statements requires our management to make judgments, assumptions andestimates that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. Weevaluate these judgments, assumptions and estimates for changes which wouldaffect the reported amounts. These estimates are based on management’shistorical industry experience and on various other judgments and assumptionsthat are believed to be reasonable under the circumstances. Actual results maydiffer from these judgments, assumptions and estimates. Our significantjudgments, assumptions and estimates include the consolidation of variableinterest entities (“VIEs”), the allocation of the purchase price of acquiredproperties and evaluating our real-estate related investments for impairment.

 

 

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***Principles of Consolidation and Basis of Presentation***

 

Ourconsolidated financial statements will include our accounts, the accounts ofvariable interest entities (“VIEs”) in which we are the primary beneficiary andthe accounts of other subsidiaries over which we will have control. Allinter-company transactions, balances and profits are eliminated in consolidation.Interests in entities acquired will be evaluated for consolidation based onFinancial Accounting Standards Board Interpretation (“FIN”) 46R, which requiresthe consolidation of VIEs in which we are deemed to be the primary beneficiary.If the interest in the entity is determined to not be a VIE under FIN 46R, thenthe entity will be evaluated for consolidation under the American Institute ofCertified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accountingfor Investments in Real Estate Ventures,” and by Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.”

 

Thereare judgments and estimates involved in determining if an entity in which wewill make an investment will be a VIE and if so, if we will be the primarybeneficiary. The entity will be evaluated to determine if it is a VIE by, amongother things, calculating the percentage of equity being risked compared to thetotal equity of the entity. FIN 46R provides some guidelines as to what theminimum equity at risk should be, but the percentage can vary depending uponthe industry or the type of operations of the entity and it will be up to ouradvisor to determine that minimum percentage as it relates to our business andthe facts surrounding each of our acquisitions. In addition, even if the entity’sequity at risk is a very low percentage, our advisor will be required by FIN46R to evaluate the equity at risk compared to the entity’s expected futurelosses to determine if there could still in fact be sufficient equity at theentity. Determining expected future losses involves assumptions of variouspossibilities of the results of future operations of the entity, assigning aprobability to each possibility using a discount rate to determine the netpresent value of those future losses and allocation those losses between theequity owners, subordinated lenders or other variable interests. A change inthe judgments, assumptions, allocations and estimates outlined above couldresult in consolidating an entity that should not be consolidated or accountingfor an investment on the equity method that should in fact be consolidated, theeffects of which could be material to our results of operations and financialcondition.

 

***Notes Receivable***

 

Notesreceivable are reported at their outstanding principal balances net of anyunearned income and unamortized deferred fees and costs. Included in notesreceivable are both mortgage notes receivable and mezzanine notesreceivable.  Loan origination fees andcertain direct origination costs are generally deferred and recognized asadjustments to interest income over the lives of the related loans.

 

Inaccounting for notes receivables by our Co-Investment Ventures or us, there arejudgments related to whether the investments are loans, investments in jointventures or acquisitions of real estate. In applying Exhibit 1 of AICPAPractice Bulletin 1, “AICPA Notice to Practitioners regarding Acquisition,Development, and Construction Arrangements to Acquisition of an OperatingProperty” and EITF 86-21 “Application of the AICPA Notice to Practitionersregarding Acquisition, Development, and Construction Arrangements toAcquisition of an Operating Property”, we evaluate whether the loans containany rights to participate in expected residual profits, the loans providesufficient collateral or qualifying guarantees or include other characteristicsof a loan. As a result of our review, neither our wholly owned loan nor theloans made through our BHMPCO-JVs contain a right to participate in expected residual profits. Inaddition the PropertyEntities or project borrower remain obligated to pay principal and interest dueon the loan with sufficient collateral, reserves or qualifying guarantees toaccount for the investments as loans.

 

Weassess notes receivables for impairment in accordance with SFAS No. 114 “Accountingby Creditors for Impairment of a Loan”. Based on specific circumstances wedetermine whether it is probable that there has been an adverse change in theestimated cash flows of the contractual payments for the notes receivable. Wethen assess whether the impairment is other than temporary based on factorsincluding the general or market specific economic conditions for the project;the financial conditions of the borrower and guarantors, if any; the degree ofany defaults by the borrower on any of its obligations; the assessment of theunderlying project’s financial viability and other collateral; the length oftime and extent of the condition and our or the Co-Investment Venture’s intentand ability to retain its investment in the issuer for a period sufficient toallow for any anticipated recovery in the market value. If the impairment isother than temporary, we recognize an impairment loss equal to the differencebetween our or the Co-Investment Venture’s investment in the loan and thepresent value of the estimated cash flows discounted at the loan’s effectiveinterest rate. Where we have the intent and the ability to foreclose on oursecurity interest in the property, we will use the property’s fair value as abasis for the impairment.

 

 

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Thereare judgments involved in determining whether an impairment is other thantemporary. As these types of loans are generally investment specific based onthe particular loan terms and the underlying project characteristics, there isusually not any secondary market to evaluate impairments. Accordingly, we mustrely on our subjective judgments and individual weightings of the specificfactors. If loans are considered impaired, then judgments and estimates arerequired to determine the projected cash flows for the loan, considering theborrower’s or if applicable the guarantor’s financial condition and theconsideration and valuation of the secured property and any other collateral.

 

Changesin these facts or in our judgments and assessments of these facts could resultin impairment losses which could be material to our results of operations andfinancial condition.

 

***Investments in******Real******Estate Joint Ventures***

 

Substantiallyall of our current investments have been made through joint Co-InvestmentVentures. We are the manager of the Co-Investment Venture’s affairs, but theoperation of Co-Investment Ventures are conducted in accordance with operatingplans prepared by us and approved by us and the other joint venture member (the“Co-Investment Partner”). In addition, without the consent of both members ofthe Co-Investment Venture, the manager may not approve or disapprove on behalfof the Co-Investment Venture certain major decisions affecting theCo-Investment Venture, such as (i) selling or otherwise disposing of theinvestment or any other property having a value in excess of $100,000, (ii) sellingany additional interests in the Co-Investment Venture or its subsidiary REIT(with limited exceptions relating to the subsidiary REIT maintaining its statusas a real estate investment trust or the sale of an interest to the developerof the project) or (iii) incurring or materially modifying anyindebtedness of the Co-Investment Venture or the subsidiary REIT. As of December 31,2008, each Venture has two members, and each Venture member possesses equalsubstantive participating rights to make decisions which constitute routineoccurrences in each Venture’s ordinary course of business. These decisionsinclude the requirement to approve initial and annual operating plans, initialand annual capital expenditures, any sales or dispositions of investments, and,any method of refinancing or raising additional debt or equity capital.

 

EachCo-Investment Venture is evaluated under FIN 46R. If the Co-Investment Ventureis determined to not be a variable interest entity under FIN 46R, then theventures are evaluated for consolidation under the American Institute ofCertified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accountingfor Investments in Real Estate Ventures,” and by Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.” As a result of the equal substantiveparticipating rights possessed by each partner, no single party controls eachventure; accordingly, we account for each Co-Investment Venture using theequity method of accounting pursuant to SOP 78-9. The equity method ofaccounting requires these investments to be initially recorded at cost andsubsequently increased (decreased) for our share of net income (loss),including eliminations for our share of inter-company transactions and reducedwhen distributions are received.

 

Eachof the PropertyEntities have different profit sharing interests, some of which have numerousallocation and distribution provisions where certain equity investors receivepreferred interests or deferred participations. In accordance with SOP 78-9, weallocate income and loss for determining our equity in earnings ofunconsolidated joint ventures based on the underlying economic effect orparticipation in the benefit or loss. Although our policy is to use theconcepts of a hypothetical liquidation at book value, judgment is required todetermine which owners are bearing economic benefits or losses, particularly asproperties move from development to operations and guarantees are triggered orremoved. A change in these judgments could result in greater or lesser amountsof equity in earnings.

 

Wherewe or the BHMP CO-JV have bothequity investments and loans to Property Entities and Property Entities arecapitalizing interest expense during construction, we must evaluate whether ouror the BHMP CO-JV’s interestshould be recognized as income or if any of the interest income is allocated toours or the BHMPCO-JVs’ partnership equity interest and then deferred until realization fromthird parties through a sale of the Property Entities’ property. There arejudgments and estimates involved in determining which party is responsible forthe interest and whether there has been a realization with respect to ourinterest. Where interest is paid from the Property Entity which are funded from theother partners, either directly or from loans guaranteed by the other partners,our policy is to consider the interest income realized and no amounts aredeferred. If interest income is not paid currently, after the period the seniorloan has funded, or if the circumstances indicate that we or the BHMP CO-JV have not realized theinterest income, we or the BHMP CO-JV defer the portion of the interest that relates toour equity interest. A change in the judgments, assumptions or specific factscould result in us or the BHMP CO-JV recording interest income when it should bedeferred and recognized when the underlying property is sold or in us or the BHMP CO-JV deferring the interestincome when it should have been recorded as interest income. The effects ofthese changes could be material to our results of operations and financialcondition.

 

 

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***Investment Impairments***

 

Forreal estate we wholly own or record on a consolidated basis, we will monitorevents and changes in circumstances indicating that the carrying amounts of thereal estate assets may not be recoverable. When such events or changes incircumstances are present, we will assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset and from its eventual disposition, to the carryingamount of the asset. In the event that the carrying amount exceeds theestimated future undiscounted operating cash flows, we will recognize animpairment loss to adjust the carrying amount of the asset to estimated fairvalue.

 

Forreal estate we may own through an investment in a joint venture, TIC interestor other similar investment structure, at each reporting date we will comparethe estimated fair value of our investment to the carrying value. An impairmentcharge will be recorded to the extent the fair value of our investment is lessthan the carrying amount and the decline in value is determined to be otherthan a temporary decline.

 

Inevaluating our investments for impairment, our advisor will make severaljudgments, assumptions and estimates, including, but not limited to, theprojected date of disposition of our investments in real estate, the estimatedfuture cash flows from our investments in real estate and the projected salesprice of each of our investments in real estate. Recently, domestic financialand real estate markets have experienced unusual volatility and uncertaintywith fewer non-distressed secondary transactions available to base theseestimates and assumptions on. A change in these judgments, assumptions and estimatescould result in understating or overstating the book value of our investmentswhich could be material to our financial statements.

 

***Real Estate***

 

Uponthe acquisition of real estate properties, we will allocate the purchase priceof those properties to the tangible assets acquired, consisting of land andbuildings, any assumed debt, identified intangible assets and asset retirementobligations based on their relative fair values in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations”and No. 142, “Goodwill and Other Intangible Assets.”  Identified intangible assets consist of thefair value of above-market and below-market leases, in-place leases, in-placetenant improvements, in-place leasing commissions and tenant relationships.Initial valuations are subject to change until our information is finalized,which will be no later than twelve months from the acquisition date.

 

Wewill determine the fair value of assumed debt by calculating the net present valueof the scheduled mortgage payments using interest rates for debt with similarterms and remaining maturities that our advisor believes we could obtain. Anydifference between the fair value and stated value of the assumed debt will berecorded as a discount or premium and amortized over the remaining life of theloan.

 

Thefair value of the tangible assets acquired, consisting of land and buildings,will be determined by valuing the property as if it were vacant, and the “as-if-vacant”value will then be allocated to land and buildings. Land values will be derivedfrom appraisals, and building values will be calculated as replacement costless depreciation or our advisor’s estimates of the relative fair value ofthese assets using discounted cash flow analyses or similar methods. The valueof the building will be depreciated over the estimated useful life oftwenty-five years to thirty-five years, using the straight-line method.

 

We will determine the value of above-market andbelow-market in-place leases for acquired properties based on the present value(using an interest rate that reflects the risks associated with the leasesacquired) of the difference between (1) the contractual amounts to be paidpursuant to the in-placeleases and (2) management’s estimate of current market lease rates for thecorresponding in-place leases, measured over a period equal to (a) theremaining non-cancelable lease term for above-market leases, or (b) theremaining non-cancelable lease term plus any fixed rate renewal options forbelow market leases. We record the fair value of above-market and below-marketleases as intangible assets or intangible liabilities, respectively, andamortize them as an adjustment to rental income over the above determined leaseterm.

 

Thetotal value of identified real estate intangible assets acquired will befurther allocated to in-place lease values, in-place tenant improvements,in-place leasing commissions and tenant relationships based on our evaluationof the specific characteristics of each tenant’s lease and our overallrelationship with that respective tenant. The aggregate value for tenantimprovements and leasing commissions will be based on estimates of these costsincurred at inception of the acquired leases, amortized through the date ofacquisition. The aggregate value of in-place leases acquired and tenantrelationships will be determined by applying a fair value model. The estimatesof fair value of in-place leases will include an estimate of carrying costsduring the expected lease-up periods for 

 

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the respective spacesconsidering then current market conditions. In estimating the carrying coststhat would have otherwise been incurred had the leases not been in place, wewill include such items as real estate taxes, insurance and other operatingexpenses as well as lost rental revenue during the expected lease-up periodbased on then current market conditions. The estimates of the fair value oftenant relationships will also include costs to execute similar leasesincluding leasing commissions, legal and tenant improvements as well as anestimate of the likelihood of renewal as determined by our advisor on atenant-by-tenant basis.

 

Wewill amortize the value of in-place leases and in-place tenant improvementsover the initial term of the respective leases. The value of tenantrelationship intangibles will be amortized over the initial term and anyanticipated renewal periods, but in no event exceeding the remainingdepreciable life of the building. If a tenant terminates its lease prior toexpiration of the initial terms, the unamortized portion of the in-place leasevalue and tenant relationship intangibles will be charged to expense.

 

Inallocating the purchase price of each of our properties, our advisor will makeassumptions and use various estimates, including, but not limited to, theestimated useful lives of the assets, the cost of replacing certain assets,discount rates used to determine present values, market rental rates per squarefoot and the period required to lease the property up to its occupancy atacquisition if it were vacant. Many of these estimates will be obtained fromindependent third party appraisals. However, our advisor will be responsiblefor the source and use of these estimates. A change in these estimates andassumptions could result in the various categories of our real estate assets orrelated intangibles being overstated or understated which could result in anoverstatement or understatement of depreciation or amortization expense. Thesevariances could be material to our results of operations and financialcondition.

 

**Results of Operations**

** **

Forthe year ended 2008, we are reporting net income of $2.6 million, compared to anet loss of $0.2 million in 2007, primarily due to our 2008 results benefitingfrom additional investments in 2008 while our 2007 results included investmentsplaced during 2007. These investments were funded from cash previously raisedfrom our 2007 Private Offering and new proceeds from our 2008 Initial PublicOffering.  These operating benefits werepartially offset by higher asset management fees and general and administrativeexpenses due to our larger portfolio.

 

For2008 and 2007, our primary investments have been mezzanine and mortgagedevelopment loans in PropertyEntities, substantially all BHMP CO-JVs.  As of December 31,2008, we and our BHMPCO-JVs invested in nine properties under development and one operatingmultifamily community. As of December 31, 2007, we and our BHMP CO-JVs hadinvestments in seven properties under development and one operating apartmentcommunity. We began acquiring interests in real estate in April 2007.

 

In June 2007,PGGM purchased 45% of the equity in two of our wholly-owned subsidiaries; oneowning the Grand Reserve Senior Mezzanine Loan commitment and the other owningThe Eclipse commitments. We entered into these commitments in April 2007and had partially funded it as of June 2007.  The purchase resulted in our deconsolidatingthe investment and accounting for them on the equity method.  We recorded the transaction at the investmentcarry over basis and accordingly no gain or loss was recognized.

 

Accordingly,our results for 2008 are not directly comparable to 2007 or 2006, where our results of operations for eachperiod presented reflect significant increases in all categories. This willlikely by the case until we substantially invest the proceeds from the InitialPublic Offering.

 

***Fiscal year ended December 31, 2008 as comparedto fiscal year ended December 31, 2007***

 

*Asset Management Fee and otherfees.*Assetmanagement fees for the years ended December 31, 2008 and 2007 wereapproximately $0.9 million and $0.2 million, respectively. These fees arebased on the amount of our real estate investment and the time period inplace.  Accordingly, the increase is dueto the timing and funded amounts of our investments for 2008 compared to 2007.We expect continued increases in these fees as a result of owning and acquiringadditional real estate investments.

 

*InterestExpense*. Interestexpense for the years ended December 31, 2008 and 2007 was approximately$0 and $0.6 million, respectively, and was comprised of interest costs due forborrowings under the credit facility with Behringer Harvard OperatingPartnership I LP. We entered into this credit facility in April 2007 andborrowed a total of $36 million during 2007. This credit facility wasterminated on December 20, 2007 and all amounts were paid in full. In theordinary course of our business, we may enter into borrowing arrangements inthe future, which would create additional interest expenses; however, as of December 31,2008, there is no credit facility or company borrowings in place.

 

 

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*Generaland Administrative Expense*. General and administrative expenses for the yearsended December 31, 2008 and 2007 were approximately $1.6 million and $0.4million respectively, and included corporate general and administrativeexpenses incurred and reimbursable, as well as compensation of our board ofdirectors, auditing and tax fees, and legal fees. Significant increases in 2008included new corporate legal and accounting allocations from our Advisor for$0.5 million, increased audit fees for $0.3 million and directors and officersinsurance expenses of $0.2 million related to our Initial Public Offering.  We expect further increases as a result ofowning and acquiring additional joint venture interests and other real estateinvestments.

 

*OrganizationExpense*.Organization expense for the years ended December 31, 2008 and 2007 wasapproximately $9,500 and $50,000, respectively. In connection with the September 2, 2008 amendment to our AdvisoryManagement Agreement, we recorded the remaining unreimbursed organizationcosts. We do not expect any significant additional organization expenses in thefuture.  In 2007, related to our PrivateOffering, we had an obligation to pay a fixed fee of 1.5% of our gross privateoffering proceeds to our advisor, which covered organization and offeringexpenses incurred on our behalf. We recorded the pro-rated share oforganization expenses embedded in the fee as an expense. The private offeringwas terminated on December 28, 2007.

 

*InterestIncome.*Interestincome for the years ended December 31, 2008 and 2007 was approximately$0.9 million and $0.3 million, respectively, and primarily included interestearned on our bank deposits with funds from our Private Offering, whichterminated on December 28, 2007, and to a lesser extent our Initial PublicOffering in 2008. During 2008, we had a higher average balance as compared to2007, which was only partially offset by lower interest rates in 2008. Ouraverage interest rate as of December 31, 2008 and 2007 was 1.75% and2.15%, respectively.  Our interest incomeon bank deposits is a function of the timing and magnitude of our acquisitionactivity, which we expect to increase. As of December 31, 2008, interest income on direct, wholly ownedinvestments, primarily mezzanine loans, has not been significant.

 

*Equity inEarnings of Investments in Unconsolidated Real Estate Joint Ventures.*Equity in earnings of joint ventureinvestments for the years ended December 31, 2008 and 2007 wasapproximately $4.3 million and $0.8 million, respectively, and included ourshare in earnings from our unconsolidated joint venture investments. These netearnings increased due to the increased funding of investments and theacquisition of two joint venture investments. During 2008, we made $35.4million of new investments in BHMP CO-JVs. Of this amount,approximately $27.0 million related to loan investments in Property Entities andapproximately $8.4 million related to equity investments in Property Entities. A breakdownof our approximate equity earnings by type of underlying investments for theyears ended December 31, 2008 and 2007 are as follows (amounts inmillions):

 

| ** **         | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------|------------|----------|------------|----------|------------|
| Loan investments   |       | $        | 5.4        |     | $          | 1.2 |   |
| Equity investments |       | (1.1     | )          | (0.4     | )          |
| Total              |       | $        | 4.3        |     | $          | 0.8 |   |

 

Earningsfrom underlying loan investments increased due to investments in Property Entities for the GrandReserve, Fairfield at Baileys, and Fairfield at Cameron House. Our weighted-averageinterest rate on the underlying loan investments was approximately 10.1% in2008 and 9.7% in 2007. Equity in earnings from underlying equity investmentswas a loss in 2008 and related to one Property Entity that was an operatingproperty, The Reserve at Johns Creek. A loss was recognized due to interestexpense and depreciation exceeding net operating income for the project.

 

Wewould expect our equity in earnings related to underlying loan investments toincrease until the PropertyEntities have completed the project development, when, if the mezzanine loansare converted to equity investments, our equity investments will increase.However, we anticipate equity investments to report less earnings due todepreciation and interest expense exceeding net operating income for the Property Entity during thefirst years of operations. Accordingly, as the proportion of our equity investmentsincreases, we expect our net earnings in unconsolidated real estate jointventures to decline for an interim period and may even reflect a net loss. Evenif underlying loan investments are not converted to equity interests, ourearnings in unconsolidated real estate joint ventures may decline due torestrictions on recording interest income, either due to deferral of interestor consolidation. See “Critical Accounting Policies and Estimates” discussedabove.

 

Wereview our investments for impairments in accordance with our accounting policies.For the years ended 2008 and 2007 we have not recorded any impairment losses.However, this conclusion could change in future periods based in changes incertain factors, primarily:

 

 

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·                  Status ofguarantor’s financial position. If market prices continue to decline, parties thatprovided us guarantees may not have the assets or net worth as previouslyreported. If our analysis was dependent on a guarantor’s ability to perform,our judgments could change. Each of our development Property Entities depend upon the guarantor’sfinancial position.

 

·                  Projectspecific performance. All of our loan and equity investments in Property Entities are dependenton the level 3 assumptions (management derived market assumptions) included inour SFAS No. 157 fair value determinations. These assumptions particularlyinclude projected rents, occupancy and terminal cap rates. If general andspecific market conditions continue to deteriorate, changes in these assumptionswill affect our fair value determinations.

 

·                  Workouts. Instructuring the BHMPCO-JVs investment in PropertyEntities, some of our investments contain provisions that provide us withpriority or preferential returns. If the underlying projects are affected bymarket conditions, which may not directly affect our returns, but do affect theother partners, the other partners may request workouts or other changes to thedeal structures. Although we may not be contractually forced to accept thesechanges, there could be other factors that would cause us to accept certainmodifications or enter into workouts. Based on the consequences of theseschanges, our assessment of our investment could change.

 

Wereview for these and similar events in the preparation of our consolidatedfinancial statements.

 

***Fiscal year ended December 31, 2007 as compared to the periodfrom August 4, 2006 (date of inception) through December 31, 2006***

 

*AssetManagement Fees.*Asset management fees for the year ended December 31, 2007 wereapproximately $0.2 million. There were no asset management fees for the yearended December 31, 2006.  Theincrease is due to acquiring joint venture interests in eight properties during2007.  During the period ended December 31,2006, we did not own or acquire any joint venture interests or real estate.

 

*Interest Expense*. Interest expense for the year ended December 31,2007 was approximately $0.6 million. There was no interest expense for the period ended December 31,2006. The increase is due to interest costs due for borrowings under the creditfacility with Behringer Harvard Operating Partnership I LP.  We entered into this credit facility in April 2007and borrowed a total of $36.0 million during the year ending December 31,2007.  This credit facility wasterminated on December 20, 2007; all amounts were paid in full.

 

*General and Administrative Expenses*. General and administrativeexpenses for the years ended December 31, 2007 and 2006 were approximately$0.4 million and $14,000, respectively, and included corporate general andadministrative expenses, as well as compensation of our board of directors,auditing and tax fees, and legal fees. The increased amount in 2007 was due to increased corporate activity.

 

*Organization Expense.* Organization expense forthe year ended December 31, 2007 was approximately $50,000.  There was no organization expense for theperiod ended December 31, 2006.  Wehad an obligation to pay a fixed fee of 1.5% of our gross private offeringproceeds to our advisor, which covered organization and offering expensesincurred on our behalf. We have recorded the pro-rated share of organizationexpenses embedded in the fee as an expense. The private offering was terminatedon December 28, 2007.

 

*InterestIncome.*  Interest income for the year ended December 31,2007 was approximately $0.3 million. There was no interest revenue for the period ended December 31,2006.  Interest income primarily includedinterest earned on our funds on deposit with banks that resulted from thereceipt of proceeds from our Private Offering, which terminated on December 28,2007, as well as interest earned on the Grand Reserve loans during the periodthey were accounted for as a loan.

 

***Equity in Earnings of Investments in UnconsolidatedReal Estate Joint Ventures.***  Equity in earningsof joint venture investments for the year ended December 31, 2007 wasapproximately $0.8 million, and included our share in earnings fromour unconsolidated joint venture investments. There was no equity in earnings of joint venture investments for theperiod ended December 31, 2006. Equity in earnings generated from thejoint venture investments were due primarily from interest and fees accrued onloans made to Property Entities. Equity in earnings was reduced, in part, from a joint venture investmentin an operating property that incurred a net loss after deducting interest,depreciation and amortization.

** **

 

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**CashFlow Analysis**

 

Cashand cash equivalents decreased in 2008 by approximately $29.6 million primarilydue to our Private Offering terminating in December 2007 and our InitialPublic Offering not commencing until September 2008. Accordingly, welargely used our cash resources carried over from our 2007 Private Offering tofund our $36.6 million new investment acquisitions and fundings. During 2007 weraised $127.3 million from our Private Offering and invested $61.3 million innew investment acquisitions and fundings. There was no significant cash flowfor our short period of operations in 2006. Should we fund additional real estate investments, we may reduce theamount of available cash and cash equivalents in 2009.

 

*Yearended December 31, 2008 as compared to the year ended December 31,2007*

 

As of December 31,2008, we made BHMP CO-JV investments in nine properties under development andone joint venture interest in an operating multifamily community. We began toreceive proceeds from our Private Offering in April 2007, which terminatedon December 28, 2007.We began acquiring interests in real estate in April 2007. As a result, our cash flows for the year ended December 31, 2008 reflectsignificant differences from the cash flows for the year ended December 31,2007.

 

Cash flows provided byoperating activities for the year ended December 31, 2008 were $2.4million compared to $0.2 million in 2007. The increase was due to additional BHMP CO-JV investments in 2008, whichwere proportionally outstanding longer than compared to 2007. In 2008, wereceived operating distributions from BHMP CO-JVs of $4.3 million comparedto $0.8 million in 2007. This was partially offset by additional assetmanagement fees and general and administrative costs related to additional BHMP CO-JVs.

 

Cash flows used ininvesting activities for the year ended December 31, 2008 were $35.4million compared to $60.8 million in 2007. Our primary investing activity isinvestment acquisitions or fundings, which are largely dependent on our capitalraises. During 2007, we were investing proceeds from our Private Offering,which expired in December 2007. These proceeds provided the funding sourcefor our 2007 acquisitions with funds not spent carrying over to 2008. We didnot commence our Initial Public Offering until September 2008; therefore,new proceeds were not available earlier in the year. Consequently, investmentsin 2008 were down compared to 2007. As our Initial Public Offering continuesinto 2009, we would expect our new acquisitions to increase. Also providing asource of investing cash flow in 2008 were BHMP CO-JV distributions in 2008,which were in excess of the equity earnings in unconsolidated joint ventures.These are presented as an investing activity and not cash flows from operatingactivity.

 

Cashflow from financing activities for the year ended December 31, 2008 were$3.4 million compared to $113.9 million in 2007.  Financing activities decreased from 2007 to2008 due to our Private Offering continuing through December 2007 and ourInitial Public Offering not beginning until September 2008. As our InitialPublic Offering continues into 2009, we would expect proceeds from the sale ofcommon stock to increase. Distributions in 2008 were higher than 2007 due tohigher distribution rates and increased common stock outstanding. As our boardof directors has increased the distribution rate from an effective annual rateof 6.5% to 7.0% in March 2009, we would expect the amount of distributionsto increase significantly. As discussed above, we expect to fund increaseddistributions from the increased amount of investments and to the extentnecessary from the proceeds of our Initial Public Offering. Offering costs paidwere significantly higher in 2007 compared to 2008 because offering costs paidare a factor of our common stock sales. Also, in 2007 we received financingcash flows from our credit facility. These amounts were repaid in December 2007from proceeds of our capital raises.

 

The Company and BehringerHarvard Multifamily Advisors I intends to amend the Advisory ManagementAgreement, effective April 1, 2009. Under the amended Advisory Management Agreement, we will reimburse ouradvisor for all Initial Public Offering organization and offering costs as wellas all Private Offering organization and offering costs previously advanced byour advisor to the extent not previously reimbursed by us.  Our reimbursements will no longer be subjectto a cap at the time of reimbursement, but will be reimbursed by our advisor atthe end of the Initial Public Offering to the extent such amounts incurred byus exceed 1.5% of our gross Public Offering. Accordingly, we expect payments of offerings costs to increase in 2009.

 

**In accordance with the Statement of Policy Regarding Real EstateInvestment Trusts published by the North American Securities AdministratorsAssociation, also known as the NASAA REIT Guidelines, our charter requires thatwe monitor our expenses on a trailing twelve month basis.  Our charterdefines the following terms and requires that our Total Operating Expenses (“TOE”)are deemed to be excessive if at the end of any quarter they exceed for theprior trailing twelve month period the greater of 2% of our Average InvestedAssets (“AIA”) or 25% of our Net Income (“NI”).  For the trailing twelvemonths ended December 31, 2008, TOE of approximately $2.5 million exceeded2% of our AIA (which was approximately $1.9 million) by approximately $0.6million.  Our board of directors, including all of our independentdirectors, have reviewed this analysis and unanimously determined the excess to**

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**be justifiedconsidering the fact that we were in the registration for our initial publicoffering of common stock from December 31, 2007 through September 2,2008 and our rate of investments thereafter caused the expenses incurred as aresult of being a public company for audit and legal services, director andofficer liability insurance and fees for board of directors members inconnection with service on the board of directors and its committees to be disproportionateto the Company’s AIA and NI.**

** **

**Liquidityand Capital Resources**

** **

***General***

** **

Ourprincipal demands for funds will continue to be for making investments, on ourown or through joint ventures, in existing core multifamily communities,multifamily communities in various stages of development, mortgage, bridge ormezzanine loans and other investments, for the payment of operating expensesand distributions, and for the payment of interest on our outstandingindebtedness, if any.  Generally, cashneeds for items other than our investments are expected to be met fromoperations, and cash needs for our investments are expected to be met from thenet proceeds from our Initial Public Offering and other offerings of oursecurities as well as mortgages secured by our real estate investments.  However, there may be a delay between thesale of our shares, making investments in real estate and loans and the receiptof income from such investments, which could result in a delay in the benefitsto our stockholders of returns generated from our operations.  During this period, we may decide totemporarily invest any uninvested proceeds in investments that could lowerreturns than our targeted investments in real estate-related assets.  These lower returns may affect our ability tomake distributions or the amount actually disbursed.

 

Ifdebt financing is not available on terms and conditions we find acceptable, wemay not be able to obtain financing for investments.  Recently, domesticand international financial markets have experienced unusual volatility anduncertainty.  If this volatility and uncertainty persists, our ability toborrow monies to finance the purchase of, or other activities related to, realestate assets will be significantly impacted.  If we are unable to borrowmonies on terms and conditions that we find acceptable, we likely will have toreduce the number of properties we can purchase, and the return on theproperties we do purchase likely will be lower.  In addition, we may findit difficult, costly or impossible to refinance indebtedness that ismaturing.  If interest rates are higher when the properties arerefinanced, we may not be able to finance the properties and our income couldbe reduced. In addition, if we pay fees to lock in a favorable interest rate,falling interest rates or other factors could require us to forfeit these fees.

 

***Short Term Liquidity and Credit Facility***

 

Ourprimary indicator of short-term liquidity is our cash and cash equivalents. Asof December 31, 2008, our cash and cash equivalent balance was $23.8million, compared to $53.4 million as of December 31, 2007. On a dailybasis cash is affected by our net raise from our Initial Public Offering anddistributions from our investments, primarily investments in unconsolidatedjoint ventures. Since September 2, 2008, we sold approximately 1.1 millionshares of our common stock with gross proceeds of approximately $10.9million.  Although there can be noassurance, we expect our common stock sales to increase in 2009. We also expectour operating cash flows to increase as additional investments are added to ourportfolio.

 

ThroughDecember 20, 2007, we had the ability to borrow funds and use guarantees and letters ofcredit under a credit agreement with Behringer Harvard Operating Partnership ILP (the “Credit Facility”), and used borrowings under the Credit Facility tofund certain of our investments.  Wepledged substantially all of the assets of Behringer Harvard Multifamily OP Iand subsidiaries as collateral for the Credit Facility.  Interest was set at rates between 7.5% and13% depending on defined leverage ratios. In addition, 

 

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commitment, facility andother fees were approximately $0.3 million. The Credit Facility had an aggregate commitment of $100 million, whichcould have been increased to a maximum of $400 million. This Credit Facilitywas terminated on December 20, 2007. As of December 31, 2008, we have not replaced the Credit Facilityand we currently rely on proceeds from our Initial Public Offering andoperations to meet our liquidity requirements. As the amount of our real estate investments grow, we would expect our expensesfor asset management and general and administrative expenses to also increase.These expenses represent our primary short-term cash requirements.  Accordingly, as we evaluate the timing andmagnitude of our offering proceeds, we may eventually decide to enter into anew credit facility with financial institutions to facilitate our cashmanagement for these recurring expenses. 

 

***Long-Term Liquidity, Acquisition and******Property Entity******Debt Financing***

 

Ourprimary source for acquisitions is the funds from our Initial Public Offering.This is an offering of up to $2 billion in gross proceeds exclusive of ourDRIP. Total offering expenses are expected to be approximately 11% of the grossproceeds, netting approximately 89% that is generally available for newinvestment, before funding of distributions and other operations as discussedabove. Through December 31, 2008, we have raised gross proceeds ofapproximately $10.9 million and paid related offering costs of approximately$1.4 million.

 

Weintend to supplement these and future Initial Public Offering proceeds withcapital from our Co-Investment program. As of December 31, 2008, our onlyCo-Investment arrangements are with PGGM and the BHMP CO-JVs. PGGM has committed toinvest up to $200 million in the BHMP CO-JVs, but may increase theircommitment to $300 million at any time prior to November 9, 2011.Generally PGGM and its general partner will own 45% of each BHMP CO-JV and we will own theremaining 55%.

 

ThroughDecember 31, 2008, we and PGGM have contributed approximately $92.6million and $73.5 million, respectively, to the BHMP CO-JVs for acquisition ofinvestments, primarily mezzanine construction loans. PGGM’s contribution as of December 31,2008, is their funding towards a remaining contractual commitment ofapproximately $11.8 million. For us to realize the commitment, we wouldgenerally be expected to contribute approximately $12.7 million. We anticipateraising this capital from our continuing proceeds of our Initial PublicOffering. There is no assurance that we will be able to raise sufficientcapital to meet these requirements and consequently, all or portions of thePGGM commitment may not be available to us.

 

Foreach equity investment made by the BHMP CO-JV in a Property Entity, we will alsoevaluate the use of existing or new property debt. Based on current marketconditions and our investment and borrowing policies, we would expect toutilize PropertyEntity debt financing for 50 to 75% of acquisition or constructionrequirements. This PropertyEntity debt is not an obligation or contingency of the BHMP CO-JVs or of us but does allow usto increase our access to capital. As of December 31, 2008, the Property Entities****hadapproximately $132.4 million of borrowings (exclusive of BHMP CO-JV debt),which are summarized as follows (amounts in millions):

 
| ** **                                              | ** ** | **Amount** | ** ** | **Interest Rates** | ** **               | **Maturity Dates** | ** **                                   |
|---------------------------------------------------------|------------|------------|------------|--------------------|--------------------------|--------------------|----------------------------------------------|
| Construction financing - variable interest rates        |       | $          | 50.4       |               | LIBOR+  211bps (average) |               | October 2011through  December 2012 |   |
| Construction financing - fixed or capped interest rates |       | $          | 59.0       |               | 6.35%  to 7.0%           |               | April 2010  through November 2010  |   |
| Permanent mortgages                                     |       | $          | 23.0       |               | 6.46%                    |               | March 2013                              |   |
| Total                                                   |       | $          | 132.4      |               |                     |               |                                         |   |

 

Wewould expect that the PropertyEntities would refinance these borrowings prior to their respective maturitydate. There is no assurance that at those times market terms would allowfinancings at comparable interest rates or leverage levels. We would anticipatethat for some of these properties lower leverage levels may be necessary, whichmay require additional contributions from the BHMP CO-JVs. To the best of ourknowledge all of the PropertyEntities are compliant with each of their borrowings. See the followingsections below on Off-Balance Sheet Arrangements and Contractual Obligationsfor further discussion of our Project Commitments.

 

Otherpotential future sources of capital may include proceeds from secure orunsecured financings, arrangements with other Co-Investment partners, proceedsfrom the sale of our investments, if and when they are sold, and undistributedcash flow from operations.

 

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**Distributions**

 

Distributions are authorized at the discretion of ourboard of directors based on its analysis of our performance over the****previous period, expectations ofperformance for future periods and other factors, including, but not limited,to our earnings, cash flow,****anticipatedcash flow, capital expenditure requirement, general financial condition orother factors that our board deems relevant. The board’s discretion will be influenced, in substantial part, by itsobligation to cause us to comply with the REIT requirements.  In light of the pervasive and fundamentaldisruptions in****the globalfinancial and real estate markets, we cannot provide assurance that we will beable to achieve expected cash flows necessary****to continue to pay distributions as they may be established ormaintain distributions at any particular level, or at all.  If the current economic conditions continue,our board could determine to reduce our current distribution rate or ceasepaying distributions at all in****orderto conserve cash.  

 

Until proceeds from our offerings are fully investedand generating sufficient operating cash flow from operations to fully fund thepayment of distributions to stockholders, we have and will continue to pay someor all of our distributions from sources other than operating cash flow.  We may generate cash to pay distributionsfrom financing activities, components of which may include proceeds from ourofferings and borrowings (including borrowings secured by our assets) inanticipation of future operating cash flow. In addition, from time to time, our advisor and its affiliates may agreeto waive or defer all,****or aportion, of the acquisition, asset management or other fees or other incentivesdue to them, pay general administrative expenses or otherwise supplementinvestor returns in order to increase the amount of cash****available to make distributions to ourstockholders.

 

The distributions declared and paid during the years ended December 31,2008 and 2007 exceeded FFO for the years ended December 31, 2008 and 2007by approximately $2.7 million and $0.6 million, respectively.  Accordingly, for the years ended December 31,2008 and 2007, approximately 58% and 32% of the distributions were funded fromFFO.  Cash amounts distributed tostockholders were funded primarily from our offerings.

 

Distributions as of December 31, 2008 and December 31,2007 were as follows:

 

| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2008**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** | **Per Share** | ** ** |
| Fourth Quarter |       | $                 | 2,394,437  |   | $ | 1,996,413 |   | 0.164 |   |
| Third Quarter  |       | 1,330,495         |       | 1,330,539 |   | 0.093 |   |
| Second Quarter |       | 1,330,847         |       | 1,330,802 |   | 0.092 |   |
| First Quarter  |       | 1,301,225         |       | 1,279,428 |   | 0.092 |   |
|           |       | $                 | 6,357,004  |   | $ | 5,937,182 |   | $ | 0.441 |   |
|                |            |                   |            |  |  |  |  |  |  |  |

 

| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2007**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** | **Per Share** | ** ** |
| Fourth Quarter |       | $                 | 730,682    |   | $ | 396,450 |   | 0.092 |   |
| Third Quarter  |       | 196,590           |       | 118,764 |   | 0.091 |   |
| Second Quarter |       | —            |       | — |   | — |   |
| First Quarter  |       | —            |       | — |   | — |   |
|           |       | $                 | 927,272    |   | $ | 515,214 |   | $ | 0.183 |   |
|                |            |                   |            |  |  |  |  |  |  |  |

 

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Over the long term, we expect that a greater percentage ofour distributions will be paid from cash flow from investments and operations(except with respect to distributions related to sales of our assets). However, operating performance cannot be accurately predicted due to numerousfactors, including our ability to raise and invest capital at favorable yields,the financial performance of our investments in the current real estateenvironment, the types and mix of investments in our portfolio and theaccounting treatment of our investments in accordance with our accountingpolicies.  In addition, effective on March 2009, our board ofdirectors increased our distribution rate for an annual effective rate of 6.5%to 7.0%. As a result, future distributions declared and paid may continue toexceed FFO.  FFO is a non-GAAP financialmeasure that is widely recognized as a measure of REIT operatingperformance.  See “Funds from Operations”section below for a reconciliation of FFO to our net income.

 

**Off-BalanceSheet Arrangements**

 

Our only BHMP CO-JV borrowing as of December 31,2008 that meets the requirement of a consolidated BHMP CO-JV borrowingis the debt at The Reserve at Johns Creek. The Reserve at Johns Creek is an operating apartment community wholly ownedby a single-purpose limited liability company (the “The Reserve at Johns CreekProperty Entity”). The Reserve at Johns Creek Property Entity, including itsoperating receipts lock-box account, serves as collateral for an interest-onlybank loan with a principal balance of $23 million from an unaffiliated lender(the “Bank Loan”). The Bank Loan of $23 million was entered into during August 2007,matures in March 2013, and bears interest at a rate of 6.461%. The lenderhas no recourse to the BHMP CO-JV or us, only to The Reserve at Johns CreekProperty Entity. Breaching the Bank Loan’s restrictions on encumbrances, sale,transfer, or refinancing of the property could constitute an event of defaultand increase the interest rate by 5%; uncured events of default can acceleratethe loan’s maturity date.  No events ofdefault have occurred. One of our BHMP CO-JVs owns an80 percent equity interest in The Reserve at Johns Creek Property Entity, withthe remaining 20% owned by the unaffiliated previous owner.

 

The investments in real estate and loans owned by us andour BHMP CO-JVswere entered into with unaffiliated developers and previous owners who owninterests in the underlying real estate and development projects.  These unaffiliated parties and theiraffiliates have provided us with collateral interests in the properties,development projects, improvements, project owning entities and/or financialand performance guarantees of the developer and certain of its affiliates.  These Project Entities have also obtainedadditional financing that is senior to our investments, both our loans andequity investments. The senior loans are collateralized by the development andimprovements and further secured with repayment and completion guarantees fromthe unaffiliated developer or their affiliates. We have no contractual obligation on these senior level financingsobtained by the unaffiliated developer, which includes land loans, constructionloans, and ground leases.  These seniorlevel financings have rates and terms that are different from our investmentrates and terms.  In addition, financialinstitutions behind these loans have independent unfunded obligations under theloan terms.  See discussion above andNote 4 to our consolidated financial statements for information regardingborrowings for unconsolidated Property Entities.

 

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We have no otheroff-balance sheet arrangements that are reasonably likely to have a current orfuture material effect on our financial condition, changes in financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources.

 

**ContractualObligations**

 

In the ordinary course ofbusiness, we and/or Co-Investment Ventures contract with unaffiliatedcommercial property development companies and provide equity and/or loans for ourProject Commitments.  We generally fund an initial amount under ourProject Commitments at contract inception and fund additional amounts asconstruction progresses, typically spanning one to three years.  As of December 31, 2008, all of ourCo-Investment Ventures have been BHMP CO-JVs.

 

As of December 31,2008, the BHMP CO-JVs held contracts for equity investments and/or loans with atotal commitment value of approximately $173.0 million and the BHMP CO-JVs havecurrently funded approximately $162.0 million. The BHMP CO-JVs will require additional capital from us and BehringerHarvard Master Partnership I in order to fund the remaining commitments of$11.0 million.  The BHMP CO-JVs maybecome obligated under contingent sell options to three Property Entities asdescribed below. In addition, we hold the Grand Reserve Junior Mezzanine Loanwith a total commitment value of approximately $2.2 million and have currentlyfunded approximately $1,000.

 

TheBHMP CO-JVs’ unfunded commitments for project construction will be generallyfunded as actual real estate project construction progresses. Estimated futurepayments and timing are as follows, as of December 31, 2008 (amounts inmillions):

 
| ** ** | ** ** | **The BHMP CO-JVs’  total unfunded  commitments for project construction** | ** ** | **The BHMP CO-JVs’  other contingent  obligations under  sell options** | ** ** | **Our estimated  portion of the  BHMP CO-JVs’ unfunded  commitments and  contingent options** | ** ** | **Our unfunded  commitment on  our mortgage  loan** | ** ** | **Our estimated  total** | ** ** |
|------------|------------|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------|------------|
| 2009       |       | $                                                                                         | 11.0       |                                                                                             | $          | —                                                                                                                           |       | $                                                                  | 6.0        |                          | $          | 2.2 |   | $ | 8.2 |   |
| 2010       |       | —                                                                                    |       | 55.8                                                                                             |       | 30.7                                                                                                                             |       | —                                                             |       | 30.7                          |       |
| Total      |       | $                                                                                         | 11.0       |                                                                                             | $          | 55.8                                                                                                                             |       | $                                                                  | 36.7       |                          | $          | 2.2 |   | $ | 38.9 |   |

 

Thecontingent obligations under sell options relate to Fairfield at BaileysCrossing, Fairfield at Cameron House and the Grand Reserve ProjectEntities.  The options are generallyexercisable after completion of the development and for a period of three yearsthereafter.  The option price is set byagreement and is either based on the fair value of the project at exercise orthe cost of the project as defined in the respective agreement.  The information in the table above representsour current estimates and actual amounts may be more or less.  As of December 31, 2008, no sell optionsare exercisable.

 

OnSeptember 2, 2008, our board of directors authorized a share redemptionprogram for investors who hold their shares for more than one year.  Thepurchase price for redeemed shares is set forth in the prospectus for ourInitial Public Offering of common stock, as supplemented from time totime.  Our board of directors reserves the right in its sole discretion atany time, and from time to time, to (1) waive the one-year holding periodin the event of the death, disability, need for long-term care, or otherexigent circumstances such as bankruptcy, a mandatory distribution requirementunder a stockholder’s IRA or with respect to shares purchased under or throughour DRIP or automatic purchase plan, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program.  Under the terms of theplan, during any calendar year, we will not redeem in excess of 5% of theweighted average number of shares outstanding during the twelve-monthcalendar-based period immediately prior to the date of redemption.  Inaddition, our board of directors will determine whether we have sufficient cashfrom operations to repurchase shares, and such purchases will generally belimited to proceeds of our DRIP plus 1% of operating cash flow for the previousfiscal year.  We redeemed 16,667 shares of common stock for $140,000during the year ended December 31, 2008.

 

**Fundsfrom Operations**

 

Funds fromoperations (“FFO”) is a non-GAAP financial measure that is widely recognized asa measure of REIT operating performance. We use FFO as defined by the National Association of Real EstateInvestment Trusts to be net income (loss), computed in accordance with GAAPexcluding 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.  We believe that FFO ishelpful to our investors 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 to year, reflects the impact on operations from trends inoccupancy rates, rental rates, operating costs, development activities, generaland administrative expenses, and interest costs, which is not immediatelyapparent from net income.  Historicalcost accounting for real estate assets in accordance with GAAP implicitlyassumes that the value of real estate diminishes predictably over time.  Since real estate values have historicallyrisen or fallen with market conditions, many industry investors and analystshave considered the presentation of operating results for real estate companiesthat use historical cost accounting alone to be insufficient.  As a result, our management believes that theuse of FFO, together with the required GAAP presentations, provide a more completeunderstanding of our performance. Factors that impact FFO include start-up costs, fixed costs, delay inbuying assets, lower yields on 

 

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cash held in accountspending investment, income from portfolio properties and other portfolioassets, interest rates on acquisition financing and operating expenses.  In addition, FFO will be affected by thetypes of investments in our and/or our Co-Investment Ventures’ portfolio, whichinclude but are not limited to equity and mezzanine, mortgage and bridge loaninvestments in existing operating properties and properties in various stagesof development, mezzanine, mortgage and bridge loans and the accountingtreatment of the investments in accordance with our accounting policies.  FFO should not be considered as analternative to net income (loss), as an indication of our liquidity, nor is itindicative of funds available to fund our cash needs, including our ability tomake distributions.

 

Our calculationsof FFO are presented below:

 
| ** **                                 | ** ** | **Year Ended  December 31,** | ** ** |
|--------------------------------------------|------------|-----------------------------------|------------|
| ** **                                 | ** ** | **2008**                          | ** ** | **2007** | ** ** |
| Net income (loss)                          |       | $                                 | 2,630,263  |   | $ | (207,107 | ) |
|                                       |       |                              |       |   |   |
| Real Estate Depreciation  and Amortization |       | 1,050,649                         |       | 508,263 |   |
|                                       |       |                              |       |   |   |
| Funds from Operations  (FFO)               |       | $                                 | 3,680,912  |   | $ | 301,156 |   |
|                                       |       |                              |       |   |   |
| GAAP weighted average common  shares       |       | 14,351,399                        |       | 2,730,621 |   |
|                                       |       |                              |       |   |   |
| FFO per share                              |       | $                                 | 0.26       |   | $ | 0.11 |   |

 

·                  The real estate depreciation and amortization amountincludes our consolidated real estate depreciation and amortization and ourshare of Co-Investment depreciation and amortization which is included inearnings of unconsolidated real estate joint venture investments.  As of December 31, 2008 and 2007,respectively, two and one of our BHMP CO-JVs recognize depreciation andamortization.

 

·                  We had limited operations in 2006 with no depreciationor amortization incurred.  FFO for 2006was not significant.

 

*Non-cash Items Included in Net Income (Loss)*

 

Our Co-InvestmentVentures recognize certain non-cash items as income or expense which wereceived our share in equity in earnings in unconsolidated real estate jointventures. Provided below is additional information related to those items thatare included in our net income (loss) above, which may be helpful in assessingour operating results.

 

·                  Accrued interest income on loans withdeferred interest payment terms was approximately $278,000 and $274,000 foryears ended December 31, 2008 and 2007, respectively;

 

·                  Amortization of intangible lease assetswas approximately $308,000 and $0 for the years ended December 31, 2008and 2007, respectively;

 

·                  Amortized loan fee income wasapproximately $308,000 and $55,000 for the years ended December 31, 2008and 2007, respectively;

 

·                  Amortization of deferred financing andother costs was approximately $102,000 and $1,000 for the years ended December 31,2008 and 2007, respectively.

 

In addition, FFOmay be used to fund all or a portion of certain capitalizable items that areexcluded from FFO, such as capital expenditures and payments of principal onany future debt, each of which may impact the amount of cash available fordistribution to our stockholders.

** **

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** **

**Recently Announced AccountingPronouncements**

** **

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  We adopted the provisionsof  SFAS No. 157 effective January 1, 2008, and did not have amaterial effect on our consolidated results of operations or financialposition.

 

InFebruary 2008, the FASB staff issued Staff Position No. 157-2 “EffectiveDate of FASB Statement No. 157” (“FSP SFAS 157-2”).  FSP SFAS 157-2 delayed the effective date ofSFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except foritems that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually).  The provisions of FSP SFAS 157-2 areeffective for our fiscal year beginning January 1, 2009.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an Amendment of FASBStatement No. 115.”  The fair valueoption established by SFAS No. 159 permits all entities to choose tomeasure eligible items at fair value at specified election dates.  A business entity will report unrealizedgains and losses on items for which the fair value option has been elected inearnings (or another performance indicator if the business entity does notreport earnings) at each subsequent reporting date.  SFAS No. 159 was effective for fiscalyears beginning after November 15, 2007. We have not elected the fair value measurement option for any financialassets or liabilities at the present time.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “Business Combinations.”  This Statement replaces SFAS No. 141 “BusinessCombinations” but retains the fundamental requirement that the acquisitionmethod of accounting, or purchase method, be used for all business combinationsand for an acquirer to be identified for each business combination.  This Statement is broader in scope than thatof Statement 141, which applied only to business combinations in which controlwas obtained by transferring consideration. SFAS No. 141(R) applies the same method of accounting (theacquisition method) to all transactions and other events in which one entityobtains control over one or more other businesses.  This Statement also makes certain othermodifications to Statement 141, including a broader definition of a businessand the requirement that acquisition related costs are expensed asincurred.  This statement applies to ourbusiness combinations occurring beginning January 1, 2009.  The acquisition of a real estate property has beendetermined to meet the definition of a business combination as defined in SFAS No. 141(R);however, investments in unconsolidated joint ventures are not affected.  Therefore, SFAS No. 141(R) will havea material effect on our accounting for future consolidated acquisitions of propertiesas acquisition costs will no longer be capitalized, but will be expensedbeginning January 1, 2009.

 

**Inflation**

** **

The real estate markethas not been affected significantly by inflation in the past several years dueto a relatively low inflation rate.  The majority of our fixed lease termsis less than 18 months and contains protection provisions applicable toreimbursement billings for utilities.

 

**REITTax Election**

** **

Wehave elected to be taxed as a REIT under Sections 856 through 860 of the Code,and have qualified as a REIT since the year ended December 31, 2007. To qualify as a REIT, we must meet a number of organizational and operationalrequirements, including a requirement that we distribute at least 90% of ourREIT taxable income to our stockholders.  As a REIT, we generally will notbe subject to federal income tax at the corporate level.  We are organizedand operate in such a manner as to qualify for taxation as a REIT under theCode, and we intend to continue to operate in such a manner, but no assurancecan be given that we will operate in a manner so as to qualify or remainqualified as a REIT.

 

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

 

Recently, domesticfinancial markets have experienced unusual volatility and uncertainty. Althoughthis condition has   occurred mostvisibly within the “subprime” single-family mortgage lending sector of thecredit market, liquidity has tightened in overall domestic financial markets,including the investment grade debt, mezzanine and equity capital markets.Consequently, there is greater uncertainty regarding our ability to access thecredit market in order to attract financing on reasonable terms. Investment 

 

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returns on our assets andour ability to make acquisitions could be adversely affected by our inabilityto secure financing on reasonable terms, if at all.

 

We are exposed tointerest rate changes as a result of long-term debt used by the PropertyEntities.  Our interest rate risk management objectives are primarily tolimit the impact of interest rate changes on earnings and cash flows and tolower overall borrowing costs. To achieve these objectives, borrowings are doneprimarily at fixed rates or variable rates with the lowest margins availableand in some cases, the ability to convert variable rates to fixed rates. Withregard to variable rate financing, we will assess interest rate cash flow riskby continually identifying and monitoring changes in interest rate exposuresthat may adversely impact expected future cash flows and by evaluating hedgingopportunities.

 

Asof December 31, 2008, we did not have any outstanding debt. Our BHMP CO-JVs had investments in Property Entities with fundedaggregate senior debt (which consists of third party first mortgages andconstruction loans) of approximately $132.4 million and BHMP CO-JV mezzanine and mortgage debtof $74.0 million. Of the third-party Property Entity debt, approximately $82.0million was at fixed rate and $50.4 million was at variable interest rates witha weighted average of LIBOR plus 211 bps. Included in the fixed rate are twoProperty Entity construction loans totaling $59.0 million which are subject tointerest rate hedges which effectively cap the interest rate exposure atinterest rates ranging between 6.35% to 7.0%.

 

Asof December 31, 2008, we did not have any significant notes receivables.Our BHMP CO-JVs had mortgagereceivables from PropertyEntities of approximately $122.5 million with a weighted average coupon of10.1%, all of which were at fixed rates.

 

Asof December 31, 2008 we also had approximately $23.8 million of bankdeposits and money market accounts. During 2008, the interest rates on theseaccounts significantly decreased and as of December 31, 2008 had weightedaverage interest rate of 1.75%. We do not believe interest rates couldsignificantly decrease further; however, if interest rates were to increase, wecould earn a higher return on our cash and cash equivalents.

 

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

 

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

 

Theinformation required by this Item 8 is hereby included in our ConsolidatedFinancial Statements beginning on page F-1 of the Annual Report on Form 10-K.

 

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

 

None.

 

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

 

*Evaluationof Disclosure Controls and Procedures*

 

As required by Rule 13a-15(b) andRule 15d-15(b) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), our management, including our Chief Executive Officer andChief Financial Officer, evaluated, as of December 31, 2008, theeffectiveness of our disclosure controls and procedures as defined in ExchangeAct Rule 13a-15(e) and Rule 15d-15(e).  Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of December 31,2008, to provide reasonable assurance that information required to be disclosedby us in this report is recorded, processed, summarized and reported within thetime periods specified by the rules and forms of the Exchange Act and isaccumulated and communicated to management, including the Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures.

 

We believe,however, that a controls system, no matter how well designed and operated,cannot provide absolute assurance that the objectives of the controls systemare met, and no evaluation of controls can provide absolute assurance that allcontrol issues and instances of fraud or error, if any, within a company havebeen detected.

 

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

 

This Annual Report on Form 10-K does not include a report ofmanagement’s assessment regarding internal control over financial reporting or an attestation report of theCompany’s registered public accounting firm due to a transition period established by rules of theSecurities and Exchange Commission fornewly public companies.

 

*Changesin Internal Control over Financial Reporting*

 

There has been nochange in internal control over financial reporting that occurred during thequarter ended December 31, 2008 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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

 

None.

 

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** **

**PART III**

 

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

 

The informationrequired by this Item will be presented in our definitive proxy statement forthe annual meeting of stockholders to be held on June 23, 2009, which isexpected to be filed with the Securities and Exchange Commission on or about April 20,2009, and is incorporated herein by reference.

 

**Item11.****       ****Executive Compensation**

 

The informationrequired by this Item will be presented in our definitive proxy statement forthe annual meeting of stockholders to be held on June 23, 2009, which isexpected to be filed with the Securities and Exchange Commission on or about April 20,2009, and is incorporated herein by reference.

 

**Item 12.****       ****Security Ownership of CertainBeneficial Owners and Management and Related Stockholder Matters**

 

The informationrequired by this Item will be presented in our definitive proxy statement forthe annual meeting of stockholders to be held on June 23, 2009, which isexpected to be filed with the Securities and Exchange Commission on or about April 20,2009, and is incorporated herein by reference.

 

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

 

The informationrequired by this Item will be presented in our definitive proxy statement forthe annual meeting of stockholders to be held on June 23, 2009, which isexpected be filed with the Securities and Exchange Commission on or about April 20,2009, and is incorporated herein by reference.

 

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

 

The informationrequired by this Item will be presented in our definitive proxy statement forthe annual meeting of stockholders to be held on June 23, 2009, which isexpected to be filed with the Securities and Exchange Commission on or about April 20,2009, and is incorporated herein by reference.

 

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**PART IV**

 

**Item 15.****       ****Exhibits, Financial Statement Schedules**

 

**(a) FinancialStatement Schedules**

 

All financialstatement schedules are omitted because they are not applicable or the requiredinformation is presented in the consolidated financial statements and notesthereto.

 

**(b) Exhibits**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                               |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                                                                                                                                                                                          |
| 3.1                 |       | Articles  of Restatement, incorporated by reference to Exhibit 3.1.2 to  Form 8-K filed on September 8, 2008                                                                                                                                                                                                   |
| 3.2                 |       | Third  Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to  the Company’s Form 10-Q filed on November 14, 2008                                                                                                                                                                       |
| 4.1                 |       | Form of  Subscription Agreement, incorporated by reference to Exhibit B to the  Company’s Post-Effective Amendment No. 1 to its Registration Statement  on Form S-11 filed on March 6, 2009, Commission File  No. 333-148414                                                               |
| 4.2                 |       | Distribution  Reinvestment Plan, incorporated by reference to Exhibit C to the  Company’s Post-Effective Amendment No .1 to its Registration Statement on  Form S-11 filed on March 6, 2009, Commission File  No. 333-148414                                                                         |
| 4.3                 |       | Automatic  Purchase Plan, incorporated by reference to Exhibit D to the Company’s  Post-Effective Amendment No. 1 to its Registration Statement on  Form S-11 filed on March 6, 2009, Commission File  No. 333-148414                                                                           |
| 4.4                 |       | Share  Redemption Program, incorporated by reference from the description under  “Description of Shares—Share Redemption Program” in the Company’s  Post-Effective Amendment No. 1 to its Registration Statement on Form S-11  filed on March 6, 2009, Commission File No. 333-148414 |
| 4.5                 |       | Statement  regarding Restrictions on Transferability of Shares of Common Stock,  incorporated by reference to Exhibit 4.5 to the Company’s Registration  Statement on Form S-11/A filed on May 9, 2008                                                                                                    |
| 10.1                |       | Amended  and Restated Advisory Management Agreement, incorporated by reference to  Exhibit 10.1 to the Company’s Form 10-Q filed on November 14,  2008                                                                                                                                                    |
| 10.2                |       | Amended  and Restated Property Agreement, incorporated by reference to  Exhibit 10.2 to the Company’s Form 10-Q filed on November 14,  2008                                                                                                                                                               |
| 10.3                |       | Incentive  Award Plan, incorporated by reference to Exhibit 10.3 to the Company’s  Registration Statement on Form S-11/A filed on May 9, 2008,  Commission File No. 333-148414                                                                                                                       |
| 10.4                |       | Service  Mark Agreement, incorporated by reference to Exhibit 10.4 to the  Company’s Form 10-Q filed on November 14, 2008                                                                                                                                                                                 |
| 10.5*               |       | Senior  and Junior Mezzanine Promissory Notes by and between SW 131 St. Rose  Mezzanine Borrower LLC as borrower and Behringer Harvard St. Rose REIT, LLC  as lender dated December 31, 2008                                                                                                                             |
| 10.6*               |       | Senior  and Junior Mezzanine Loan Agreements by and between SW 131 St. Rose Mezzanine  Borrower LLC as borrower and Behringer Harvard St. Rose REIT, LLC as lender  dated December 31, 2008                                                                                                                              |
| 10.7*               |       | Senior  and Junior Mezzanine Deeds of Trust, Assignments of Rents and Leases,  Security Agreements, Fixture Filings and Financing Statements by and between  SW 132 St. Rose Senior Borrower LLC as grantor and Behringer Harvard St. Rose  REIT, LLC as lender dated December 31, 2008                                  |
| 10.8*               |       | Mezzanine  Guaranty Agreement by and between CFP Residential, L.P., Kenneth J. Valach,  Bruce Hart and J. Ronald Terwilliger collectively as guarantor and Behringer  St. Rose REIT, LLC as lender dated December 31, 2008                                                                                               |
| 10.9*               |       | Intercreditor  and Subordination Agreement by and between Bank of America, N.A. on behalf of  senior construction lenders and land loan lender and Behringer Harvard St.  Rose REIT, LLC as subordinate lender dated December 31, 2008                                                                                   |
| 10.10*              |       | Sale,  Purchase and Escrow Agreement between Verandah Owner Limited Partnership as  seller and Harvard Property Trust, LLC as purchaser dated January 26,  2009                                                                                                                                                          |
| 10.11*              |       | Assignment  and Assumption of Sale, Purchase and Escrow Agreement by and between Harvard  Property Trust, LLC as assignor and Behringer Harvard Multifamily OP I LP as  assignee dated January 28, 2009                                                                                                                  |
| 10.12*              |       | First  Amendment to Sale, Purchase and Escrow Agreement by and between Verandah  Owner Limited Partnership as seller and Behringer Harvard Multifamily OP I LP  as purchaser dated February 20, 2009                                                                                                                     |
| 21.1                |       | Subsidiaries  of the Company, incorporated by reference to Exhibit 21.1 to the  Company’s Post-Effective Amendment No.1 to its Registration Statement on  Form S-11 filed on March 6, 2009, Commission File  No. 333-148414                                                                          |
| 31.1*               |       | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                     |
| 31.2*               |       | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002                                                                                                                                                                                                                     |
| 32.1*               |       | Certifications  of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.  1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002**                                                                                                                                                        |

 

----

* Filed herewith

 

** In accordance withItem 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” forpurposes of Section 18 of the Exchange Act or otherwise subject to theliabilities of that section.  Such certifications will not be deemedincorporated by reference into any filing under the Securities Act or theExchange Act, except to the extent that the registrant specifically incorporatesit by reference.

 

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**INDEX TO FINANCIAL STATEMENTS**

 
| **Financial  Statements**                                                                                                                                                                                  | ** ** | **Page** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                                                                                                       |       |     |
| **Behringer  Harvard Multifamily REIT I, Inc. — Consolidated Financial Statements**                                                                                                              |       |     |
|                                                                                                                                                                                                       |       |     |
| Report  of Independent Registered Public Accounting Firm                                                                                                                                                   |       | F-4      |
|                                                                                                                                                                                                       |       |     |
| Consolidated  Balance Sheets as of December 31, 2008 and 2007                                                                                                                                         |       | F-5      |
|                                                                                                                                                                                                       |       |     |
| Consolidated  Statements of Operations for the years ended December 31, 2008 and 2007  and for the period from  August 4, 2006 (date of inception) through December 31, 2006                |       | F-6      |
|                                                                                                                                                                                                       |       |     |
| Consolidated  Statements of Stockholders’ Equity for the years ended December 31, 2008  and 2007 and for the period from August 4, 2006 (date of inception)  through December 31, 2006 |       | F-7      |
|                                                                                                                                                                                                       |       |     |
| Consolidated  Statements of Cash Flows for the years ended December 31, 2008 and 2007  and for the period from August 4, 2006 (date of inception) through  December 31, 2006                |       | F-8      |
|                                                                                                                                                                                                       |       |     |
| Notes to  Consolidated Financial Statements                                                                                                                                                                |       | F-9      |
|                                                                                                                                                                                                       |       |     |
| **Behringer  Harvard Baileys Venture, LLC — Consolidated Financial Statements**                                                                                                                       |       |     |
|                                                                                                                                                                                                       |       |     |
| Report of Independent  Registered Public Accounting Firm                                                                                                                                                   |       | F-28     |
|                                                                                                                                                                                                       |       |     |
| Consolidated Balance  Sheets as of December 31, 2008 and 2007                                                                                                                                         |       | F-29     |
|                                                                                                                                                                                                       |       |     |
| Consolidated  Statements of Income for the year ended December 31, 2008 and for the  period from June 26, 2007 (date of inception) through December 31,  2007                               |       | F-30     |
|                                                                                                                                                                                                       |       |     |
| Consolidated  Statements of Members’ Equity for the year ended December 31, 2008 and  for the period from June 26, 2007 (date of inception) through  December 31, 2007                 |       | F-31     |
|                                                                                                                                                                                                       |       |     |
| Consolidated  Statements of Cash Flows for the year ended December 31, 2008 and for  the period from June 26, 2007 (date of inception) through  December 31, 2007                           |       | F-32     |
|                                                                                                                                                                                                       |       |     |
| Notes to  Consolidated Financial Statements                                                                                                                                                                |       | F-33     |
|                                                                                                                                                                                                       |       |     |
| **Behringer Harvard Cameron House Venture, LLC —  Consolidated Financial Statements**                                                                                                                 |       |     |
|                                                                                                                                                                                                       |       |     |
| Report of  Independent Registered Public Accounting Firm                                                                                                                                                   |       | F-38     |
|                                                                                                                                                                                                       |       |     |
| Consolidated Balance  Sheets as of December 31, 2008 and 2007                                                                                                                                         |       | F-39     |
|                                                                                                                                                                                                       |       |     |
| Consolidated  Statements of Income for the year ended December 31, 2008 and for the  period from September 12, 2007 (date of inception) through  December 31, 2007                          |       | F-40     |
|                                                                                                                                                                                                       |       |     |
| Consolidated  Statements of Members’ Equity for the year ended December 31, 2008 and  for the period from September 12, 2007 (date of inception) through  December 31, 2007            |       | F-41     |
|                                                                                                                                                                                                       |       |     |
| Consolidated  Statements of Cash Flows for the year ended December 31, 2008 and for  the period from September 12, 2007 (date of inception) through  December 31, 2007                      |       | F-42     |
|                                                                                                                                                                                                       |       |     |
| Notes to  Consolidated Financial Statements                                                                                                                                                                |       | F-43     |

 

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Table of Contents

 
| **Behringer  Harvard Columbia Venture, LLC — Consolidated Financial Statements**                                                                                                       |   |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                        |   |   |
| Report of  Independent Registered Public Accounting Firm                                                                                                                                    |   | F-48   |
|                                                                                                                                                                                        |   |   |
| Consolidated Balance  Sheets as of December 31, 2008 and 2007                                                                                                                          |   | F-49   |
|                                                                                                                                                                                        |   |   |
| Consolidated  Statements of Income for the year ended December 31, 2008 and for the  period from August 6, 2007 (date of inception) through December 31,  2007               |   | F-50   |
|                                                                                                                                                                                        |   |   |
| Consolidated  Statements of Members’ Equity for the year ended December 31, 2008 and  for the period from August 6, 2007 (date of inception) through  December 31, 2007 |   | F-51   |
|                                                                                                                                                                                        |   |   |
| Consolidated  Statements of Cash Flows for the year ended December 31, 2008 and for  the period from August 6, 2007 (date of inception) through  December 31, 2007           |   | F-52   |
|                                                                                                                                                                                        |   |   |
| Notes to  Consolidated Financial Statements                                                                                                                                                 |   | F-53   |
|                                                                                                                                                                                        |   |   |
| **Behringer Harvard Johns Creek Venture, LLC —  Consolidated Financial Statements**                                                                                                    |   |   |
|                                                                                                                                                                                        |   |   |
| Report of  Independent Registered Public Accounting Firm                                                                                                                                    |   | F-59   |
|                                                                                                                                                                                        |   |   |
| Consolidated  Balance Sheets as of December 31, 2008 and 2007                                                                                                                          |   | F-60   |
|                                                                                                                                                                                        |   |   |
| Consolidated  Statements of Operations for the year ended December 31, 2008 and for  the period from August 3, 2007 (date of inception) through  December 31, 2007           |   | F-61   |
|                                                                                                                                                                                        |   |   |
| Consolidated  Statements of Members’ Equity for the year ended December 31, 2008 and  for the period from August 3, 2007 (date of inception) through  December 31, 2007 |   | F-62   |
|                                                                                                                                                                                        |   |   |
| Consolidated  Statements of Cash Flows for the year ended December 31, 2008 and for  the period from August 3, 2007 (date of inception) through  December 31, 2007           |   | F-63   |
|                                                                                                                                                                                        |   |   |
| Notes to  Consolidated Financial Statements                                                                                                                                                 |   | F-64   |
|                                                                                                                                                                                        |   |   |
| **Behringer  Harvard Lovers Lane Venture I, LLC — Consolidated Financial Statements**                                                                                                  |   |   |
|                                                                                                                                                                                        |   |   |
| Report of  Independent Registered Public Accounting Firm                                                                                                                                    |   | F-70   |
|                                                                                                                                                                                        |   |   |
| Consolidated Balance  Sheets as of December 31, 2008 and 2007                                                                                                                          |   | F-71   |
|                                                                                                                                                                                        |   |   |
| Consolidated  Statements of Income for the year ended December 31, 2008 and for the  period from June 1, 2007 (date of inception) through December 31,  2007                 |   | F-72   |
|                                                                                                                                                                                        |   |   |
| Consolidated  Statements of Members’ Equity for the year ended December 31, 2008 and  for the period from June 1, 2007 (date of inception) through  December 31, 2007   |   | F-73   |
|                                                                                                                                                                                        |   |   |
| Consolidated  Statements of Cash Flows for the year ended December 31, 2008 and for  the period from June 1, 2007 (date of inception) through  December 31, 2007             |   | F-74   |
|                                                                                                                                                                                        |   |   |
| Notes to  Consolidated Financial Statements                                                                                                                                                 |   | .F-75  |
|                                                                                                                                                                                        |   |   |
| **Behringer  Harvard Satori Venture, LLC — Consolidated Financial Statements**                                                                                                         |   |   |
|                                                                                                                                                                                        |   |   |
| Report  of Independent Registered Public Accounting Firm                                                                                                                                    |   | F-80   |
|                                                                                                                                                                                        |   |   |
| Consolidated Balance  Sheets as of December 31, 2008 and 2007                                                                                                                          |   | F-81   |

 

F-2

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Table of Contents

 
| Consolidated  Statements of Income for the year ended December 31, 2008 and for the  period from June 26, 2007 (date of inception) through December 31,  2007               |   | F-82   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                                                       |   |   |
| Consolidated  Statements of Members’ Equity for the year ended December 31, 2008 and  for the period from June 26, 2007 (date of inception) through  December 31, 2007 |   | F-83   |
|                                                                                                                                                                                       |   |   |
| Consolidated  Statements of Cash Flows for the year ended December 31, 2008 and for the  period from June 26, 2007 (date of inception) through December 31,  2007           |   | F-84   |
|                                                                                                                                                                                       |   |   |
| Notes  to Consolidated Financial Statements                                                                                                                                                |   | .F-85  |
|                                                                                                                                                                                       |   |   |
| **Behringer  Harvard St. Rose Venture, LLC — Consolidated Financial Statements**                                                                                                      |   |   |
|                                                                                                                                                                                       |   |   |
| Report of  Independent Registered Public Accounting Firm                                                                                                                                   |   | F-91   |
|                                                                                                                                                                                       |   |   |
| Consolidated Balance  Sheets as of December 31, 2008 and 2007                                                                                                                         |   | F-92   |
|                                                                                                                                                                                       |   |   |
| Consolidated  Statements of Income for the year ended December 31, 2008 and for the  period from July 9, 2007 (date of inception) through December 31,  2007                |   | F-93   |
|                                                                                                                                                                                       |   |   |
| Consolidated  Statements of Members’ Equity for the year ended December 31, 2008 and  for the period from July 9, 2007 (date of inception) through  December 31, 2007  |   | F-94   |
|                                                                                                                                                                                       |   |   |
| Consolidated  Statements of Cash Flows for the year ended December 31, 2008 and for  the period from July 9, 2007 (date of inception) through  December 31, 2007            |   | F-95   |
|                                                                                                                                                                                       |   |   |
| Notes to  Consolidated Financial Statements                                                                                                                                                |   | F-96   |

 

F-3

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Table ofContents

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To the Board of Directorsand Stockholders of

Behringer HarvardMultifamily REIT I, Inc.

Addison, Texas

 

We have audited theaccompanying consolidated balance sheets of Behringer Harvard Multifamily REITI, Inc. and subsidiaries (the “Company”) as of December 31, 2008 and2007 and the related consolidated statements of operations, stockholders’equity and cash flows for each of the two years in the period ended December 31,2008 and for the period from August 4, 2006 (date of inception) through December 31,2006.  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 auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States).  Those standards require that we plan and performthe audit to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  The Company is not required to have,nor were we engaged to perform, an audit of its internal control over financialreporting.  Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company at December 31, 2008 and 2007, and theresults of its operations and its cash flows for each of the two years in theperiod ended December 31, 2008 and for the period from August 4, 2006(date of inception) through December 31, 2006, in conformity withaccounting principles generally accepted in the United States of America.

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

 

 

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Table of Contents

 

**Behringer Harvard Multifamily REIT I, Inc.**

**Consolidated Balance Sheets**

** **
| ** **                                                                                                                                                                                                                        | ** ** | **December 31,** | ** **  | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|-------------|-----------------------|------------|
| ** **                                                                                                                                                                                                                        | ** ** | **2008**              | ** **  | **2007**              | ** ** |
| **Assets**                                                                                                                                                                                                                        | ** ** | ** **            | ** **  | ** **            | ** ** |
| Investments in unconsolidated real estate joint ventures                                                                                                                                                                          |       | $                     | 96,504,812  |                  | $          | 60,068,633 |   |
| Cash and cash equivalents                                                                                                                                                                                                         |       | 23,771,206            |        | 53,377,585            |       |
| Receivables from affiliates                                                                                                                                                                                                       |       | 298,807               |        | 300,927               |       |
| Notes receivable                                                                                                                                                                                                                  |       | 1,175                 |        | 70,986                |       |
| Restricted cash                                                                                                                                                                                                                   |       | —                |        | 53,300                |       |
| Escrow deposits                                                                                                                                                                                                                   |       | —                |        | 888,525               |       |
| Other assets, net                                                                                                                                                                                                                 |       | 318,381               |        | 681,917               |       |
| **Total assets**                                                                                                                                                                                                                  |       | $                     | 120,894,381 |                  | $          | 115,441,873 |   |
|                                                                                                                                                                                                                              |       |                  |        |                  |       |
| **Liabilities and stockholders’ equity**                                                                                                                                                                                     | ** ** | ** **            | ** **  | ** **            | ** ** |
|                                                                                                                                                                                                                              |       |                  |        |                  |       |
| **Liabilities**                                                                                                                                                                                                                   | ** ** | ** **            | ** **  | ** **            | ** ** |
| Payables to affiliates                                                                                                                                                                                                            |       | $                     | 627,445     |                  | $          | 1,130,992 |   |
| Distributions payable                                                                                                                                                                                                             |       | 831,878               |        | 412,058               |       |
| Accrued offering costs payable to affiliates                                                                                                                                                                                      |       | 6,918,354             |        | 282,214               |       |
| Accounts payable and accrued liabilities                                                                                                                                                                                          |       | 122,756               |        | 143,812               |       |
| Subscriptions for common stock                                                                                                                                                                                                    |       | —                |        | 53,300                |       |
| **Total liabilities**                                                                                                                                                                                                             |       | 8,500,433             |        | 2,022,376             |       |
|                                                                                                                                                                                                                              |       |                  |        |                  |       |
| **Commitments and contingencies**                                                                                                                                                                                                 | ** ** | ** **            | ** **  | ** **            | ** ** |
|                                                                                                                                                                                                                              |       |                  |        |                  |       |
| **Stockholders’ equity**                                                                                                                                                                                                     | ** ** | ** **            | ** **  | ** **            | ** ** |
| Preferred stock, $.0001 par value per share; 125,000,000 shares  authorized, none outstanding                                                                                                                                     |       | —                |        | —                |       |
| Non-participating, non-voting convertible stock, $.0001 par value per  share; 1,000 shares authorized, 1,000 and 0 shares issued and outstanding at  December 31, 2008 and December 31, 2007, respectively (see Note 6) |       | —                |        | —                |       |
| Common stock, $.0001 par value per share; 875,000,000 shares  authorized, 15,347,792 and 14,272,919 shares issued and outstanding at  December 31, 2008 and December 31, 2007, respectively                             |       | 1,535                 |        | 1,427                 |       |
| Additional paid-in capital                                                                                                                                                                                                        |       | 117,267,588           |        | 114,566,504           |       |
| Cumulative distributions and net loss                                                                                                                                                                                             |       | (4,875,175            | )           | (1,148,434            | )          |
| **Total stockholders’ equity**                                                                                                                                                                                               |       | 112,393,948           |        | 113,419,497           |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                                               |       | $                     | 120,894,381 |                  | $          | 115,441,873 |   |

 

*SeeNotes to Consolidated Financial Statements*

 

F-5

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Table of Contents

 

**Behringer Harvard Multifamily REIT I, Inc.**

**Consolidated Statements of Operations**

 
| ** **                                                                      | ** ** | ** **            | ** ** | ** **            | ** ** | **For the period**      | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------------|------------|
| ** **                                                                      | ** ** | ** **            | ** ** | ** **            | ** ** | **from August 4,** | ** ** |
| ** **                                                                      | ** ** | ** **            | ** ** | ** **            | ** ** | **2006 (date of**       | ** ** |
| ** **                                                                      | ** ** | **Year ended**        | ** ** | **Year ended**        | ** ** | **inception) through**  | ** ** |
| ** **                                                                      | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **December 31,**   | ** ** |
| ** **                                                                      | ** ** | **2008**              | ** ** | **2007**              | ** ** | **2006**                | ** ** |
| **Rental revenue**                                                              |       | $                     | —     |                  | $          | —                  |       | $ | — |   |
| ** **                                                                      | ** ** | ** **            | ** ** | ** **            | ** ** | ** **              | ** ** |
| **Expenses**                                                                    | ** ** | ** **            | ** ** | ** **            | ** ** | ** **              | ** ** |
| Asset management and other fees                                                 |       | 884,211               |       | 217,837               |       | —                  |       |
| Organization expenses                                                           |       | 9,458                 |       | 49,709                |       | —                  |       |
| Interest expense                                                                |       | —                |       | 642,124               |       | —                  |       |
| General and administrative                                                      |       | 1,589,750             |       | 433,895               |       | 14,055                  |       |
| Depreciation and amortization                                                   |       | 46,705                |       | —                |       | —                  |       |
| **Total expenses**                                                              |       | 2,530,124             |       | 1,343,565             |       | 14,055                  |       |
|                                                                            |       |                  |       |                  |       |                    |       |
| Interest income                                                                 |       | 884,506               |       | 343,240               |       | —                  |       |
| Equity in earnings of investments in unconsolidated real estate joint  ventures |       | 4,275,881             |       | 793,218               |       | —                  |       |
| **Net income (loss)**                                                           |       | $                     | 2,630,263  |                  | $          | (207,107                | )          | $ | (14,055 | ) |
|                                                                            |       |                  |       |                  |       |                    |       |
| Weighted average number of common shares outstanding                            |       | 14,351,399            |       | 2,730,621             |       | 1,249                   |       |
|                                                                            |       |                  |       |                  |       |                    |       |
| Basic and diluted income (loss) per share                                       |       | $                     | 0.18       |                  | $          | (0.08                   | )          | $ | (11.25 | ) |

 

*SeeNotes to Consolidated Financial Statements*

 

F-6

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Table ofContents

 

**Behringer Harvard Multifamily REIT I, Inc.**

**Consolidated Statements ofStockholders’ Equity**

 
|                                                         |       | **Common Stock** |       | **Additional** |       | **Cumulative** |       | **Total**                  |   |
|--------------------------------------------------------------|------------|-----------------------|------------|----------------|------------|----------------|------------|----------------------------|--------|
|                                                         |       | **Number**            |       | **Par**        |       | **Paid-in**    |       | **Distributions and** |   | **Stockholders’** |   |
|                                                         |       | **of Shares**    |       | **Value**      |       | **Capital**    |       | **Net Income (Loss)** |   | **Equity** |   |
| Balance at August 4, 2006 (inception)                   |       | —                |       | $              | —     |           | $          | —                     |   | $ | — |   | $ | — |   |
| Net loss                                                     | ** ** | ** **            | ** ** | ** **     | ** ** | ** **     |       | (14,055                    | )      | (14,055 | ) |
| Issuances of common stock under:                             |       |                  |       |           |       |           |       |                       |   |   |   |
| Sale of common stock, net                                    |       | 1,249                 |       | —         |       | 10,004         |       | —                     |   | 10,004 |   |
| Incentive award plan                                         |       | 3,000                 |       | —         |       | 3,055          |       | —                     |   | 3,055 |   |
| Balance at December 31, 2006                            |       | 4,249                 |       | —         |       | 13,059         |       | (14,055                    | )      | (996 | ) |
|                                                         |       |                  |       |           |       |           |       |                       |   |   |   |
| Net loss                                                     | ** ** | ** **            | ** ** | ** **     | ** ** | ** **     |       | (207,107                   | )      | (207,107 | ) |
| Issuances of common stock under:                             |       |                  |       |           |       |           |       |                       |   |   |   |
| Sale of common stock, net                                    |       | 14,265,670            |       | 1,427          |       | 116,438,616    |       | —                     |   | 116,440,043 |   |
| Offering costs                                               | ** ** | ** **            | ** ** | ** **     |       | (1,909,606     | )          | —                     |   | (1,909,606 | ) |
| Incentive award plan                                         |       | 3,000                 |       | —         |       | 24,435         |       | —                     |   | 24,435 |   |
| Distributions declared on common stock                       | ** ** | ** **            | ** ** | ** **     |       | —         |       | (927,272                   | )      | (927,272 | ) |
| Balance at December 31, 2007                            |       | 14,272,919            |       | 1,427          |       | 114,566,504    |       | (1,148,434                 | )      | 113,419,497 |   |
|                                                         |       |                  |       |           |       |           |       |                       |   |   |   |
| Net income                                                   | ** ** | ** **            | ** ** | ** **     | ** ** | ** **     |       | 2,630,263                  |   | 2,630,263 |   |
| Issuances of common stock under:                             |       |                  |       |           |       |           |       |                       |   |   |   |
| Sale of common stock, net                                    |       | 1,073,506             |       | 107            |       | 9,554,808      | ** ** | ** **                 |   | 9,554,915 |   |
| Offering costs                                               | ** ** | ** **            | ** ** | ** **     |       | (6,907,442     | )          | ** **                 |   | (6,907,442 | ) |
| Incentive award plan                                         |       | —                |       | —         |       | 22,399         |       | —                     |   | 22,399 |   |
| Redemptions of common stock                                  |       | (16,667               | )          | (1             | )          | (139,999       | )          | —                     |   | (140,000 | ) |
| Distributions declared on common stock                       | ** ** | ** **            | ** ** | ** **     |       | —         |       | (6,357,004                 | )      | (6,357,004 | ) |
| Stock issued pursuant to Distribution Reinvestment Plan, net |       | 18,034                |       | 2              |       | 171,318        |       | —                     |   | 171,320 |   |
| Balance at December 31, 2008                            |       | 15,347,792            |       | $              | 1,535      |           | $          | 117,267,588                |   | $ | (4,875,175 | ) | $ | 112,393,948 |   |

 

*SeeNotes to Consolidated Financial Statements*

 

F-7

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Table of Contents

 

**BehringerHarvard Multifamily REIT I, Inc.**

**ConsolidatedStatements of Cash Flows**

** **
| ** **                                                                                | ** ** | ** **                      | ** ** | ** **                      | ** ** | **For the period from** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                | ** ** | ** **                      | ** ** | ** **                      | ** ** | **August 4, 2006 (date of**  | ** ** |
| ** **                                                                                | ** ** | **Year  ended**            | ** ** | **Year  ended**            | ** ** | **inception) through**            | ** ** |
| ** **                                                                                | ** ** | **December 31, 2008** | ** ** | **December 31, 2007** | ** ** | **December 31, 2006**   | ** ** |
| **Cash flows from operating activities**                                                  | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **                        | ** ** |
| Net income (loss)                                                                         |       | $                               | 2,630,263  |                            | $          | (207,107                          | )          | $ | (14,055 | ) |
| Adjustments to reconcile net income (loss) to net cash provided by operating  activities: |       |                            |       |                            |       |                              |       |
| Amortization of deferred financing costs                                                  |       | —                          |       | 327,994                         |       | —                            |       |
| Depreciation and amortization                                                             |       | 46,705                          |       | —                          |       | —                            |       |
| Stock-based compensation                                                                  |       | 22,399                          |       | 24,435                          |       | 3,055                             |       |
| Equity in earnings of investments in unconsolidated real estate joint  ventures           |       | (4,275,881                      | )          | (793,218                        | )          | —                            |       |
| Distributions received from unconsolidated real estate joint ventures                     |       | 4,275,881                       |       | 793,218                         |       | —                            |       |
| Changes in operating assets and liabilities:                                              |       |                            |       |                            |       |                              |       |
| Accounts receivables and other receivables                                                |       | 28,218                          |       | (69,986                         | )          | —                            |       |
| Other assets                                                                              |       | (205,539                        | )          | (164,107                        | )          | —                            |       |
| Payables to affiliates                                                                    |       | (67,735                         | )          | 130,475                         |       | —                            |       |
| Accounts payable and other liabilities                                                    |       | (70,875                         | )          | 203,607                         |       | 11,000                            |       |
| **Cash provided by operating activities**                                                 |       | 2,383,436                       |       | 245,311                         |       | —                            |       |
|                                                                                      |       |                            |       |                            |       |                              |       |
| **Cash flows from investing activities**                                                  | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **                        | ** ** |
| Investments in unconsolidated real estate joint ventures                                  |       | (36,614,540                     | )          | (58,292,831                     | )          | —                            |       |
| Issuances of notes receivable                                                             |       | —                          |       | (2,995,719                      | )          | —                            |       |
| Advances to unconsolidated real estate joint ventures                                     |       | —                          |       | (226,443                        | )          | —                            |       |
| Repayments of advances to unconsolidated real estate joint ventures                       |       | 18,849                          |       | —                          |       | —                            |       |
| Prepaid acquisition costs                                                                 |       | —                          |       | (517,810                        | )          | —                            |       |
| Proceeds from sales of interests in real estate ventures                                  |       | —                          |       | 1,969,242                       |       | —                            |       |
| Return of investments in unconsolidated real estate joint ventures                        |       | 1,176,147                       |       | 160,346                         |       |                              |       |
| Escrow deposits                                                                           |       | —                          |       | (888,525                        | )          | —                            |       |
| **Cash used in investing activities**                                                     |       | (35,419,544                     | )          | (60,791,740                     | )          | —                            |       |
|                                                                                      |       |                            |       |                            |       |                              |       |
| **Cash flows from financing activities**                                                  | ** ** | ** **                      | ** ** | ** **                      | ** ** | ** **                        | ** ** |
| Proceeds from sales of common stock                                                       |       | 10,711,736                      |       | 127,498,054                     |       | 10,004                            |       |
| Issuance (return) of incentive units                                                      |       | —                          |       | (10,000                         | )          | 10,000                            |       |
| Offering costs                                                                            |       | (1,367,772                      | )          | (12,967,617                     | )          | —                            |       |
| Redemption of common stock                                                                |       | (140,000                        | )          | —                          |       | —                            |       |
| Change in subscriptions for common stock                                                  |       | (53,300                         | )          | 53,300                          |       | —                            |       |
| Change in subscription cash received                                                      |       | 53,300                          |       | (53,300                         | )          | —                            |       |
| Distributions on common stock paid                                                        |       | (5,765,866                      | )          | (515,214                        | )          | —                            |       |
| Credit Facility:                                                                          |       |                            |       |                            |       |                              |       |
| Proceeds                                                                                  |       | —                          |       | 35,672,006                      |       | —                            |       |
| Repayments                                                                                |       | —                          |       | (36,000,000                     | )          | —                            |       |
| Change in payables to affiliates                                                          |       | (8,369                          | )          | 226,781                         |       | —                            |       |
| **Cash provided by financing activities**                                                 |       | 3,429,729                       |       | 113,904,010                     |       | 20,004                            |       |
| Net change in cash and cash equivalents                                                   |       | (29,606,379                     | )          | 53,357,581                      |       | 20,004                            |       |
| Cash and cash equivalents at beginning of period                                          |       | 53,377,585                      |       | 20,004                          |       | —                            |       |
| Cash and cash equivalents at end of period                                                |       | $                               | 23,771,206 |                            | $          | 53,377,585                        |       | $ | 20,004 |   |
|                                                                                           |            |                                 |            |                                 |            |                                   |            |  |  |  |  |  |  |

 

***SeeNotes to Consolidated Financial Statements***

 

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**Behringer HarvardMultifamily REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

 

**1.**                                      Organization and Business

** **

***Organization***

 

Behringer HarvardMultifamily REIT I, Inc. (which may be referred to as the “Company,” “we,”“us,” or “our”) was organized in Maryland on August 4, 2006 and haselected to be taxed, and currently qualifies, as a real estate investment trust(“REIT”) for federal income tax purposes. As a REIT, we generally are notsubject to corporate-level income taxes. To maintain our REIT status, we are required, among other requirements,to distribute annually at least 90% of our “REIT taxable income”, as defined bythe Internal Revenue Code of 1986, as amended (the “Code”), to ourstockholders.  If we fail to qualify as aREIT in any taxable year, we would be subject to federal income tax on ourtaxable income at regular corporate tax rates. As of December 31, 2008, we believe we are in compliance with allapplicable REIT requirements.

 

We primarily invest inmultifamily related investments. These may include conventional multifamilyassets, such as mid-rise, high-rise, and garden style properties, and may alsoinclude student housing and age-restricted properties, typically requiringresidents to be age 55 or older. We intend to make investments directly inwholly owned investments and indirectly through co-investments arrangementswith other participants (“Co-Investment Ventures”).  Further, we either directly or indirectly mayinvest in commercial real estate, options to acquire real estate, real estaterelated securities, collateralized mortgage-backed securities, mortgage,bridge, mezzanine or other loans and Section 1031 tenant-in-commoninterests, or in entities that make similar investments.  We completed our first investment in April 2007and, as of December 31, 2008, we have made ten investments in sevenstates, substantially all Co-Investment Ventures.

 

We have no employees andare supported by related party service agreements. We are externally managed byBehringer Harvard Multifamily Advisors I LP (“Behringer Harvard MultifamilyAdvisors I”), a Texas limited partnership. Behringer Harvard MultifamilyAdvisors I is responsible for managing our affairs on a day-to-day basis andfor identifying and making real estate investments on our behalf.  Substantially all our business is conductedthrough our operating partnership Behringer Harvard Multifamily OP I LP, aDelaware limited partnership (“Behringer Harvard Multifamily OP I”). Ourwholly-owned subsidiary, BHMF, Inc., a Delaware corporation (“BHMF Inc.”)owns less than 0.1% of Behringer Harvard Multifamily OP I as its sole generalpartner. The remaining ownership interest in Behringer Harvard Multifamily OP Iis held as a limited partner’s interest by BHMF Business Trust, a Marylandbusiness trust.

 

***Offeringsof our Common Stock***

 

We are authorized toissue 875,000,000 shares of common stock, 1,000 shares of convertible stock and124,999,000 shares of preferred stock. All shares of common stock have a parvalue of $.0001 per share. On August 4, 2006 (date of inception), we sold1,249 shares of our common stock to Behringer Harvard Holdings, LLC (“BehringerHarvard Holdings”) for cash of $10,004. On November 28, 2007, we sold anadditional 23,720 shares of our common stock to Behringer Harvard Holdings forcash of $189,997.

 

On November 22,2006, we commenced a private offering pursuant to Regulation D of theSecurities Act of 1933, as amended (the “Securities Act”) to sell a maximum ofapproximately $400 million of common stock to accredited investors (the “PrivateOffering”). We held all Private Offering proceeds in escrow until after we hadsold our initial $1.5 million of shares of common stock. In April 2007,the Company released the proceeds from escrow and began issuing shares of ourcommon stock. We terminated the Private Offering on December 28, 2007. Wesold a total of approximately 14.2 million shares of common stock and raised atotal of approximately $127.3 million in gross offering proceeds in the PrivateOffering. Net proceeds after selling commissions, dealer manager fees, andother offering costs were approximately $114.3 million.

 

On September 2,2008, we commenced a public offering (the “Initial Public Offering”) of up to200,000,000 shares of common stock offered at a price of $10.00 per sharepursuant to a Registration Statement on Form S-11filed under theSecurities Act.   The Initial PublicOffering also covered the registration of up to an additional 50,000,000 sharesof common stock at a price of $9.50 per share pursuant to our distributionreinvestment plan (“DRIP”).  We reservethe right to reallocate shares of our common stock between the primary offeringand our DRIP.  As of December 31,2008, we sold a total of approximately 1.1 million shares of common stock andraised a total of approximately $10.9 million in gross offering proceeds in theInitial Public Offering. Net proceeds after selling commissions, dealer managerfees, and other offering costs were approximately $9.5 million.

 

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Our common stock is notcurrently listed on a national securities exchange. However, managementanticipates within four to six years after the termination of our publicoffering to begin the process of either listing the common stock on a nationalsecurities exchange or liquidating our assets, depending on then-prevailingmarket conditions**.**

 

**2.**                                      **Summaryof Significant Accounting Policies**

 

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

 

The preparation ofconsolidated financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates include such items as the purchase price allocation forreal estate acquisitions; impairment of long-lived assets, notes receivablesand equity-method real estate investments; revenue recognition of notereceivable interest income and equity in earnings of investments inunconsolidated real estate joint ventures; depreciation and amortization andallowance for doubtful accounts.  Actualresults could differ from those estimates.

 

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

 

Our consolidatedfinancial statements include our accounts, the accounts of variable interestentities in which we are the primary beneficiary and the accounts of othersubsidiaries over which we have control. All inter-company transactions, balances and profits have beeneliminated in consolidation.  Interestsin entities acquired are evaluated based on Financial Accounting StandardsBoard Interpretation (“FIN”) 46R, “Consolidation of Variable Interest Entities,”which requires the consolidation of variable interest entities in which we aredeemed to be the primary beneficiary.  Ifthe interest in the entity is determined to not be a variable interest entityunder FIN 46R, then the entities are evaluated for consolidation under theAmerican Institute of Certified Public Accountants’ (“AICPA”) Statement ofPosition (“SOP”) 78-9, “Accounting for Investments in Real Estate Ventures,”and by Emerging Issues Task Force (“EITF”) 04-5, “Determining Whether a GeneralPartner, or the General Partners as a Group, Controls a Limited Partnership orSimilar Entity When the Limited Partners Have Certain Rights.”

 

***RealEstate and Other Related Intangibles***

 

For acquired real estateproperties, we will allocate the purchase price of those properties to thetangible assets acquired, consisting of land, inclusive of associated rights,and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their relative fair values in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 141(R), “BusinessCombinations” and SFAS No. 142, “Goodwill and Other Intangible Assets.”  Identified intangible assets consist of thefair value of above-market and below-market leases, in-place leases, in-placetenant improvements, in-place leasing commissions and tenant relationships.

 

The fair value of anytangible assets that will be acquired, expected to consist of land andbuildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to land and buildings. Land values are derived from appraisals, and building values arecalculated as replacement cost less depreciation or estimates of the relativefair value of these assets using discounted cash flow analyses or similarmethods.  The values of buildings aredepreciated over the estimated useful lives ranging from 25-35 years using thestraight-line method.

 

We will determine thevalue of above-market and below-market in-place leases for acquired propertiesbased on the present value (using an interest rate that reflects the risksassociated with the leases acquired) of the difference between (1) thecontractual amounts to be paid pursuant to the in-place leases and (2) estimatesof 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 leases. We record thefair value of above-market andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over theabove determined lease term.

 

The total value ofidentified real estate intangible assets that we may acquire in the future isfurther allocated to in-place lease values and tenant relationships based onour evaluation of the specific characteristics of each tenant’s lease and ouroverall relationship with that respective tenant.  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 fair value ofin-place leases, we consider items such as real estate taxes, insurance andother operating expenses as well as lost rental revenue during the expected 

 

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lease-up period andcarrying costs that would have otherwise been incurred had the leases not beenin place, including tenant improvements and commissions.  The estimates of the fair value of tenantrelationships also include costs to execute similar leases including leasingcommissions, legal and tenant improvements as well as an estimate of thelikelihood of renewal as determined by management on a tenant-by-tenant basis.

 

We will amortize thevalue of in-place leases acquired in the future to expense over the term of therespective leases. The value of tenant relationship intangibles is amortized toexpense 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. Should a tenant terminate their lease, theunamortized portion of the in-place lease value and tenant relationship intangibleswould be charged to expense.

 

We will determine thefair value of assumed debt by calculating the net present value of thescheduled debt service payments using interest rates for debt with similarterms and remaining maturities that management believes we could obtain.  Any difference between the fair value andstated value of the assumed debt is recorded as a discount or premium andamortized over the remaining life of the loan.

 

Initial valuations aresubject to change until our information is finalized, which is no later than 12months from the acquisition date.

 

***Impairmentof Long Lived Assets and Investments in Unconsolidated Real Estate JointVentures***

 

Upon the acquisition ofany wholly-owned properties, we will monitor events and changes in circumstancesindicating that the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances are present, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset including its eventual disposition, to the carryingamount of the asset.  In the event thatthe carrying amount exceeds the estimated future undiscounted operating cash flows,we recognize an impairment loss to adjust the carrying amount of the asset toestimated fair value.

 

For real estate we ownthrough an investment in a real estate joint venture or other similar realestate investment structure, at each reporting date we compare the estimatedfair value of our real estate investment to the carrying value.  An impairment charge is recorded to theextent the fair value of our real estate investment is less than the carryingamount and the decline in value is determined to be other than a temporarydecline.

 

No impairment chargeshave been recorded as of December 31, 2008 and December 31, 2007.

 

***Cashand Cash Equivalents***

 

We consider investmentsin bank deposits, money market funds and highly-liquid cash investments withoriginal maturities of three months or less to be cash equivalents.

 

***RestrictedCash***

 

Restricted cash includedsubscription proceeds from our Private Offering that were held in a separateaccount until the subscribing investors were admitted as stockholders.  During our Private Offering, we admitted newstockholders at least monthly.  Uponacceptance of stockholders and issuance of shares of stock, we transfer theproceeds from restricted cash to cash and cash equivalents where its availablefor general business purposes.  With thetermination of the Private Offering, there is no restricted cash as of December 31,2008.

 

***NoteReceivable***

 

Notesreceivable are reported at their outstanding principal balances net of anyunearned income and unamortized deferred fees and costs. Loan origination feesand certain direct origination costs are generally deferred and recognized asadjustments to interest income over the lives of the related loans.

 

Inaccounting for notes receivables by our Co-Investment Ventures or us weevaluate whether the investments are loans, investments in joint ventures oracquisitions of real estate. In applying Exhibit 1 of AICPA PracticeBulletin 1, “AICPA Notice to Practitioners regarding Acquisition, Development,and Construction Arrangements to Acquisition of an Operating Property” and EITF86-21, “Application of the AICPA Notice to Practitioners regarding Acquisition,Development, and Construction Arrangements to Acquisition of an OperatingProperty”, we evaluate whether the loans contain any rights to participate inexpected residual profits, the loans provide sufficient collateral orqualifying guarantees or include other characteristics of a loan. As a resultof our review, neither 

 

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ourwholly owned loan nor the loans made through our Co-Investment Ventures containa right to participate in expected residual profits. In addition the projectborrowers remain obligated to pay principal and interest due on the loan withsufficient collateral, reserves or qualifying guarantees to account for theinvestments as loans.

 

Weassess notes receivables for impairment in accordance with SFAS No.114, “Accountingby Creditors for Impairment of a Loan”. Based on specific circumstances wedetermine whether it is probable that there has been an adverse change in theestimated cash flows of the contractual payments for the notes receivable. Wethen assess whether the impairment is other than temporary. If the impairmentis other than temporary, we recognize an impairment loss equal to thedifference between our or the Co-Investment Venture’s investment in the notereceivable and the present value of the estimated cash flows discounted at thenote receivable’s effective interest rate. Where we have the intent and theability to foreclose on our security interest in the property, we will use thecollateral’s fair value as a basis for the impairment.

 

Thereare judgments involved in determining whether an impairment is other thantemporary. As these types of notes receivable are generally investment specificbased on the particular loan terms and the underlying project characteristics,there is usually not any secondary market to evaluate impairments. Accordingly,we must rely on our subjective judgments and individual weightings of thespecific factors. If  notes receivableare considered impaired, then judgments and estimates are required to determinethe projected cash flows for the note receivable, considering the borrower’s orif applicable the guarantor’s financial condition and the consideration andvaluation of the secured property and any other collateral. Changes in thesefacts or in our judgments and assessments of these facts could result inimpairment losses which could be material to our consolidated financialstatement.

 

***EscrowDeposits***

 

As of December 31,2007, the escrow deposit related to our real estate investment in The Venue.

 

***Investmentsin Unconsolidated Real Estate Joint Ventures***

 

We or our Co-InvestmentVentures account for certain investments in unconsolidated real estate jointventures using the equity method of accounting because we exercise significantinfluence over, but do not control these entities.  These investments are initially recorded atcost and are adjusted for our share of equity in earnings anddistributions.  We report our share ofincome and losses based on our economic interests in the entities.

 

In connection with theacquisition of investments in unconsolidated real estate joint ventures, weincur certain acquisition and advisory fees that are paid to Behringer HarvardMultifamily Advisors I or an affiliate.  These fees are capitalized aspart of our basis in the investments in joint ventures.  We amortize anyexcess of the carrying value of our investments in joint ventures over the bookvalue of the underlying equity over the estimated useful lives of theunderlying operating property, which represents the assets to which the excessis most clearly related.

 

***Organization and******O******fferingCosts***

 

Behringer HarvardMultifamily Advisors I or its affiliates are obligated to pay all of ourInitial Public Offering and Private Offering organization and offeringcosts.  Offering costs include items suchas legal and accounting fees, marketing, promotional and printing costs.  On November 22, 2006, we entered into anagreement with Behringer Harvard Multifamily Advisors I, where BehringerHarvard Multifamily Advisors I or its affiliates will earn fees andcompensation in connection with their obligation to pay all of our organizationand offering costs, and in connection with the acquisition, management, andsale of our assets (the “Advisory Management Agreement”).  In connection with the effectiveness of ourInitial Public Offering on September 2, 2008, the fees and compensationunder the Advisory Management Agreement were amended.

 

***InitialPublic Offering Costs***

 

Under the amendedAdvisory Management Agreement, we will reimburse Behringer Harvard MultifamilyAdvisors I for all Initial Public Offering organization and offering costsincurred by them in an amount not to exceed 1.5% of our gross Initial PublicOffering, (the “O&O Reimbursement”). Total Initial Public Offering organization and offering costs incurredby Behringer Harvard Multifamily Advisors I are approximately $7.1 million and$0.5 million as of December 31, 2008 and 2007, respectively.  At the end of each reporting period, weestimate the total gross Initial Public Offering proceeds expected to bereceived over the entire offering period and recognize the amount of estimatedtotal O&O Reimbursement as determined under SFAS No. 5, “Accountingfor Contingencies”.  We have recognizedthe O&O Reimbursement at the lower amount of (a) 1.5% of the estimatedtotal gross Initial Public Offering proceeds expected to be received over theentire offering period, or (b) the actual Public Offering costs incurredby Behringer Harvard Multifamily Advisors I or its affiliates.  The O&O Reimbursement obligation isrecorded as an offset to additional 

 

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paid-in capital inaccordance with Staff Accounting Bulletin (“SAB”) Topic 5.A, Miscellaneous Accounting— Expenses of Offering.  Total unpaidO&O Reimbursement recorded as a liability and as an offset to additionalpaid-in capital was approximately $6.9 million as of December 31,2008.  As of December 31, 2007, wehad no obligation for such costs and none was recognized.  We used only proceeds from our Initial PublicOffering to pay our O&O Reimbursement obligation and as a result we havepaid approximately $0.2 million as of December 31, 2008.

 

***PrivateOffering Costs***

 

Behringer HarvardMultifamily Advisors I or its affiliates were obligated to pay all of ourPrivate Offering organization and offering costs.  Our only obligation for those costs was topay a fee to Behringer Harvard Multifamily Advisors I under our AdvisorManagement Agreement.  We incurred thisfee obligation at the rate of 1.5% of the actual gross Private Offeringproceeds (the “O&O Fee”), regardless of whether the actual amount ofPrivate Offering costs incurred by Behringer Harvard Multifamily Advisors I orits affiliates was higher or lower than the O&O Fee. Total Private Offeringorganization and offering costs incurred by Behringer Harvard MultifamilyAdvisors I were approximately $3.5 million and $3.0 million as of December 31,2008 and 2007, respectively. We had no obligation for Private Offering costsincurred by Behringer Harvard Multifamily Advisors I and its affiliates inexcess of total amounts due under the O&O Fee. The amount of O&O Feesrecorded was determined as 1.5% of the actual Private Offering proceeds receivedto date; no other amounts were considered by management to be probable ofreimbursement. At the end of each reporting period, we recorded the pro-ratedshare of offering costs embedded in the O&O Fee as an offset to additionalpaid-in capital in accordance with Staff Accounting Bulletin (“SAB”) Topic 5.A,Miscellaneous Accounting — Expenses of Offering.  Total unpaid O&O Fees recognized as aliability and as an offset to additional paid-in capital were approximately$50,000 as of December 31, 2007; no amounts remained unpaid as of December 31,2008. Total O&O Fees recognized as an offset to additional paid-in capitalwere approximately $1.9 million as of December 31, 2008 and 2007,respectively.

 

The Advisory ManagementAgreement was amended on September 2, 2008 and the O&O Reimbursementobligation now includes Private Offering costs incurred by Behringer HarvardMultifamily Advisors I or its affiliates in excess of total amounts due underthe O&O Fee.  As a result, approximately$1.6 million of such costs are included in our estimated total O&OReimbursement obligation as of December 31, 2008.

 

As of December 31,2008 and 2007, the amount of our accrued obligation under the O&O Fee forthe private offering costs and O&O Reimbursement for the public offeringcosts has been recognized in our consolidated statements in accordance withSFAS No. 5.

 

***OrganizationCosts***

 

Behringer HarvardMultifamily Advisors I or its affiliates were obligated to pay all of ourPrivate Offering organizational expenses. Our only obligation for these costswas to pay the O&O Fee as discussed above; we have no other obligations forthese costs. Our organization costs are recorded as an expense in accordancewith SOP 98-5, “Reporting on the Costs of Start-up Activities” and we recordedthe pro-rata share of organization expenses embedded in the O&O Fee as anexpense. We had no obligation for organization costs incurred by BehringerHarvard Multifamily Advisors I and its affiliates in excess of total amountsdue under the O&O Fee, which are approximately $9,500.

 

The Advisory ManagementAgreement was amended on September 2, 2008 and the O&O Reimbursementobligation now includes Private Offering costs incurred by Behringer HarvardMultifamily Advisors I or its affiliates in excess of total amounts due underthe O&O Fee.  In September 2008,we recognized as an expense organization costs incurred by Behringer HarvardMultifamily Advisors I and its affiliates in excess of total amounts due underthe O&O Fee, which were approximately $9,500.

 

***Redemptionof Common Stock***

 

The portion of theredeemed common stock in excess of the par value is charged to additionalpaid-in capital.

 

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***IncomeTaxes***

 

Wehave elected to be taxed as a REIT under Sections 856 through 860 of theInternal Revenue Code of 1986, as amended (the “Code”), and have qualified as aREIT since the year ended December 31, 2007.  To qualify as a REIT,we must meet a number of organizational and operational requirements, includinga requirement that we distribute at least 90% of our REIT taxable income to ourstockholders.  As a REIT, we generally will not be subject to federalincome tax at the corporate level.  We are organized and operate in such amanner as to qualify for taxation as a REIT under the Code, and we intend tocontinue to operate in such a manner, but no assurance can be given that wewill operate in a manner so as to qualify or remain qualified as a REIT.

 

We have evaluated thecurrent and deferred income tax related to the Texas margin tax and we have nosignificant tax liability or benefit as of December 31, 2008 and 2007. Inaddition, we recognized no current tax expense for the year ended December 31,2008 and 2007 related to the Texas margin tax.

 

On January 1, 2007,we adopted the provisions of FASB Interpretation No. 48 Accounting foruncertainty in income taxes — an interpretation of FASB Statement No. 109 (“FIN48”). Under FIN 48, we recognize the financial statement benefit of anuncertain tax position only after determining that the relevant tax authoritywould more likely than not sustain the position following an audit. As of December 31,2008, we have no significant uncertain tax positions.

 

***StockBased Compensation***

 

We have a stock-basedincentive award plan for our directors and consultants and for employees,directors and consultants of our affiliates, and our advisor and itsaffiliates.  We account for this planunder the modified prospective method of SFAS No. 123R, “Share-BasedPayment.” In the modified prospective method, compensation cost is recognizedfor all share-based payments granted after the effective date and for allunvested awards granted prior to the effective date. In accordance with SFAS No. 123R,prior period amounts were not restated. SFAS No. 123R also requires thetax benefits associated with these share-based payments to be classified asfinancing activities in the Consolidated Statements of Cash Flows, rather thanas operating cash flows as required under previous regulations.

 

On November 14,2006, we issued a total of 3,000 shares of restricted stock to our independentdirectors.  On November 28, 2007, weissued an additional 3,000 shares of restricted stock to our independentdirectors. These restricted share issuances each require a 12 month service andvesting period, have no exercise price, and each had an estimated fair value ofapproximately $24,000, for a total fair value of $48,000, using similar shareprices at the time of $8.15 per share. The fair value of each issuance is beingrecognized as compensation expense on a straight-line basis over the requiredservice period. For the year ended December 31, 2008 and 2007, werecognized stock-based compensation expense of approximately $22,000 and$24,000, respectively.

 

No other stock-basedcompensation has been issued.

 

***Concentrationof Credit Risk***

 

As of December 31,2008 and 2007 we had cash and cash equivalents deposited in certain financialinstitutions in excess of federally insured levels.  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.

 

We invest our cash andcash equivalents between several banking institutions in an attempt to minimizeexposure to any one of these entities.  However, the Federal DepositInsurance Corporation, or “FDIC,” generally only insures limited amounts perdepositor per insured bank.  Beginning October 3, 2008 through December 31,2009, the FDIC will insure up to $250,000 per depositor per insured bank; on January 1,2010, the standard coverage limit will return to $100,000 for most depositcategories.  (Unlimited deposit insurancecoverage will be available to our non-interest bearing transaction accountsheld at those institutions participating in FDIC’s Temporary LiquidityGuarantee Program through December 31, 2009.)  As of December 31, 2008, we have cashand cash equivalents deposited at certain financial institutions in excess offederally insured levels.

 

***Income per Share***

 

We calculate earnings pershare in accordance with SFAS No. 128, “Earnings Per Share”. Basicearnings per share is calculated by dividing net earnings available to commonshares by the weighted-average common shares outstanding during the period.Diluted earnings per share is calculated similarly, except that it includes thedilutive effect of the assumed exercise of securities, including the effect ofshares issuable under our stock-based incentive plans. Upon our adoption of ashare redemption plan, the weighted-average common shares redeemable during theperiod will be excluded from basic earnings per share, and included in dilutedearnings per share.

 

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On November 14,2006, we issued a total of 3,000 shares of restricted stock to our independentdirectors, which require a 12 month service and vesting period.  On November 28, 2007 we issued anadditional 3,000 shares of restricted stock to our independent directors. Therestricted shares have no exercise price and are presented as issued shares onour balance sheet. However, as a result of the outstanding performancerequirements the number of shares are excluded from our basic earnings pershare calculation until performance is achieved. As of December 31, 2008,the requirements for the restricted stock have been met and included in thedilutive earnings per share calculation.

 

The Behringer HarvardMultifamily REIT I, Inc. 2006 Amended and Restated Incentive Award Plan (“IncentiveAward Plan”) was approved by the board of directors on November 14, 2006and by the stockholders on November 15, 2006 and later amended andrestated and approved by the board of directors on March 14, 2008.  The Incentive Award Plan authorizes the grantof non-qualified and incentive stock options, restricted stock awards,restricted stock units, stock appreciation rights, dividend equivalents andother stock-based awards.  A total of10,000,000 shares have been authorized and reserved for issuance under theIncentive Award Plan.

 

As of December 31,2008 and December 31, 2007 we had 1,000 shares of convertible stock issuedand outstanding, no shares of preferred stock issued and outstanding, and hadno options to purchase shares of common stock outstanding.  The convertible stock is not included in thedilutive earnings per share calculation.

 

***Reportable Segments***

 

SFAS No. 131, “Disclosuresabout Segments of an Enterprise and Related Information,” establishes standardsfor reporting and financial and descriptive information about an enterprise’sreportable segments. Our current business consists of investing in andoperating multifamily communities. Substantially all of our consolidated netincome is from real estate properties that we own through joint-ventures, andwe account for each joint venture under the equity method of accounting. Ourchief operating decision maker evaluates operating performance on an individualjoint venture level. However, as each of our joint ventures has similareconomic characteristics in our consolidated financial statements, the companyis managed on an enterprise-wide basis with one reportable segment.

 

***Fair Value of Financial Instruments***

 

We believe the carrying values of cash and cashequivalents, notes receivables and receivables from affiliates approximatestheir fair values.

 

***Reclassifications***

 

Certain financialinformation from the previous fiscal year has been revised to conform to thecurrent year presentation.  Theserevisions to the historical presentation do not reflect a material change tothe information presented in the Consolidated Statements of Cash Flows, BalanceSheet and Stockholders’ Equity.

 

For the year ended December 31,2007, in order to combine immaterial amounts we revised the presentation of theoperating activities in our Consolidated Statement of Cash Flows to combine theaccounts receivable caption $2,000 and the accrued interest on mortgage notesreceivable caption $67,986 into one caption titled accounts receivable andother receivables $69,986.  We alsorevised the financing activities section by combining the credit facilityfinancing fees caption $327,994 into the credit facility proceeds caption$35,672,006.

 

For the year ended December 31,2007, in order to separately report the increased 2008 activity related tooffering costs we revised the presentation of the Consolidated Balance Sheet toseparately classify accrued offering costs payable to affiliates $282,214 frompayables to affiliates by adding  thecaption accrued offering costs payable to affiliates.

 

For the year ended December 31,2007, in order to separately report the increased activity related to offeringcosts we revised the presentation of the Consolidated Statement of Stockholders’Equity to separately classify offering costs $1,909,606 from sale of commonstock, net.  We also are presenting theshares issued from our incentive award plan 3,000 shares separately from ourshares issued in our sale of common stock.

 

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**3.****                                     ****Recently Announced AccountingPronouncements**

 

In September 2006,the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS 157”).SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosuresabout fair value measurements.  Weadopted the provisions of SFAS 157 effective January 1, 2008, and it didnot have a material effect on our consolidated results of operations orfinancial position.

 

In February 2008,the FASB staff issued Staff Position No. 157-2 “Effective Date of FASBStatement No. 157” (“FSP SFAS 157-2”). FSP SFAS 157-2 delayed the effective date of SFAS 157 for nonfinancialassets and nonfinancial liabilities, except for items that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  The provisions of FSPSFAS 157-2 will expire for our fiscal year beginning January 1, 2009.

 

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

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  This Statement replacesSFAS No. 141, “Business Combinations” but retains the fundamentalrequirement that the acquisition method of accounting, or purchase method, beused for all business combinations and for an acquirer to be identified foreach business combination.  ThisStatement is broader in scope than that of Statement 141, which applied only tobusiness combinations in which control was obtained by transferringconsideration.  SFAS No. 141(R) appliesthe same method of accounting (the acquisition method) to all transactions andother events in which one entity obtains control over one or more otherbusinesses.  This Statement also makescertain other modifications to Statement 141, including a broader definition ofa business and the requirement that acquisition related costs are expensed asincurred.  This statement applies to ourbusiness combinations occurring beginning January 1, 2009.  The acquisition of a real estate property has beendetermined to meet the definition of a business combination as defined in SFAS No. 141(R);however, investments in unconsolidated joint ventures are not affected.  Therefore, SFAS No. 141(R) willhave a material effect on our accounting for future consolidated acquisitionsof  properties as acquisition costs willno longer be capitalized, but will be expensed beginning January 1, 2009.

 

**4.**                                      Investments in Unconsolidated Real EstateJoint Ventures

** **

Asof December 31, 2008 and 2007, we had ten and eight investments inunconsolidated real estate joint ventures, respectively. All of our investmentsin unconsolidated real estate joint ventures are BHMP CO-JVs (as defined below). We arenot limited to BHMPCO-JVs and we may choose other joint venture partners or investmentstructures.

 

***BHMPCO-JV***

 

We have entered intoseparate joint ventures with Behringer Harvard Master Partnership I LP (“BehringerHarvard Master Partnership I”) in which we are the manager. The 1% generalpartner of Behringer Harvard Master Partnership I is Behringer HarvardInstitutional GP LP, which is an affiliate of Behringer Harvard MultifamilyAdvisors I, is indirectly owned by our sponsor, Behringer Harvard Holdings, LLCand the 99% limited partner of Behringer Harvard Master Partnership I is anunaffiliated social work sector pension fund based in The Netherlands,Stichting Pensioenfonds Zorg en Welijn (“PGGM”). Substantially all of thecapital provided to Behringer Harvard Master Partnership I is from PGGM. Wehave no direct financial or other ownership interest in either of theseentities.  Each separate joint venturewith Behringer Harvard Master Partnership I is referred to as a BHMPCO-JV.  Currently, our ownership,contribution and distribution interests are 55% except for our one operatingBHMP CO-JV, which has a 64% interest.

 

Untilthe maximum funding commitment from PGGM of $200 million has been placed, weexpect substantially all of our future real estate acquisitions and real estateunder development activities will use a joint venture structure with BHMPCO-JV.  The maximum funding commitmentfrom PGGM may be increased to $300 million.

 

Wehave determined that our BHMP CO-JVs are not variable interest entities underFIN 46R, and thus have evaluated them for consolidation under SOP 78-9 and EITF04-5. Each BHMP CO-JV has two partners, and each BHMP CO-JV partner possessesequal substantive participating rights to make decisions which constituteroutine occurrences in each BHMP CO-JV’s ordinary course of business. Thesedecisions include the requirement to approve initial and annual operatingplans, initial and annual capital 

 

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expenditures, any salesor dispositions of investments, and, any method of refinancing or raisingadditional debt or equity capital. As a result of these equal substantiveparticipating rights, no single party controls each BHMP CO-JV; accordingly, weaccount for each BHMP CO-JV using the equity method of accounting.

 

During April 2007, weentered into commitments for and partially funded equity investments inunconsolidated real estate joint ventures and interest-bearing loans to realestate joint ventures with two separate commercial real estate developers, theLovers Lane Townhomes and the Eclipse, in our real estate development business(the “Two Development Contracts”). These Two Development Contracts were held bytwo separate subsidiaries that we fully consolidated in our financialstatements (the “Two Subsidiaries”). Prior to June 1, 2007, ourconsolidated financial statements recognized 100% of these equity investmentsin real estate joint ventures as investments in unconsolidated real estatejoint ventures, and, 100% of these interest-bearing real estate loans to realestate joint ventures as notes receivable, recognizing accrued interest incomeon a monthly basis.  During June 2007,Behringer Harvard Master Partnership I purchased for cash approximately 45% ofthe ownership interest in each of our two subsidiaries that held the Two DevelopmentContracts. Subsequent to June 1, 2007, we no longer consolidate those twosubsidiaries and prospectively recognize our remaining approximate 55%ownership interest under the equity method of accounting as investments inunconsolidated real estate joint ventures. We believe the carrying values ofthe joint ventures’ equity interests sold approximated fair value because ofthe short duration and lack of change in the entity’s underlying assets, theTwo Development Contracts. We recorded Behringer Harvard Master Partnership I’spurchase as a reduction in the carrying value of our real estate investmentbalance; no gains or losses were incurred or recognized.

 

***BHMP CO-JV Investments in unconsolidated real estate joint ventures***

 

Wehave established one BHMP CO-JV to make investments in only one separateproject or property. Each BHMP CO-JV owns 100% of the voting equity interest inone subsidiary REIT and substantially all business is conducted through itssubsidiary REIT. Each subsidiary REIT has made equity investments and/or notesreceivable to entities that own one real estate project (the “Property Entities”).Each BHMP CO-JV, its respective subsidiary REIT, and its respective PropertyEntity is an independent investment; investments are not commingled. Thegeneral partner of the Property Entities are generally commercial developersand were organized to own, construct, and finance only one particular realestate project. The Property Entities are not consolidated in our financialstatements.

 

Our interestsin the BHMP CO-JVs are recorded as investments in unconsolidated real estatejoint ventures and use the equity method of accounting.  The following presents the BHMP CO-JVs’combined balance sheet data (amounts in thousands):

 
| ** **                                               | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|
| **Balance sheet data:**                        | ** ** | **2008**              | ** ** | **2007**              | ** ** |
| Notes receivable, net (1)                                |       | $                     | 119,911    |                  | $          | 76,379 |   |
| Investments in unconsolidated real estate joint ventures |       | 29,895                |       | 14,981                |       |
| Land and buildings, net                                  |       | 30,988                |       | 32,803                |       |
| Cash and restricted cash                                 |       | 7,997                 |       | 1,797                 |       |
| Accounts receivable                                      |       | 27                    |       | 31                    |       |
| Accrued interest receivable                              |       | 1,616                 |       | 1,041                 |       |
| Deferred financing costs and other assets, net           |       | 392                   |       | 482                   |       |
| Total assets                                             |       | $                     | 190,826    |                  | $          | 127,514 |   |
|                                                     |       |                  |       |                  |       |
| Bank loan                                                |       | $                     | 23,000     |                  | $          | 23,000 |   |
| Accrued liabilities                                      |       | 167                   |       | 313                   |       |
| Other liabilities                                        |       | 222                   |       | 104                   |       |
| Minority shareholder interest                            |       | 1,784                 |       | 2,085                 |       |
| Preferred units                                          |       | 229                   |       | —                |       |
| Members’ equity:                                    |       |                  |       |                  |       |
| Behringer Harvard Multifamily REIT I, Inc.          |       | 91,598                |       | 57,005                |       |
| Behringer Harvard Master Partnership I LP                |       | 73,826                |       | 45,007                |       |
| Total liabilities and members’ equity               |       | $                     | 190,826    |                  | $          | 127,514 |   |

----

(1) Note receivable balance include loansadvanced less deferred commitment fees and other deferred financing liabilities

 

The Reserve at Johns Creek is an operating multifamilycommunity wholly-owned by a single-purpose limited liability company (the “TheReserve at Johns Creek Property Entity”) and for 2008 and 2007 represents theonly Property Entity reported on a consolidated basis by the BHMP CO-JV. One ofour BHMP CO-JV owns an 80 percent equity interest in The Reserve at Johns CreekProperty Entity, with an unaffiliated owner who owns the remaining 20 percent.The unaffiliated owner’s 20 percent 

 

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equity interest is presented in the BHMP CO-JV’scombined balance sheet data above as minority shareholder interest.  The Reserve at Johns Creek Property Entity,including its operating receipts lock-box account, serves as collateral for aninterest-only bank loan with a principal balance of $23 million from anunaffiliated lender (the “Bank Loan”). The Bank Loan of $23 million was enteredinto during August 2007, matures in March 2013, and bears interest ata rate of 6.461%. The lender has no recourse to the BHMP CO-JV or us, only toThe Reserve at Johns Creek Property Entity. Breaching the Bank Loan’srestrictions on encumbrances, sale, transfer, or refinancing of the propertycould constitute an event of default and increase the interest rate by 5%;uncured events of default can accelerate the loan’s maturity date.  Management believes no events of default haveoccurred.

 

The following presents the BHMP CO-JVs’ combinedincome statement data for the year ended December 31, 2008 and the periodfrom their respective dates of inception in 2007, through December 31,2007. The operating results of The Reserve at Johns Creek Walk Property Entityare consolidated in the BHMP CO-JV’s combined income statement data (amounts inthousands):

 
| ** **                                                              | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|-------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Revenues**                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Rent, fees and other                                                    |       | $          | 3,036      |       | $          | 1,191 |   |
| Interest                                                                |       | 10,207     |       | 2,294      |       |
|                                                                    |       | 13,243     |       | 3,485      |       |
|                                                                    |       |       |       |       |       |
| **Expenses**                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| General and operating                                                   |       | 1,235      |       | 354        |       |
| Real estate taxes                                                       |       | 329        |       | 106        |       |
| Interest expense                                                        |       | 1,511      |       | 650        |       |
| Depreciation and amortization                                           |       | 1,910      |       | 991        |       |
|                                                                    |       | 4,985      |       | 2,101      |       |
|                                                                    |       |       |       |       |       |
| Equity in loss of unconsolidated real estate joint venture  investments |       | (515       | )          | —     |       |
|                                                                    |       |       |       |       |       |
| Minority shareholder interest                                           |       | 301        |       | 177        |       |
| **Net income**                                                          |       | $          | 8,044      |       | $          | 1,561 |   |

 

Includedin our equity in earnings of unconsolidated real estate joint ventureinvestments for the year ended December 31, 2008 and 2007 is our share ofthe above BHMP CO-JVs’ net income in the amount of $4,275,881 and $793,218,respectively.

 

Thefollowing presents the reconciliation between our members’ equity interest inthe BHMP CO-JVs and our total investments in unconsolidated real estate jointventures (amounts in thousands):

 
| ** **                                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance of our Member’s equity in the BHMP CO-JVs   |       | $        | 91,598     |     | $          | 57,006 |   |
| Other capitalized costs, net of amortization             |       | 4,907    |       | 3,063    |       |
| Investments in unconsolidated real estate joint ventures |       | $        | 96,505     |     | $          | 60,069 |   |

 

***The BHMP CO-JVs’ notes receivable from and equity investments inProperty Entities***

 

Includedin the BHMP CO-JV combined financial data are loans to and equity investmentsin ten Property Entities, one an operating property and eight indevelopment.  All of the equityinvestments are accounted for using the equity method of accounting because theBHMP CO-JV exercises significant influence on, but does not control theseentities. Below are the BHMP CO-JVs’ notes receivable from and equityinvestments in the Property Entities (amounts in millions):

 

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***Wholly Owned Investment — Loans***

 

**MultifamilyDevelopments**

 
| ** **                      | ** ** | **Our Company Investment Information (1)** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|
| **Name of Underlying Property** | ** ** | **Maximum Advance**                        | ** ** | **Amount Advanced** | ** ** | **Interest Rate** | ** ** | **Maturity Date** | ** ** | **Equity Option** | ** ** |
| Grand Reserve                   |       | $                                          | 2.2        |   | $ | — |   | 10.0 | % | 4/2012 |   | (2) |   |
|                                 |            |                                            |            |  |  |  |  |  |  |  |  |  |  |

 

***BHMPCO-JV**********Investments —Loans***

 

**MultifamilyDevelopments**

 
| ** **                             | ** ** | **BHMP CO-JV Investment Information (1)** | ** ** |
|----------------------------------------|------------|-------------------------------------------|------------|
| **Name of Underlying Property**        | ** ** | **Maximum Advance**                       | ** ** | **Amount Advanced** | ** ** | **Interest Rate** | ** ** | **Maturity Date** | ** ** | **Equity Option** | ** ** |
| Grand Reserve                          |       | $                                         | 7.5        |   | $ | 7.1 |   | 10.0 | % | 4/2012 |   | (2) |   |
| The Eclipse                            |       | 8.1                                       |       | 8.1 |   | 9.5 | % | 4/2012 |   | (2) |   |
| Fairfield at Baileys Crossing          |       | 22.1                                      |       | 22.1 |   | 9.5 | % | 7/2012 |   | (2) |   |
| Alexan St. Rose (3)                    |       | 21.0                                      |       | 14.7 |   | 13.0 | % | 12/2013 |   | (2) |   |
| Tower 55 Hundred                       |       | 20.0                                      |       | 20.0 |   | 9.5 | % | 10/2012 |   | (2) |   |
| Satori                                 |       | 14.8                                      |       | 14.8 |   | 10.0 | % | 10/2012 |   | (2) |   |
| Fairfield at Cameron House             |       | 19.3                                      |       | 19.3 |   | 9.5 | % | 12/2012 |   | (2) |   |
| Alexan Prospect                        |       | 14.8                                      |       | 10.6 |   | 10.0 | % | 4/2013 |   | (2) |   |
| The Venue                              |       | 5.8                                       |       | 5.8 |   | 10.0 | % | 6/2013 |   | — |   |
| Total BHMP CO-JV Loans to Developments |       | $                                         | 133.4      |   | $ | 122.5 |   |   |   |   |   |   |   |

 

***BHMPCO-JV**********Investments —Equity***

 

**MultifamilyDevelopments**

 
| ** **                                           | ** ** | **BHMP CO-JV Investment Information (1)** |
|------------------------------------------------------|------------|-------------------------------------------|
| **Name of Underlying Property**                      | ** ** | **Investment  Amount**                    | ** ** | **Property Entity  Ownership (7)** | ** ** | **Preferred  Return (8)** | ** ** |
| The Eclipse                                          | ** ** | $                                         | 3.5 |   | 50.1 | % | 9.5 | % |
| Tower 55 Hundred (5)                                 | ** ** | 3.5                                       |   | 50.1 | % | 9.5 | % |
| Alexan St. Rose (6)                                  | ** ** | 5.2                                       |   | 60.0 | % | 9.5 | % |
| Satori                                               | ** ** | 7.4                                       |   | 50.0 | % | 9.5 | % |
| Alexan Prospect                                      | ** ** | 7.3                                       |   | 50.1 | % | 9.5 | % |
| The Venue                                            | ** ** | 2.9                                       |   | 50.1 | % | 9.5 | % |
| Total BHMP  CO-JV Equity Investments in Developments | ** ** | $                                         | 29.8 |   |   |   |   | ** ** |

 

**MultifamilyOperating**

 
| ** **                                              | ** ** | **BHMP  CO-JV Investment Information (1)** | ** ** |
|---------------------------------------------------------|------------|--------------------------------------------|------------|
| **Name of  Property**                                   | ** ** | **Investment**

**Amount**                 | ** ** | **Property  Entity**

**Ownership  (7)** | ** ** | **Preferred**

**Return  (8)** | ** ** |
| The Reserve at Johns Creek (4)                          |       | $                                          | 6.7        |   | 80.0 | % | 5.0 | % |
|                                                    |       |                                       |       |   |   |   |   |
| Total BHMP  CO-JV Equity Investments                    |       | $                                          | 36.5       |   |   |   |   |   |
|                                                    |       |                                       |       |   |   |   |   |
| Total BHMP  CO-JV Loans Advanced and Equity Investments |       | $                                          | 159.0      |   |   |   |   |   |

----

(1)          We hold a 55% ownership interest in each BHMP CO-JVand PGGM owns the remaining 45% ownership interest, expect for The Reserve atJohns Creek Walk BHMP CO-JV, in which we hold a 64% ownership interest in theBHMP CO-JV and PGGM owns the remaining 36%.

 

(2)          The BHMP CO-JVs acquired options to purchase a certainpercentage ownership interest in the Property Entity, or to convert into equity.Options are generally exercisable for a period ranging from 60-90 days afterproject completion.

 

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(3)          The mezzanine loan investment made to the owner of theAlexan St. Rose project was made in the form of a senior mezzanine loan and ajunior mezzanine loan, but they are referred to collectively as a singlemezzanine loan.

 

(4)          This property is managed by a party that is affiliatedwith the other equity investors in the Property Entity.

 

(5)          BHMP CO-JV has a right to 50.1% of net proceeds afterall other required distributions are made by the Property Entity.  In addition, our contributed capital isentitled to a preferred return.  In orderto maintain our share of back end interest (the residual profit after all otherrequired distributions are made) and maintain the priority level of ourcapital, we must contribute 70% if certain capital is required by the PropertyEntity.

 

(6)          BHMP CO-JV has a right to 60% of net proceeds afterall other required distributions are made by the Property Entity.  In addition, our contributed capital isentitled to a preferred return.  In orderto maintain the priority level of our capital, we must contribute 50% ifcertain capital is required by the Property Entity.

 

(7)          Property Entity ownership refers to the BHMP CO-JVs’back end interest. Additional capital contributions may have differentallocation percentages.

 

(8)          Preferred Return refers to the rate of return on BHMPCO-JV’s invested capital which has a higher priority than certain otherdistributions to equity owners.

 

Our involvement with eachof the Property Entities began at the time the BMMP CO-JV committed to makingan investment, and our maximum potential loss exposure is limited to the fundedportion of our commitments. The Property Entities also owe amounts under othermortgage loans, bank loans, and other liabilities balances which areobligations of the Property Entities. Neither we nor the BHMP CO-JVs have aprimary or secondary obligation on those obligations of the Property Entities.The following table includes estimated information about the nature and size ofthe activities of the Property Entities. (see Note 7 for amounts of ourunfunded commitments):

 

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| **Project Name / Location  / Description**                                                                                                                                     | ** ** | **Estimated Project  Completion Date** | ** ** | **Construction Cost  (millions)** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|----------------------------------------|
| The Reserve at Johns  Creek Walk / Fulton County, Georgia                                                                                                                                     |       | Operating                                        |       | $                                      | 33.5 |
| A 3 story operating  apartment community with 210 rental units within an overall mixed-use  development containing retail and for-sale townhomes                                              |       |                                             |       |                                   |
|                                                                                                                                                                                          |       |                                             |       |                                   |
| The Eclipse / Houston,  Texas                                                                                                                                                                 |       | 2nd Quarter 2009                            |       | 35.7                                   |
| Previously undeveloped  land expected to be a 3 story apartment community with approximately 330  rental units                                                                                |       |                                             |       |                                   |
|                                                                                                                                                                                          |       |                                             |       |                                   |
| Satori / Broward  County, Florida                                                                                                                                                             |       | 3rd Quarter 2009                            |       | 98.5                                   |
| Previously developed  land which has been demolished and is expected to be a 3 and 9 story  structure apartment community with approximately 279 rental units                                 |       |                                             |       |                                   |
|                                                                                                                                                                                          |       |                                             |       |                                   |
| Tower 55 Hundred /  Arlington County, Virginia                                                                                                                                                |       | 3rd Quarter 2009                            |       | 99.8                                   |
| Previously developed land  which has been demolished and is expected to be a 10 story high-rise  apartment community with approximately 234 rental units and an underground  parking facility |       |                                             |       |                                   |
|                                                                                                                                                                                          |       |                                             |       |                                   |
| The Venue / Clark  County, Nevada                                                                                                                                                             |       | 4th Quarter 2009                            |       | 29.1                                   |
| Previously undeveloped land  expected to be a 3 story apartment structure with approximately 168 units                                                                                        |       |                                             |       |                                   |
|                                                                                                                                                                                          |       |                                             |       |                                   |
| Fairfield at Baileys  Crossing / Fairfax County, Virginia                                                                                                                                     |       | 1st Quarter 2010                            |       | 147.6                                  |
| Previously undeveloped  land, expected to be a 3, 4 and 7 story structure apartment community with  approximately 414 rental units and an attached parking structure                          |       |                                             |       |                                   |
|                                                                                                                                                                                          |       |                                             |       |                                   |
| Grand Reserve / Dallas,  Texas                                                                                                                                                                |       | 1st Quarter 2010                            |       | 38.7                                   |
| Previously developed  land which has been demolished and is expected to be a 2 story townhome  community with approximately 149 rental units                                                  |       |                                             |       |                                   |
|                                                                                                                                                                                          |       |                                             |       |                                   |
| Fairfield at Cameron  House / Silver Spring, Maryland                                                                                                                                         |       | 1st Quarter 2010                            |       | 128.9                                  |
| Previously developed  land which has been demolished and is expected to be a 15 story high-rise  apartment community with approximately 325 rental units                                      |       |                                             |       |                                   |
|                                                                                                                                                                                          |       |                                             |       |                                   |
| Alexan Prospect /  Denver, Colorado                                                                                                                                                           |       | 3rd Quarter 2010                            |       | 94.8                                   |
| Previously undeveloped  land expected to be a 4 story apartment structure with approximately 400  units                                                                                       |       |                                             |       |                                   |
|                                                                                                                                                                                          |       |                                             |       |                                   |
| Alexan St. Rose /  Henderson, Nevada                                                                                                                                                          |       | 2nd Quarter 2011                            |       | 70.1                                   |
| Previously undeveloped  land, expected to be a 3 story apartment community with approximately 430  rental units                                                                               |       |                                             |       |                                   |

 

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***Disclosure of summarizedfinancial information of the Property Entities***

 

Certain BHMP CO-JVs have made an equity investment inits respective Property Entity.  EachBHMP CO-JV and its respective Property Entity are independent investments;investments are not commingled. The Property Entities own development projectsand****typically have no operational incomeor loss until they begin leasing.  Thefollowing presents the summarized financial information of those unconsolidatedProperty Entities including The Eclipse, St. Rose, Satori, Tower 55 Hundred,Alexan Prospect, and The Venue (amounts in thousands):

 

| ** **                                       | ** ** | **December 31,**

**2008** | ** ** | **December 31,**

**2007** | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|
| Land and construction in progress                |       | $                               | 244,679    |                            | $          | 85,522 |   |
| Cash                                             |       | 254                             |       | 538                             |       |
| Other assets                                     |       | 58                              |       | 9                               |       |
| **Total assets**                                 |       | $                               | 244,991    |                            | $          | 86,069 |   |
|                                             |       |                            |       |                            |       |
| Construction loans                               |       | $                               | 109,422    |                            | $          | 7,601 |   |
| BHMP CO-JV notes payable                         |       | 74,021                          |       | 35,873                          |       |
| Accounts payable, interest payable and other     |       | 28,119                          |       | 25,168                          |       |
| Partners’ capital                           |       | 33,429                          |       | 17,427                          |       |
| **Total liabilities and partners’ capital** |       | $                               | 244,991    |                            | $          | 86,069 |   |

 

TheEclipse PropertyEntity began initial leasing activities in October 2008. For the yearended December 31, 2008, revenues were approximately $48,000 and net losswas approximately $489,000. All other Property Entities operational losses wereimmaterial.

 

As of December 31, 2008 and 2007, twounaffiliated commercial property companies and their affiliates are developers,partners and guarantors in six and four of the Property Entities, respectively,representing 42% and 28% of our total assets, respectively.

 

**5.****                                      CreditFacility with Behringer Harvard Operating Partnership I LP**

 

On April 2,2007, our operating partnership, Behringer Harvard Multifamily OP I, enteredinto a one-year credit facility with the operating partnership of BehringerHarvard REIT I, Inc., Behringer Harvard Operating Partnership I LP (the “CreditFacility”). The Credit Facility was terminated on December 20, 2007.During 2007 we paid cash for interest and other fees of approximately $925,000.As of December 31, 2008 and December 31, 2007, our investments inunconsolidated real estate joint ventures included approximately $283,000 ofcapitalized interest costs.

 

**6.****                                      StockholdersEquity**

 

***Capitalization***

 

As of December 31,2008 and December 31, 2007, we had 15,347,792 and 14,272,919 shares ofcommon stock outstanding, respectively, including 6,000 shares of restrictedstock issued to our independent directors for no cash, and 24,969 shares ownedby Behringer Harvard Holdings for cash of $200,001. As of December 31, 2008and December 31, 2007, we had 1,000 shares of convertible stock and noshares of preferred stock issued and outstanding.

 

In2006, Behringer Harvard Multifamily Advisors I purchased a special limitedpartnership interest in our operating partnership, Behringer HarvardMultifamily OP I, for cash of $10,000 (the “Incentive Unit”). This IncentiveUnit entitled the special limited partner to receive an amount when certainevents occur. On November 28, 2007, the Incentive Unit was canceled andthe $10,000 cash purchase price was returned to Behringer Harvard MultifamilyAdvisors I. Concurrently, Behringer Harvard Multifamily REIT I, Inc. sold1,000 shares of convertible stock to Behringer Harvard Multifamily Advisors Ifor $1,000.  In September 2008, werepurchased the outstanding convertible stock from our advisor, cancelled thestock and issued non-participating, non-voting convertible stock for $1,000.Management has reviewed the terms of the underlying convertible stock anddetermined the fair value under GAAP approximated the nominal value paid forthe shares.

 

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Theconvertible stock generally is convertible into shares of common stock with avalue equal to 15% of the amount by which (1) our enterprise value at thetime of conversion, including the total amount of distributions paid to ourstockholders, exceeds (2) the sum of the aggregate capital invested by ourstockholders plus a 7% cumulative, non-compounded, annual return on suchcapital at the time of conversion, on a cash-on-cash basis.  The convertible stock can be converted whenthe excess value described above is achieved or our common stock is listed on anational securities exchange.

 

***Share Redemption Program***

 

OnSeptember 2, 2008, our board of directors has authorized a shareredemption program for investors who hold their shares for more than oneyear.  The purchase price for redeemed shares is set forth in theprospectus for our Initial Public Offering of common stock, as supplementedfrom time to time.  Our board of directors reserves the right in its solediscretion at any time, and from time to time, to (1) waive the one-yearholding period in the event of the death, disability, need for long-term care,or other exigent circumstances such as bankruptcy, a mandatory distributionrequirement under a stockholder’s IRA or with respect to shares purchased underor through our DRIP or automatic purchase plan, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program.  Under the terms of theplan, during any calendar year, we will not redeem in excess of 5% of the weightedaverage number of shares outstanding during the twelve-month calendar-basedperiod immediately prior to the date of redemption.  In addition, ourboard of directors will determine whether we have sufficient cash fromoperations to repurchase shares, and such purchases will generally be limitedto proceeds of our DRIP plus 1% of operating cash flow for the previous fiscalyear.  We redeemed 16,667 shares of common stock for $140,000during the year ended December 31, 2008.

 

***Distributions***

 

We didnot declare or pay any distributions prior to June 6, 2007.

 

Distributions as of December 31, 2008 and 2007 were asfollows:

 

| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2008**       | ** ** | **Declared**      | ** ** | **Paid (including DRIP)** | ** ** |
| Fourth Quarter |       | $                 | 2,394,437  |   | $ | 1,996,413 |   |
| Third Quarter  |       | 1,330,495         |       | 1,330,539 |   |
| Second Quarter |       | 1,330,847         |       | 1,330,802 |   |
| First Quarter  |       | 1,301,225         |       | 1,279,428 |   |
|           |       | $                 | 6,357,004  |   | $ | 5,937,182 |   |
|           |       |              |       |   |   |
| **2007**       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $                 | 730,682    |   | $ | 396,450 |   |
| Third Quarter  |       | 196,590           |       | 118,764 |   |
| Second Quarter |       | —            |       | — |   |
| First Quarter  |       | —            |       | — |   |
|           |       | $                 | 927,272    |   | $ | 515,214 |   |

 

**7.****                                      Commitmentsand Contingencies**

 

In the ordinary course ofbusiness, we and/or Co-Investment Ventures contract with unaffiliatedcommercial property development companies and provide equity and/or loans for aparticular project (our “Project Commitments”).  We generally fund aninitial amount under our Project Commitments at contract inception and fundadditional amounts as construction progresses, typically spanning one to threeyears.  As of December 31, 2008, allof our Co-Investment Ventures have been BHMP CO-JVs.

 

As of December 31,2008, the BHMP CO-JVs held contracts for equity investments and/or loans with atotal commitment value of approximately $173.0 million and the BHMP CO-JVs havecurrently funded approximately $162.0 million. The BHMP CO-JVs will requireadditional capital from us and Behringer Harvard Master Partnership I in orderto fund the remaining commitments of $11.0 million.  The BHMP CO-JVs may become obligated undercontingent sell options to three Property Entities. In addition, we hold theGrand Reserve Junior Mezzanine Loan with a total commitment value ofapproximately $2.2 million and have currently funded approximately $1,000.

 

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TheBHMP CO-JVs’ unfunded commitments for project construction will be generallyfunded as actual real estate project construction progresses. Estimated futurepayments and timing are as follows, as of December 31, 2008 (amounts inmillions):

 
| ** ** | ** ** | **The BHMP CO-JVs’  total unfunded  commitments for  project construction** | ** ** | **The BHMP CO-JVs’  other contingent  obligations under  sell options** | ** ** | **Our estimated  portion of the  BHMP CO-JVs’ unfunded commitments**

**and contingent options** | ** ** | **Our unfunded  loan commitment** | ** ** | **Our estimated  total** | ** ** |
|------------|------------|--------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|-------------------------------|------------|
| 2009       |       | $                                                                                          | 11.0       |                                                                                             | $          | —                                                                                                                    |       | $                                      | 6.0        |                          | $          | 2.2 |   | $ | 8.2 |   |
| 2010       |       | —                                                                                     |       | 55.8                                                                                             |       | 30.7                                                                                                                      |       | —                                 |       | 30.7                          |       |
| Total      |       | $                                                                                          | 11.0       |                                                                                             | $          | 55.8                                                                                                                      |       | $                                      | 36.7       |                          | $          | 2.2 |   | $ | 38.9 |   |

 

The contingent obligations under sell options relateto Fairfield at Baileys Crossing, Fairfield at Cameron House and the GrandReserve Project Entities.  The optionsare generally exercisable after completion of the development and for a periodof three years thereafter.  The optionprice is set by agreement and is either based on the fair value of the projectat exercise or the cost of the project as, defined.   The information in the table aboverepresents our current estimates and actual amounts may be more or less.  As of December 31, 2008, no sell optionsare exercisable.

 

**8.****                                     ****Related Party Arrangements**

 

Wehave no employees and are supported by related party service agreements.  Our advisor and certain of its affiliatesearn fees and compensation in connection with the acquisition, management andsale of our assets.   We are dependent on Behringer HarvardMultifamily Advisors I, Behringer Securities and BHM Management for certainservices that are essential to us, including the sale of shares of our commonstock, asset acquisition and disposition decisions, property management andleasing services and other general administrative responsibilities. In theevent that these companies were unable to provide us with the respectiveservices, we would be required to obtain such services from other sources.

 

Behringer Securities LP (“Behringer Securities”), anaffiliate of our advisor, serves as the dealer manager for the Initial PublicOffering and receives commissions of up to 7% of gross offering proceeds beforereallowance of commissions earned by participating broker-dealers.  Inconnection with the Initial Public Offering, up to 2.5% of gross proceedsbefore reallowance to participating broker-dealers are paid to BehringerSecurities as a dealer manager fee; except that no dealer manager fee is paidon purchases made pursuant to our DRIP.  In the Initial Public Offering,Behringer Securities reallows all of its commissions to participatingbroker-dealers and reallows a portion of its dealer manager fee of up to 2.0%of the gross offering proceeds to be paid to such participating broker-dealers;provided, however, that Behringer Securities may reallow, in the aggregate, nomore than 1.5% of gross offering proceeds for marketing fees and expenses, bonafide training and educational meetings and non-itemized, non-invoiced due diligenceefforts, and no more than 0.5% of gross offering proceeds for bona fide,separately invoiced due diligence expenses incurred as fees, costs and otherexpenses from third parties. For the year ended December 31, 2008, wesold 1.1 million shares and therefore Behringer Securities earned commissionsand dealer manager fees of approximately $0.7 million and $0.3 million,respectively. For theyear ended December 31, 2007, we sold 14.2 million shares and thereforeBehringer Securities earned commissions and dealer manager fees ofapproximately $7.9 million and $3.2 million, respectively.

 

On September 2, 2008, we entered into an Amended andRestated Advisory Management Agreement (the “Advisory Management Agreement”)with our advisor, Behringer Harvard Multifamily Advisors I.  The board of directors renewed the AdvisoryManagement Agreement on November 13, 2008; therefore, the Advisory ManagementAgreement has a termination date of November 13, 2009 with the option to berenewed for an unlimited number of successive one-year terms.  The board of directors has a duty to evaluatethe performance of our advisor annually before the parties can agree to renewthe agreement. 

 

Allorganization and offering expenses (excluding selling commissions and thedealer manager fee) are incurred and paid by Behringer Harvard MultifamilyAdvisors I or its affiliates. As related to the Private Offering, we paidBehringer Harvard Multifamily Advisors I a fixed rate of 1.5% of gross offeringproceeds, regardless of whether the actual amount of organization and offeringexpenses is greater or less than 1.5% of gross offering proceeds. We beganreceiving proceeds from our Private Offering in April 2007 and terminatedthe private offering on December 28, 2007. We began receiving proceedsfrom our Initial Public Offering in October 2008.  For the years ended December 31, 2008and 2007, Behringer Harvard Multifamily Advisors I earned approximately $0.2million and $1.9 million, respectively, for organization and offering expenses.Under the terms of the amended Advisory Management Agreement, we will reimburseBehringer Harvard Multifamily Advisors I for all organization and offeringcosts they have incurred not to exceed 1.5% of our gross Initial PublicOffering proceeds, including costs the Private Offering in excess of theO&O Fee.  As of December 31,2008, we estimated our obligation to reimburse offering expenses in an amountof approximately $6.9 million and recorded it as a reduction of additionalpaid-in capital.

 

Includedin general and administrative expense for the year ended December 31, 2008is approximately $0.5 million for accounting and legal personnel costs incurredon our behalf by our advisor under the Advisory Management Agreement. None wereincurred for the year ended December 31, 2007. These obligations aretypically settled in cash within ninety days.

 

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ThroughSeptember 2008, Behringer Harvard Multifamily Advisors I or its affiliatesreceived acquisition and advisory fees of 2.5% of (1) the contractpurchase price paid or allocated in respect of the development, construction orimprovement of each asset acquired directly by us, including any debtattributable to these assets, or (2) when we make an investment indirectlythrough another entity, our pro rata share of the gross asset value of realestate investments held by that entity. Behringer Harvard Multifamily AdvisorsI or its affiliates also received 2.5% of the funds advanced in respect of aloan or other investment. Behringer Harvard Multifamily Advisors I or itsaffiliates reimbursed for all expenses related to the selection and acquisitionof assets, whether or not acquired by us. We began acquiring real estateinvestments in April 2007. Under the amended Advisory Management Agreementdated September 2, 2008, these rates were reduced to 1.75%. For the yearended December 31, 2008 and 2007, Behringer Harvard Multifamily Advisors Iearned acquisition and advisory fees of approximately $1.8 million and $2.6million, respectively.

 

Ouradvisor or its affiliates will also receive a non-accountable acquisitionexpense reimbursement in the amount of 0.25% of (a) funds advanced inrespect of a loan or other investment, and, (b) the funds paid forpurchasing an asset, including any debt attributable to the asset, plus 0.25%of the funds budgeted for development, construction or improvement in the caseof assets that we acquire and intend to develop, construct or improve. We willalso pay third parties, or reimburse the advisor or its affiliates, for anyinvestment-related expenses due to third parties in the case of a completedinvestment, including, but not limited to, legal fees and expenses, travel andcommunication expenses, costs of appraisals, accounting fees and expenses,third-party brokerage or finder’s fees, title insurance, premium expenses andother closing costs; we have no obligation to our advisor unless the acquisitionis completed. Our advisor will be responsible, and we have no obligation, forpaying all of the expenses it incurs associated with persons employed by theadvisor to the extent dedicated to making investments for us, such as wages andbenefits of the investment personnel. Our advisor will also be responsible, and we have no obligation, forpaying all of the investment-related expenses that we or our advisor incursthat are due to third parties with respect to investments we do not make.  For the year ended December 31, 2008,Behringer Harvard Multifamily Advisors I earned acquisition expensereimbursement of approximately $0.1 million. No fees were earned in 2007.

 

BehringerHarvard Multifamily Advisors I or its affiliates will receive debt financing feesof 1% of the amount available to us under debt financing originated orrefinanced by or for us. It is anticipated that our advisor will pay some orall of these fees to third parties with whom it subcontracts to coordinatefinancing for us. We began acquiring real estate investments in April 2007.For the year ended December 31, 2008 and 2007, Behringer HarvardMultifamily Advisors I earned debt financing fees of $0 and $0.2 million,respectively.

 

On September 2, 2008, the Company entered into anAmended and Restated Property Management Agreement (the “Property ManagementAgreement”) with our operating partnership and our property manager, BehringerHarvard Multifamily Management Services, LLC (“BHM Management”), an affiliateof our advisor. The Property Management Agreement has a term of two years fromthe effective date of the original property management agreement and willterminate on November 21, 2010 with automatic renewal periods of two years. Ifno party gives written notice to the other at least thirty days prior to theexpiration date of the agreement that it will terminate, then it willautomatically continue for consecutive two-year periods. The PropertyManagement Agreement also provides that, in the event the Company terminatesits advisory management agreement with the Advisor, the Manager, upon at leastthirty days prior written notice, will have the right to terminate theagreement.

 

ThroughSeptember 2008, we paid BHM Management fees for the management of ourproperties, which may be subcontracted to unaffiliated third parties. Such feeswere equal to 3.75% of gross revenues. In the event that we contract directlywith a non-affiliated third party property manager in respect of a property, wewill pay BHM Management an oversight fee equal to 1% of gross revenues of theproperty managed. On September 2, 2008, we entered into an amended andrestated property management agreement with BHM Management.  Under the terms of the amended and restatedproperty management agreement, the oversight fee was reduced to 0.5%. In noevent will we pay both a property management fee and an oversight fee to BHMManagement with respect to a particular property. We will reimburse the costsand expenses incurred by BHM Management on our behalf, including fees and expensesof apartment locators and third-party accountants, the wages and salaries andother employee-related expenses of all on-site employees of BHM Management whoare engaged in the operation, management, maintenance or access control of ourproperties, including taxes, insurance and benefits relating to such employees,and legal, travel and other out-of-pocket expenses that are directly related tothe management of specific properties. For the year ended December 31,2008, BHM Management earned approximately $13,000.  No fees were earned in 2007.

 

ThroughSeptember 2008, Behringer Harvard Multifamily Advisors I received amonthly asset management fee for each asset. This amount was calculated basedupon one-twelfth of 1% of aggregate asset value, as defined, as of the last dayof the preceding month. We began acquiring real estate investments in April 2007.Under the amended Advisory Management Agreement, this fee is 0.75% of thehigher of the cost of investment or value of the investment. For the year endedDecember 31, 2008 and 2007, Behringer Harvard Multifamily Advisors Iearned asset management fees of approximately $0.9 million and $0.2 million,respectively.

 

BehringerHarvard Multifamily Advisors I or its affiliates are paid a disposition fee ifour advisor provides a substantial amount of services, as determined by ourindependent directors, in connection with the sale of one or moreproperties.  In such event, we will pay our advisor (1) in the caseof the sale of real property, the lesser of:  (A) one-half of theaggregate brokerage commission paid (including the subordinate disposition fee)or if none is paid, the amount that customarily would be paid, or (B) 3%of the sales price of each property sold, and (2) in the case of the saleof any asset other than real property, 3% of the sales price of suchassets.  This fee shall not be earned or paid unless and until thestockholders have received total distributions in an amount equal to or inexcess of the sum of the aggregate capital contributions by stockholders plus a7% cumulative, non-compounded, annual return on 

 

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suchcapital contributions. Subordinated disposition fees that are not payableat the date of sale because stockholders have not yet received their requiredminimum distributions will be deferred and paid at such time as thesesubordination conditions have been satisfied.

 

Wewill pay a development fee to an affiliate in an amount that is usual andcustomary for comparable services rendered to similar projects in thegeographic market of the project; provided, however, we will not pay adevelopment fee to an affiliate of our advisor if our advisor or any of itsaffiliates elects to receive an acquisition and advisory fee based on the costof such development. Behringer Harvard Multifamily Advisors I has earned nodevelopment fees since our inception.

 

**For other expenses paid or incurred by the advisor in connection withthe services provided to us that are not covered by a fee, we will reimburseour advisor, subject to the limitation that we will not reimburse our advisorfor any amount by which its operating expenses (including the asset managementfee) at the end of the four preceding fiscal quarters exceeds the greaterof:  (A) 2% of our average invested assets (“AIA”), or (B) 25%of our net income determined without reduction for any additions to reservesfor depreciation, bad debts or other similar non-cash reserves and excludingany gain from the sale of our assets for that period.  Notwithstanding theabove, we may reimburse the advisor for expenses in excess of this limitationif a majority of our independent directors determines that such excess expensesare justified based on unusual and non-recurring factors.   For the trailing twelve months ended December 31,2008, total operating expenses of approximately $2.5 million exceeded 2% of ourAIA (which was approximately $1.9 million) by approximately $0.6 million. Our board of directors, including all of our independent directors, havereviewed this analysis and unanimously determined the excess to be justifiedconsidering the fact that we were in the registration for our initial public offeringof common stock from December 31, 2007 through September 2, 2008 andour rate of investments thereafter caused the expenses incurred as a result ofbeing a public company for audit and legal services, director and officerliability insurance and fees for board of directors members in connection withservice on the board of directors and its committees to be disproportionate tothe Company’s AIA and net income, as defined above.**

** **

**9.****                                     ****Supplemental disclosures of cashflow information**

 

Supplementalcash flow information is summarized below:

 
| ** **                                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | **For the period**            | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------|------------|-----------------------|------------|-------------------------------|------------|
| ** **                                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | **from August 4, 2006**  | ** ** |
| ** **                                                                                   | ** ** | ** **            | ** ** | ** **            | ** ** | **(date of inception)**       | ** ** |
| ** **                                                                                   | ** ** | **December 31,** | ** ** | **December 31,** | ** ** | **through December 31,** | ** ** |
| ** **                                                                                   | ** ** | **2008**              | ** ** | **2007**              | ** ** | **2006**                      | ** ** |
| Supplemental disclosure of cash flow information:                                            |       |                  |       |                  |       |                          |       |
| Interest paid, net of amounts capitalized                                                    |       | $                     | —     |                  | $          | 246,674                       |       | $ | — |   |
|                                                                                         |       |                  |       |                  |       |                          |       |
| Non-cash investing activities:                                                               |       |                  |       |                  |       |                          |       |
| Escrow and prepaid acquisition costs                                                         |       | $                     | 1,910,761  |                  | $          | 908,334                       |       | $ | — |   |
| Conversion of note receivable into investments in unconsolidated real  estate joint ventures |       | $                     | —     |                  | $          | 2,782,923                     |       | $ | — |   |
| Payable to BHMP CO-JV                                                                        |       | $                     | —     |                  | $          | 4,810                         |       | $ | — |   |
|                                                                                         |       |                  |       |                  |       |                          |       |
| Non-cash financing activities:                                                               |       |                  |       |                  |       |                          |       |
| Dividends payable and DRIP distributions                                                     |       | $                     | 1,003,196  |                  | $          | 412,058                       |       | $ | — |   |
| Accrued offering costs                                                                       |       | $                     | 6,918,354  |                  | $          | —                        |       | $ | — |   |

 

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**10.****                              ****Subsequent Events**

 

On February 23,2009, our board of directors authorized distributions payable to the stockholdersof record each day during the months of March, April and May 2009. This most recently declared distribution for March equals a daily amountof $0.000137 per share of common stock, which amount is in addition to thepreviously declared distribution for the month of March in an amount of$0.0017808 per share of common stock.  The distributions declared for April andMay equal a daily amount of $0.0019178 per share of common stock. Distributions payable to each stockholder of record during a month will be paidin cash on or before the 16th day of the following month.  A portion ofeach distribution may constitute a return of capital for tax purposes.  Ifthe rate we are paying for each day in March, April and May were paideach day for a 365-day period, it would equal a 7.0% annualized rate based on apurchase price of $10.00 per share, an increase from the rate of 6.5%previously declared for March 2009 and prior months.

 

For the period January 1,2009 through March 13, 2009, we have sold approximately 4.8 million sharesof common stock for gross proceeds of approximately $48.0 million.

 

The Company and Behringer Harvard Multifamily AdvisorsI intends to amend the Advisory Management Agreement, effective April 1,2009.  Under the amended AdvisoryManagement Agreement, we will reimburse our advisor for all Initial PublicOffering organization and offering costs as well as all Private Offeringorganization and offering costs previously advanced by our advisor to theextent not previously reimbursed by us. Our reimbursements will no longer be subject to a cap at the time ofreimbursement, but will be reimbursed by our advisor at the end of the InitialPublic Offering to the extent such amounts incurred by us exceed 1.5% of ourgross Public Offering.  Further, if theAdvisory Management Agreement is terminated or not renewed for reasons otherthan a material breach by our advisor, the amended Advisory ManagementAgreement will require our advisor to reimburse the Initial Public Offeringorganization and offering costs only to the extent such amounts incurred by usthrough the termination date exceed 15% of our gross Initial Public Offering.

 

**11.****                              ****Quarterly Results(Unaudited)**

 

Presented below is asummary of the unaudited quarterly financial information for the years ended December 31, 2008and 2007 (amounts in thousands, except per share data):

 
| ** **                                            | ** ** | **2008 Quarters Ended** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **March 31**       | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Revenues                                              |       |                    |       |   |   |   |   |   |   |
| Rent revenue                                          |       | $                       | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Interest income                                       |       | 425                     |       | 225 |   | 162 |   | 72 |   |
| Net income                                            |       | 697                     |       | 835 |   | 766 |   | 332 |   |
| Basic and diluted weighted average shares outstanding |       | 14,270,538              |       | 14,267,364 |   | 14,267,364 |   | 14,598,539 |   |
| Basic and diluted earnings per share                  |       | $                       | 0.05       |   | $ | 0.06 |   | $ | 0.05 |   | $ | 0.02 |   |

 
| ** **                                            | ** ** | **2007  Quarters Ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|
| ** **                                            | ** ** | **March 31**        | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
| Revenues                                              |       |                     |       |   |   |   |   |   |   |
| Rent revenue                                          |       | $                        | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Interest income                                       |       | 5                        |       | 71 |   | 11 |   | 256 |   |
| Net income (loss)                                     |       | (9                       | )          | (280 | ) | (335 | ) | 417 |   |
| Basic and diluted weighted average shares outstanding |       | 4,249                    |       | 878,939 |   | 2,152,919 |   | 7,806,982 |   |
| Basic and diluted earnings (loss) per share           |       | $                        | (2.19      | ) | $ | (0.32 | ) | $ | (0.16 | ) | $ | 0.05 |   |

 

 

 

 

 

 

 

 

*****

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Manager andMembers of

Behringer Harvard BaileysVenture, LLC

Addison, Texas

 

We have audited the accompanyingconsolidated balance sheets of Behringer Harvard Baileys Venture, LLC andsubsidiaries (the “Company”) as of December 31, 2008 and 2007, and therelated consolidated statements of income, members’ equity, and cash flows forthe year ended December 31, 2008 and for the period from June 26,2007 (date of  inception) through December 31,2007.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

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

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2008 and 2007, andthe results of its operations and its cash flows for the year ended December 31,2008 and for the period from June 26, 2007 (date of inception) through December 31,2007, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/Deloitte & Touche LLP

 

Dallas, Texas

March 31, 2009

 

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**Behringer Harvard Baileys Venture, LLC**

**ConsolidatedBalance Sheets**

as of December 31,2008 and 2007

 

 
| ** **                                                                                                                                                                                                         | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                                                                          |       | $          | 391,175    |       | $          | 413,486 |   |
| Accrued interest receivable                                                                                                                                                                                        |       | 187,039    |       | 181,104    |       |
| Mortgage note receivable, net                                                                                                                                                                                      |       | 21,832,880 |       | 21,746,252 |       |
| Deferred offering costs and other assets                                                                                                                                                                           |       | 5,367      |       | 13,218     |       |
| **Total assets**                                                                                                                                                                                                   |       | $          | 22,416,461 |       | $          | 22,354,060 |   |
|                                                                                                                                                                                                               |       |       |       |       |       |
| **Liabilities, preferred units and members’ equity**                                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued liabilities                                                                                                                                                                                                |       | $          | 308        |       | $          | 9,820 |   |
|                                                                                                                                                                                                               |       |       |       |       |       |
| **Commitments and contingencies**                                                                                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                               |       |       |       |       |       |
| Preferred units; $500.00 par value per share;

12.5% dividend per annum; 125 units authorized,

124 units issued and outstanding at December 31, 2008;

none issued and outstanding at December 31, 2007 |       | 28,902     |       | —     |       |
| Members’ equity                                                                                                                                                                                               |       | 22,387,251 |       | 22,344,240 |       |
| **Total liabilities, preferred units and members’  equity**                                                                                                                                                   |       | $          | 22,416,461 |       | $          | 22,354,060 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Baileys Venture, LLC**

**ConsolidatedStatements of Income**

 

 
| ** **                             | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from June 26,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| Interest income                        |       | $                                       | 2,230,529  |                                                                                                     | $          | 1,063,571 |   |
|                                   |       |                                    |       |                                                                                                     |       |
| General and administrative expenses    |       | 49,208                                  |       | 2,937                                                                                                    |       |
|                                   |       |                                    |       |                                                                                                     |       |
| **Net income**                         |       | $                                       | 2,181,321  |                                                                                                     | $          | 1,060,634 |   |
|                                   |       |                                    |       |                                                                                                     |       |
| Preferred units dividends              |       | (7,750                                  | )          | —                                                                                                   |       |
|                                   |       |                                    |       |                                                                                                     |       |
| Net income attributable to the Members |       | $                                       | 2,173,571  |                                                                                                     | $          | 1,060,634 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Baileys Venture, LLC**

**ConsolidatedStatements of Members’ Equity**

 

 
| ** **                                        | ** ** | **Preferred Units** | ** ** | **Members’ Equity** | ** ** | **Total**  | ** ** |
|---------------------------------------------------|------------|---------------------|------------|--------------------------|------------|------------|------------|
| Balance at June 26, 2007 (date of inception) |       | $                   | —     |                     | $          | —     |       | $ | — |   |
| * *                                          | * *   | * *            | * *   | * *                 | * *   | * *   | * *   |
| Contributions                                     |       | —              |       | 22,144,509               |       | 22,144,509 |       |
| Distributions                                     |       | —              |       | (860,903                 | )          | (860,903   | )          |
| Net income                                        |       | —              |       | 1,060,634                |       | 1,060,634  |       |
|                                              |       |                |       |                     |       |       |       |
| Balance at December 31, 2007                 |       | —              |       | 22,344,240               |       | 22,344,240 |       |
| * *                                          | * *   | * *            | * *   | * *                 | * *   | * *   | * *   |
| Preferred units:                                  |       |                |       |                     |       |       |       |
| Proceeds from issuance                            |       | 62,000              |       | —                   |       | 62,000     |       |
| Offering costs                                    |       | (33,098             | )          | —                   |       | (33,098    | )          |
| Dividends                                         |       | —              |       | (7,750                   | )          | (7,750     | )          |
| Contributions                                     |       | —              |       | 64,741                   |       | 64,741     |       |
| Distributions                                     |       | —              |       | (2,195,301               | )          | (2,195,301 | )          |
| Net income                                        |       | —              |       | 2,181,321                |       | 2,181,321  |       |
|                                              |       |                |       |                     |       |       |       |
| Balance at December 31, 2008                 |       | $                   | 28,902     |                     | $          | 22,387,251 |       | $ | 22,416,153 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Baileys Venture, LLC**

**ConsolidatedStatements of Cash Flows**

 

 
| ** **                                                                          | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from June 26,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|
| **Cash flows from operating activities**                                            | ** ** | ** **                              | ** ** | ** **                                                                                          | ** ** |
| Net income                                                                          |       | $                                       | 2,181,321  |                                                                                                | $          | 1,060,634 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities - |       |                                    |       |                                                                                                |       |
| Amortization of deferred financing fees                                             |       | (86,628                                 | )          | (41,218                                                                                             | )          |
| Changes in operating assets and liabilities:                                        |       |                                    |       |                                                                                                |       |
| Accrued interest receivable                                                         |       | (5,935                                  | )          | (181,104                                                                                            | )          |
| Accrued liabilities                                                                 |       | 308                                     |       | —                                                                                              |       |
| **Cash provided by operating activities**                                           |       | $                                       | 2,089,066  |                                                                                                | $          | 838,312 |   |
|                                                                                |       |                                    |       |                                                                                                |       |
| **Cash flows from investing activities**                                            | ** ** | ** **                              | ** ** | ** **                                                                                          | ** ** |
| Other assets                                                                        |       | (1,969                                  | )          | (3,398                                                                                              | )          |
| Advances on mortgage note receivable, net                                           |       | —                                  |       | (21,705,034                                                                                         | )          |
| **Cash used in investing activities**                                               |       | (1,969                                  | )          | (21,708,432                                                                                         | )          |
|                                                                                |       |                                    |       |                                                                                                |       |
| **Cash flows from financing activities**                                            | ** ** | ** **                              | ** ** | ** **                                                                                          | ** ** |
| Contributions                                                                       |       | 64,741                                  |       | 22,144,509                                                                                          |       |
| Distributions                                                                       |       | (2,195,301                              | )          | (860,903                                                                                            | )          |
| Preferred units:                                                                    |       |                                    |       |                                                                                                |       |
| Proceeds from issuance                                                              |       | 62,000                                  |       | —                                                                                              |       |
| Offering costs                                                                      |       | (33,098                                 | )          | —                                                                                              |       |
| Dividends paid                                                                      |       | (7,750                                  | )          | —                                                                                              |       |
| **Cash (used in) provided by financing activities**                                 |       | (2,109,408                              | )          | 21,283,606                                                                                          |       |
|                                                                                |       |                                    |       |                                                                                                |       |
| Net change in cash and cash equivalents                                             |       | (22,311                                 | )          | 413,486                                                                                             |       |
| Cash and cash equivalents at beginning of period                                    |       | 413,486                                 |       | —                                                                                              |       |
| Cash and cash equivalents at end of period                                          |       | $                                       | 391,175    |                                                                                                | $          | 413,486 |   |
|                                                                                |       |                                    |       |                                                                                                |       |
| **Supplemental schedule of noncash financing  activities:**                         | ** ** | ** **                              | ** ** | ** **                                                                                          | ** ** |
| Accrued offering costs                                                              |       | $                                       | —     |                                                                                                | $          | 9,820 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard BaileysVenture, LLC**

**Notes to Consolidated FinancialStatements**

 

**1.             Organizationand Business**

** **

***Organization***

 

Behringer Harvard BaileysVenture, LLC (which may be referred to as the “Company,” “we,” “us,” or “our”)was effectively organized in Delaware on June 26, 2007.

 

We are a co-investmentjoint venture between Behringer Harvard Multifamily OP I LP (“Behringer HarvardMultifamily OP I”), which, through its wholly owned subsidiary BehringerHarvard Baileys, LLC, is our manager and 55% owner, and, Behringer HarvardMaster Partnership I LP (“Behringer Harvard Master Partnership I”), our 45%owner.  The 1% general partner ofBehringer Harvard Master Partnership I is Behringer Harvard Institutional GPLP, a related party that is indirectly owned by Behringer Harvard Holdings, LLCand the 99% limited partner of Behringer Harvard Master Partnership I is anunaffiliated social work sector pension fund based in The Netherlands,Stichting Pensioenfonds Zorg en Welijn (“PGGM”). Substantially all of thecapital provided to Behringer Harvard Master Partnership I is from PGGM.

 

Behringer HarvardMultifamily OP I is wholly-owned by Behringer Harvard Multifamily REIT I, Inc.(“Behringer Harvard Multifamily REIT I”). Behringer Harvard Multifamily OP Iand Behringer Harvard Master Partnership I are collectively referred to hereinas the Members and hold, indirectly and directly, respectively, 100% of ourvoting interests.

 

We were organized to own100% of the voting equity interests and approximately 99% of the economicinterests in one subsidiary, Behringer Harvard Baileys REIT, LLC (“Baileys REIT”).Substantially all of our business is conducted through Baileys REIT.  Baileys REIT was organized to make a mortgageloan to Fairfield Baileys LLC (the “Project Entity”), a wholly owned subsidiaryof Fairfield Baileys Investors LP (“the Partnership Entity”). The PartnershipEntity is owned by a commercial developer and by a third party investor (“BREOFBaileys”) and was organized to develop and own one apartment community,commonly known as Fairfield at Baileys Crossing (“Fairfield at Baileys Crossing”).Fairfield at Baileys Crossing is located in Fairfax County, Virginia, iscurrently under development, has an estimated construction budget ofapproximately $147.6 million (unaudited), and is expected to be an apartmentcommunity of approximately 414 rental units (unaudited) within three-, four-and seven-story structures (unaudited). Fairfield at Baileys Crossing is alsoexpected to have an attached parking structure.

 

Neitherwe nor Baileys REIT haveemployees and both are supported by related party arrangements. BehringerHarvard Multifamily REIT I is externally managed by Behringer HarvardMultifamily Advisors I LP (“Behringer Harvard Multifamily Advisors I”), a Texaslimited partnership organized in 2006.  BehringerHarvard Multifamily Advisors I, through Behringer Harvard Multifamily REIT I,is responsible for managing our affairs on a day-to-day basis and foridentifying and making real estate investments on our behalf.

 

# **2**.             Summaryof Significant Accounting Policies

# ** **

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

 

The preparation ofconsolidated financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates include such items as amortization and accrued liabilities.  Actual results could differ from thoseestimates.

 

***IncomeTaxes***

 

Baileys REIT has electedto be taxed as a real estate investment trust (“REIT”) under Sections 856through 860 of the Internal Revenue Code, and has qualified as a REIT since theperiod ended December 31, 2007.  Toqualify as a REIT, we must meet a number of organizational and operationalrequirements, including a requirement that we distribute at least 90% of ourREIT taxable income.  As a REIT, wegenerally will not be subject to federal income tax at the corporatelevel.  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. Even if we qualify for taxation 

 

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as a REIT, we may besubject to certain state and local taxes on our income and property, andfederal income and excise taxes on our undistributed income.

 

We have adopted theprovisions of FASB Interpretation No. 48 Accounting for uncertainty inincome taxes — an interpretation of FASB Statement No. 109 (“FIN 48”). UnderFIN 48, we recognize the financial statement benefit of an uncertain taxposition only after determining that the relevant tax authority would morelikely than not sustain the position following an audit. To date, we areunaware of any uncertain tax positions.

 

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

 

Our consolidatedfinancial statements include our accounts and the account of Baileys REIT.  All inter-company transactions, balances andprofits are eliminated in consolidation. Interests in entities acquired are evaluated for consolidation based onFinancial Accounting Standards Board Interpretation (“FIN”) 46R “Consolidationof Variable Interest Entities,” which requires the consolidation of variableinterest entities (“VIEs”) in which we are deemed to be the primarybeneficiary.  If the interest in theentity is determined to not be a VIE under FIN 46R, then the entities areevaluated for consolidation under the American Institute of Certified PublicAccountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accounting forInvestments in Real Estate Ventures,” and Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.” We have determined that we are not a primarybeneficiary of any VIEs.

 

***Cashand Cash Equivalents***

 

We consider investmentsin highly-liquid money market funds with original maturities of three months orless to be cash equivalents.  In theordinary course of our business, cash requirements for substantially all of ourinvestments and obligations are paid on our behalf directly from our Members tothe other party. We have presented these transactions as cash inflows andoutflows in our consolidated statement of cash flows.

 

***Deferred Offering Costs***

 

Amounts include costsrelated to our Preferred Units offering. In connection with our receipt ofoffering proceeds in 2008, these amounts have been recorded in the December 31,2008 consolidated financial statements as an offset to the Preferred Unitsbalance.

 

***Mortgage Note Receivable***

 

Themortgage note receivable is reported at its outstanding principal balance netof any unearned income from unamortized loan origination fees. Loan originationfees are generally deferred and are amortized as adjustments to interest income using astraight-line method that approximates the effective interest method over thelife of the related debt. During 2007 we received origination fees of$433,000.  Included are unamortizeddeferred loan fees of $305,000 and $392,000 as of December 31, 2008 and2007, respectively.

 

The mortgage notereceivable is coterminous with the Project Entity’s construction loan and theProject Entity remains obligated to pay principal and interest due regardlessof its intent or ability to sell or refinance the property. In addition, themortgage note receivable does not contain a right to participate in expectedresidual profit from the sale or refinancing of the property. As a result, themortgage note receivable is accounted for as a loan pursuant to the guidance inExhibit I of AICPA Practice Bulletin 1 on accounting of real estateacquisition, development, or construction arrangements.

 

***Impairment of Mortgage Note Receivable***

 

Wereview the terms and conditions underlying the outstanding balance of themortgage note receivable. If we determine that it is probable that all amountsdue under the terms of the note will not be collected, an impairment charge isrecorded to the extent that the investment in the note exceeds our estimate ofthe fair value of the collateral securing such note.

 

Weassess impairment at the individual project basis. In evaluating the mortgagenote receivable for impairment, management makes several estimates andassumptions about the financial condition of the borrower and the guarantor. Inaddition, management makes several estimates and assumptions about the propertyand the additional collateral provided by the guarantor, including but notlimited to, the projected disposition dates, estimated future cash flows, andthe projected sales prices.  A change inthese estimates and assumptions could result in understating or overstating thecarrying value of the mortgage note receivable which could be material to ourconsolidated financial statements.

 

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Noimpairment charges have been recorded in 2008 or 2007.

 

***Concentrationof Credit Risk***

 

In the ordinary course ofour business, we hold cash and cash equivalents and restricted cash depositedin certain financial institutions in excess of federally insured levels.  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.

 

The Federal DepositInsurance Corporation, or “FDIC,” generally only insures limited amounts perdepositor per insured bank.  Beginning October 3, 2008 through December 31,2009, the FDIC will insure up to $250,000 per depositor per insured bank; on January 1,2010, the standard coverage limit will return to $100,000 for most depositcategories.  Unlimited deposit insurancecoverage may be available to our non-interest bearing transaction accounts heldat those institutions participating in FDIC’s Temporary Liquidity GuaranteeProgram through December 31, 2009.

 

**3.             New Accounting Pronouncements**

 

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  We adopted the provisions of SFAS No. 157effective January 1, 2008, and did not have a material effect on ourconsolidated results of operations or financial position.

 

In February 2008,the FASB staff issued Staff Position No. 157-2 “Effective Date of FASBStatement No. 157” (“FSP SFAS No. 157-2”). FSP SFAS No. 157-2 delayed the effective date of SFAS No. 157 fornonfinancial assets and nonfinancial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  Theprovisions of FSP SFAS No. 157-2 are effective for our fiscal year beginning January 1,2009.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities - Including an Amendment of FASB Statement No. 115.”  The fair value option established by SFAS No. 159permits all entities to choose to measure eligible items at fair value atspecified election dates.  A businessentity will report unrealized gains and losses on items for which the fairvalue option has been elected in earnings (or another performance indicator ifthe business entity does not report earnings) at each subsequent reportingdate.  SFAS No. 159 was effectivefor fiscal years beginning after November 15, 2007.  We have not elected the fair valuemeasurement option for any financial assets or liabilities at the present time.

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations.”  This Statement replaces SFAS No. 141 “BusinessCombinations” but retains the fundamental requirement that the acquisitionmethod of accounting, or purchase method, be used for all business combinationsand for an acquirer to be identified for each business combination.  This Statement is broader in scope than thatof Statement 141, which applied only to business combinations in which controlwas obtained by transferring consideration. SFAS No. 141(R) applies the same method of accounting (theacquisition method) to all transactions and other events in which one entityobtains control over one or more other businesses.  This Statement also makes certain othermodifications to Statement 141, including a broader definition of a businessand the requirement that acquisition related costs are expensed asincurred.  This statement applies to ourbusiness combinations occurring beginning January 1, 2009.  The acquisition of a real estate property hasbeen determined to meet the definition of a business combination as defined inSFAS No. 141(R).  Therefore, SFAS No. 141(R) mayhave a material effect on our accounting for future consolidated acquisitionsof properties as acquisition costs will no longer be capitalized, but will beexpensed beginning January 1, 2009.

 

**4.            ****Private Offering**

 

The limited liabilitycompany agreement of Baileys REIT has established 125 units of Class A,preferred, cumulative, non-voting membership units (“Preferred Units”).  We commenced a private offering of thePreferred Units in November 2007. During 2008, we sold 124 Preferred Units and raised gross offeringproceeds totaling $62,000. Additional offering costs associated with thepreferred units issuance incurred during 2008 were approximately $24,000 andhave been recorded as an offset to the Preferred Units balance in accordancewith Staff Accounting Bulletin (“SAB”) Topic 5.A, Miscellaneous Accounting —Expenses of Offering.

 

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Included in deferredoffering costs are offering expenses incurred for the Preferred Units as of December 31,2007 of $9,820. In connection with our receipt of offering proceeds in 2008,these amounts have been recorded in the December 31, 2008 consolidatedfinancial statements as an offset to the Preferred Units balance.

 

The Preferred Units payan annual dividend of 12.5% and are senior in priority to all other members’equity of Baileys REIT.  Baileys REIT,at its option, may redeem the Preferred Units, in whole or in part, at any timeor from time to time, for cash at a redemption price equal to $500.00 per unit,plus all accrued and unpaid distributions thereon to and including the datefixed fore redemption, plus a premium per unit as follows: (1) until December 31,2009, $100; (2) from January 1, 2010 to December 31, 2010, $75; (3) fromJanuary 1, 2011 to December 31, 2011, $50; (4) from January 1,2012 to December 2012, $25; and thereafter, no redemption premium.  The Preferred Units are not redeemable by theholders and we have no current intent to exercise our redemption option.

 

**5.             Related Party Arrangements**

 

We are dependent on theMembers and their affiliates for our operational and investment capitalneeds.  We are also ultimately dependent,through Behringer Harvard Multifamily REIT I, on Behringer Harvard MultifamilyAdvisors I and  Behringer HarvardMultifamily Management Services, LLC  forcertain services that are essential to us, including, asset acquisition anddisposition decisions, property management and leasing services and othergeneral administrative responsibilities. In the event that these companies were unable to provide us with therespective capital or services, we would be required to obtain such capital orservices from other sources. We recognize all amounts at the time incurred bythe Members on our behalf in our financial statements with an offset to MembersEquity.

 

**6.             MortgageNote Receivable**

** **

In July 2007, Baileys REIT committed to make amortgage loan in the amount of $22.1 million to the Project Entity (the “MortgageNote”). We have fully funded the commitment as of December 31, 2007.  The Mortgage Note bears interest at the rateof 9.5% per annum and matures on July 9, 2012.  Through the maturity date interest is payableon a monthly basis from a budgeted interest reserve in the amount of $5,848,000and from available net operational cash flows; at maturity, principal andunpaid interest is due.  However, ifBaileys REIT does not exercise its option to convert the Mortgage Note into anequity interest in the Partnership Entity, as described below, then the paymentof accrued interest on the Mortgage Note from funds other than the interestreserve will be  subordinate to thepayment of a 9.5% preferred return payable to the partners in the PartnershipEntity and to the return of their equity investment in the PartnershipEntity.  Generally, no prepayment of theMortgage Note may be made except (i) prepayment is permitted 150 daysafter the project is completed and (ii) prepayment is required if any ofthe interests in the Partnership Entity that are the subject of the purchaseoption are sold, including pursuant to the exercise of the purchase option orBREOF Baileys exercises its contingent sell option (as discussed below) orthere is a sale of the project. The Mortgage Note is secured by (i) a lienpursuant to a deed of trust on the project that is subordinate to the liengranted to the senior lender and (ii) a pledge by the Partnership Entityof all of the ownership interests in the Project Entity.  In connection with the making of the MortgageNote, Baileys REIT agreed with BREOF Baileys that if Baileys REIT exercises anyof its remedies under these security arrangements, including foreclosure or apower of sale, such that Baileys REIT acquires the Project Entity or theproject or receives any proceeds under a power of sale of the Project Entity orthe project, BREOF Baileys is entitled to share in such ownership or proceedsunder substantially the same co-ownership terms of the Partnership Entity, asthough Baileys REIT had exercised the option discussed below.

 

The Mortgage Note is also supported by a guaranteefrom the commercial developer**which has**guaranteed completion of the development of the project inaccordance with its plans and specifications if, for any reason, the ProjectEntity abandons the project before its completion or fails to complete theproject on the agreed schedule and pay all construction costs in full,including construction cost overruns in excess of the construction budget.  The developer has also guaranteed repaymentof the Mortgage Note should the Project Entity become the subject of abankruptcy or insolvency proceeding, provided Baileys REIT does not consent inwriting to or otherwise join as a party in such proceeding.

 

The Partnership Entityand Project Entity were formed by the commercial developer to purchase,finance, and develop one real estate project; they are not consolidated intoour financial statements.  Ourinvolvement with the Partnership Entity and Project Entity began at the time wecommitted to the Mortgage Note, and our potential loss exposure is limited tothe funded portion of our commitment. The Partnership Entity and Project Entity also owe other parties,including the senior project lender. Neither we nor Baileys REIT have a primary or secondary obligation withrespect to such obligation.

 

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**7.             Commitments and Contingencies**

 

The Fairfield at BaileysCrossing project is currently under development and is estimated to becompleted in the first calendar quarter of 2010.

 

*Contingent purchase option. *Baileys REIThas a contingent purchase option to acquire a 60% limited partnership interestin the Partnership Entity (the “Purchase Option”).  The Purchase Option is not currentlyexercisable and cannot be exercised until the development is complete and theproperty has been certificated for occupancy. Baileys REIT may exercise thePurchase Option within 90 days of completion of the Fairfield at BaileysCrossroads project or 30 days of an uncured event of default under the seniorloan.  The exercise price will generallybe calculated at the conversion amount of the Mortgage Note plus any additionalamounts necessary to adjust the owners’ capital account balances to theirstated ownership percentages at the time of exercise. Upon exercise, anyoutstanding principal and interest on the Mortgage Note will becomesecond-priority capital in the Partnership Entity and Baileys REIT will beentitled to receive an annual preferred return of 9.5%.

 

*BREOFBaileys contingent**sell option. *BREOF Baileys has an option to sell itsstated limited partnership interest to Baileys REIT at a price to be negotiatedin the future or in the absence of mutual agreement between the parties, theamount that would be distributable to BREOF Baileys if the project was sold, asdetermined by an arbitration process on the limited partners, proceeds upon asale (the “Sell Option”). The Sell Option is not currently exercisable andcannot be exercised until development is complete and the property has beencertificated for occupancy. The Sell Option becomes exercisable upon completionof the project and expires in 36 months. BREOF Baileys equity balance isapproximately $11.8 million (unaudited) as of December 31, 2008 and 2007.

 

*Developer Partners’ contingent sell option and BREOFBaileys tag-along right.*  If Baileys REIT exercises thePurchase Option and is a limited partner in the Partnership Entity, then thepartners owned by the developer (the “Developer Partners”) have a right,commencing on the 13th month following completion of the project and continuinguntil the fourth anniversary of the completion of the project, to initiate aprocedure to ascertain the fair market value of the project and, thus, toascertain the value of the partnership interests of the Developer Partners inthe Partnership Entity.  If such value isnot mutually agreed upon by the Developer Partners and Baileys REIT, then suchvalue would equal the distributions that the Developer Partners would receiveif the project were sold at its fair market value, which would be determined byan arbitration process.  Once such valueis agreed upon or determined, Baileys REIT has an option to purchase theDeveloper Partners’ interests at that price or to request that the DeveloperPartners cause the Project Entity to sell the project for a price that is notless than the determined fair market value. The Developer Partners may then elect whether to proceed with causing asale of the project.  If the DeveloperPartners do not elect to cause a sale of the project or are unable toconsummate such a sale, then the Developer Partners do not have any additionalright to initiate a liquidity event similar to that described in thisparagraph.  If Baileys REIT elects topurchase the Developer Partners’ interests as provided above, then the limitedpartner has an option to require Baileys REIT to purchase the limited partners’interest for an amount equal to the distributions that the limited partnerwould receive if the project were sold at fair market value as determined above.  If the limited partner elects not to exercisethis tag-along right, then any partner in the Partnership Entity may initiatethe buy/sell procedures described below.

 

*Baileys REIT’s Call Right.* If Baileys REIT exercises the Purchase Option and is a limited partnerin the Partnership Entity, then Baileys REIT has a right, commencing upon theearlier of either (i) 48 months after completion of the project or (ii) anelection by the limited partner not to exercise its tag-along rights inconnection with the exercise of the developer partners’ contingent sell option,to initiate a procedure to ascertain the fair market value of the project and,thus, to ascertain the value of the partnership interests of all ofthen-current partners in the partnership. If such value is not mutually agreed upon by Baileys REIT and the otherpartners, then such value would equal the collective distributions that theother partners would receive if the project were sold at its fair market value,which would be determined by an arbitration process.  Once such value is agreed upon or determined,Baileys REIT has an option to purchase the other partners’ interests at thatprice.  If Baileys REIT does not elect topurchase the other parties’ interests, then any partner has the right toinitiate buy/sell procedures described below.

 

*Buy/Sell Rights*.  Under thelimited circumstances described above, any partner in the Partnership Entitymay initiate buy/sell procedures with respect to their partnershipinterests.  Under those procedures, apartner could make an offer to purchase the interests of the other partnersbased on an offer price for the partnership’s assets and the other partnerswould either elect to sell their interests based on that price or elect topurchase the offering partner’s partnership interests based on that price.  The partnership agreement includes provisionsrequiring some partners to act as a group in connection with the exercise ofthe buy/sell provisions.

 

*****

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Manager andMembers of

Behringer Harvard CameronHouse Venture, LLC

Addison, Texas

 

We have audited theaccompanying consolidated balance sheets of Behringer Harvard Cameron HouseVenture, LLC and subsidiaries (the “Company”) as of December 31, 2008 and2007, and the related consolidated statements of income, members’ equity, andcash flows for the year ended December 31, 2008 and for the period from September 12,2007 (date of  inception) through December 31,2007.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  The Company is not required to have,nor were we engaged to perform, an audit of its internal control over financialreporting.  Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2008 and 2007, andthe results of its operations and its cash flows for the year ended December 31,2008 and for the period from September 12, 2007 (date of inception)through December 31, 2007, in conformity with accounting principlesgenerally accepted in the United States of America.

 

/s/Deloitte & Touche LLP

 

Dallas, Texas

March 31, 2009

 

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**Behringer Harvard Cameron House Venture, LLC**

**ConsolidatedBalance Sheets**

as of December 31,2008 and 2007

 

 
| ** **                                                                                                                                                           | ** ** | **2008**   | ** ** | **2007**           | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|--------------------|------------|
| **Assets**                                                                                                                                                           | ** ** | ** ** | ** ** | ** **         | ** ** |
| Cash and cash equivalents                                                                                                                                            |       | $          | 189,397    |               | $          | 602,690 |   |
| Accrued interest receivable                                                                                                                                          |       | 166,191    |       | 58,980             |       |
| Mortgage note receivable, net                                                                                                                                        |       | 19,038,554 |       | 12,042,077         |       |
| Deferred offering costs and other assets                                                                                                                             |       | 5,569      |       | 12,006             |       |
| **Total assets**                                                                                                                                                     |       | $          | 19,399,711 |               | $          | 12,715,753 |   |
|                                                                                                                                                                 |       |       |       |               |       |
| **Liabilities, preferred units and members’ equity**                                                                                                            | ** ** | ** ** | ** ** | ** **         | ** ** |
| Accrued liabilities                                                                                                                                                  |       | $          | 308        |               | $          | 209,603 |   |
|                                                                                                                                                                 |       |       |       |               |       |
| **Commitments and contingencies**                                                                                                                                    | ** ** | ** ** | ** ** | ** **         | ** ** |
|                                                                                                                                                                 |       |       |       |               |       |
| Preferred units, $500.00 par value per share;                                                                                                                        |       | 26,473     |       | —   |       |
| 12.5%  dividend per annum; 125 units authorized,  121 units issued and outstanding at December 31, 2008;  none issued and outstanding at December 31, 2007 |       |       |       |               |       |
| Members’ equity                                                                                                                                                 |       | 19,372,930 |       | 12,506,150         |       |
| **Total liabilities, preferred units and members’  equity**                                                                                                     |       | $          | 19,399,711 |               | $          | 12,715,753 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Cameron House Venture, LLC**

**ConsolidatedStatements of Income**

 

 
| ** **                             | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from  September 12, 2007  (date of inception)  through  December 31, 2007** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
|                                   |       |                                    |       |                                                                                               |       |
| Interest income                        |       | $                                       | 1,691,279  |                                                                                               | $          | 85,203 |   |
|                                   |       |                                    |       |                                                                                               |       |
| General and administrative expenses    |       | 49,167                                  |       | 2,937                                                                                              |       |
| ** **                             |       |                                    |       |                                                                                               |       |
| **Net income**                         |       | $                                       | 1,642,112  |                                                                                               | $          | 82,266 |   |
|                                   |       |                                    |       |                                                                                               |       |
| Preferred units dividends              |       | (7,080                                  | )          | —                                                                                             |       |
|                                   |       |                                    |       |                                                                                               |       |
| Net income attributable to the Members |       | $                                       | 1,635,032  |                                                                                               | $          | 82,266 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Cameron House Venture, LLC**

**ConsolidatedStatements of Members’ Equity**

 

 
| ** **                                             | ** ** | **Preferred Units** | ** ** | **Members’ Equity** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------|------------|---------------------|------------|--------------------------|------------|------------|------------|
| Balance at September 12, 2007 (date of inception) |       | $                   | —     |                     | $          | —     |       | $ | — |   |
| * *                                               | * *   | * *            | * *   | * *                 | * *   | * *   | * *   |
| Contributions                                          |       | —              |       | 12,423,884               |       | 12,423,884 |       |
| Net income                                             |       | —              |       | 82,266                   |       | 82,266     |       |
|                                                   |       |                |       |                     |       |       |       |
| Balance at December 31, 2007                      |       | —              |       | 12,506,150               |       | 12,506,150 |       |
| * *                                               | * *   | * *            | * *   | * *                 | * *   | * *   | * *   |
| Preferred units:                                       | * *   | * *            | * *   | * *                 | * *   | * *   | * *   |
| Proceeds from issuance                                 |       | 60,500              |       | —                   |       | 60,500     |       |
| Offering costs                                         |       | (34,027             | )          | —                   |       | (34,027    | )          |
| Dividends                                              |       | —              |       | (7,080                   | )          | (7,080     | )          |
| Contributions                                          |       | —              |       | 6,985,181                |       | 6,985,181  |       |
| Distributions                                          |       | —              |       | (1,753,433               | )          | (1,753,433 | )          |
| Net income                                             |       | —              |       | 1,642,112                |       | 1,642,112  |       |
|                                                   |       |                |       |                     |       |       |       |
| Balance at December 31, 2008                      |       | $                   | 26,473     |                     | $          | 19,372,930 |       | $ | 19,399,403 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Cameron House Venture, LLC**

**ConsolidatedStatements of Cash Flows**

 

 
| ** **                                                                          | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from  September 12, 2007  (date of inception)  through  December 31, 2007** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------------------------------------------------------------------------|------------|
| **Cash flows from operating activities**                                            | ** ** | ** **                              | ** ** | ** **                                                                                              | ** ** |
| Net income                                                                          |       | $                                       | 1,642,112  |                                                                                                    | $          | 82,266 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities - |       |                                    |       |                                                                                                    |       |
| Amortization of deferred financing fees                                             |       | (75,669                                 | )          | (3,661                                                                                                  | )          |
| Changes in operating assets and liabilities:                                        |       |                                    |       |                                                                                                    |       |
| Accrued interest receivable                                                         |       | (107,211                                | )          | (58,980                                                                                                 | )          |
| Accrued liabilities                                                                 |       | (201,475                                | )          | 201,783                                                                                                 |       |
| **Cash provided by operating activities**                                           |       | 1,257,757                               |       | 221,408                                                                                                 |       |
|                                                                                |       |                                    |       |                                                                                                    |       |
| **Cash flows from investing activities**                                            | ** ** | ** **                              | ** ** | ** **                                                                                              | ** ** |
| Other assets                                                                        |       | (1,383                                  | )          | (4,186                                                                                                  | )          |
| Advances on mortgage note receivable, net                                           |       | (6,920,808                              | )          | (12,038,416                                                                                             | )          |
| **Cash used in investing activities**                                               |       | (6,922,191                              | )          | (12,042,602                                                                                             | )          |
|                                                                                |       |                                    |       |                                                                                                    |       |
| **Cash flows from financing activities**                                            | ** ** | ** **                              | ** ** | ** **                                                                                              | ** ** |
| Contributions                                                                       |       | 6,985,181                               |       | 12,423,884                                                                                              |       |
| Distributions                                                                       |       | (1,753,433                              | )          | —                                                                                                  |       |
| Preferred units:                                                                    |       |                                    |       |                                                                                                    |       |
| Proceeds from issuance                                                              |       | 60,500                                  |       | —                                                                                                  |       |
| Offering costs                                                                      |       | (34,027                                 | )          | —                                                                                                  |       |
| Dividends paid                                                                      |       | (7,080                                  | )          | —                                                                                                  |       |
| **Cash provided by financing activities**                                           |       | 5,251,141                               |       | 12,423,884                                                                                              |       |
|                                                                                |       |                                    |       |                                                                                                    |       |
| Net change in cash and cash equivalents                                             |       | (413,293                                | )          | 602,690                                                                                                 |       |
| Cash and cash equivalents at beginning of period                                    |       | 602,690                                 |       | —                                                                                                  |       |
| Cash and cash equivalents at end of period                                          |       | $                                       | 189,397    |                                                                                                    | $          | 602,690 |   |
|                                                                                |       |                                    |       |                                                                                                    |       |
| **Supplemental schedule of noncash financing  activities -**                        | ** ** | ** **                              | ** ** | ** **                                                                                              | ** ** |
| Accrued offering costs                                                              |       | $                                       | —     |                                                                                                    | $          | 7,820 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Cameron House Venture, LLC**

**Notes to Consolidated FinancialStatements**

 

**1.**                                      Organization and Business

** **

***Organization***

 

Behringer Harvard CameronHouse Venture, LLC (which may be referred to as the “Company,” “we,” “us,” or “our”)was effectively organized in Delaware on September 12, 2007.

 

We are a co-investmentjoint venture between Behringer Harvard Multifamily OP I LP (“Behringer HarvardMultifamily OP I”), which, through its wholly owned subsidiary BehringerHarvard Cameron House, LLC, our manager and 55% owner, and, Behringer HarvardMaster Partnership I LP (“Behringer Harvard Master Partnership I”), our 45%owner.  The 1% general partner ofBehringer Harvard Master Partnership I is Behringer Harvard Institutional GPLP, a related party that is indirectly owned by Behringer Harvard Holdings, LLCand the 99% limited partner of Behringer Harvard Master Partnership I is anunaffiliated social work sector pension fund based in The Netherlands,Stichting Pensioenfonds Zorg en Welijn (“PGGM”). Substantially all of thecapital provided to Behringer Harvard Master Partnership I is from PGGM.

 

Behringer HarvardMultifamily OP I is wholly owned by Behringer Harvard Multifamily REIT I, Inc.(“Behringer Harvard Multifamily REIT I”). Behringer Harvard Multifamily OP Iand Behringer Harvard Master Partnership I are collectively referred to hereinas the Members and hold indirectly and directly, respectively, 100% of ourvoting interests.

 

We were organized to own100% of the voting equity interests and approximately 99% of the economicinterests in one subsidiary, Behringer Harvard Cameron House REIT, LLC, (“CameronHouse REIT”). Substantially all of our business is conducted through CameronHouse REIT. Cameron House REIT was organized to make a mortgage loan to FFCameron House LLC (the “Mortgage Borrower”), which is wholly owned by FairfieldSilver Spring, L.P. (“the Project Entity”). The Project Entity is owned by acommercial developer and by a third party investor (“BREOF Cameron House”) andwas organized to develop and own one apartment community, commonly known asFairfield at Cameron House (“Fairfield at Cameron House”). Fairfield at CameronHouse is currently under development in Silver Spring, Maryland, has anestimated construction budget of approximately $128.9 million (unaudited), andis expected to be a 15 story multifamily high-rise (unaudited) withapproximately 325 rental units (unaudited).

 

Neither we nor CameronHouse REIT have employees and both are supported by related party arrangements.Behringer Harvard Multifamily REIT I is externally managed by Behringer HarvardMultifamily Advisors I LP (“Behringer Harvard Multifamily Advisors I”), a Texaslimited partnership organized in 2006. Behringer Harvard Multifamily Advisors I, through Behringer HarvardMultifamily REIT I, is responsible for managing our affairs on a day-to-daybasis and for identifying and making real estate investments on our behalf.

 

# **2**.                                      Summary of Significant AccountingPolicies

# ** **

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

 

The preparation ofconsolidated financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates include such items as amortization and accrued liabilities.  Actual results could differ from thoseestimates.

 

***IncomeTaxes***

 

CameronHouse REIT haselected to be taxed as a real estate investment trust (“REIT”) under Sections856 through 860 of the Internal Revenue Code, and has qualified as a REIT sincethe period ended December 31, 2007.  To qualify as a REIT, we mustmeet a number of organizational and operational requirements, including arequirement that we distribute at least 90% of our REIT taxable income. As a REIT, we generally will not be subject to federal income tax at thecorporate level.  We are organized and operate in such a manner as toqualify for taxation as a REIT under the Code, and we intend to continue tooperate in such a manner, but no assurance can be given that we will operate ina manner so as to qualify or remain qualified as a REIT. Even if we qualify for

 

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taxation as a REIT, wemay be subject to certain state and local taxes on our income and property, andfederal income and excise taxes on our undistributed income.

 

We have adopted theprovisions of FASB Interpretation No. 48 Accounting for uncertainty inincome taxes — an interpretation of FASB Statement No. 109 (“FIN 48”). UnderFIN 48, we recognize the financial statement benefit of an uncertain taxposition only after determining that the relevant tax authority would morelikely than not sustain the position following an audit. To date, we areunaware of any uncertain tax positions.

 

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

 

Our consolidatedfinancial statements include our accounts and the accounts Cameron HouseREIT.  All inter-company transactions, balances andprofits have been eliminated in consolidation. Interests in entities acquired are evaluated for consolidation based onFinancial Accounting Standards Board Interpretation (“FIN”) 46R “Consolidationof Variable Interest Entities,” which requires the consolidation of variableinterest entities (“VIEs”) in which we are deemed to be the primary beneficiary.  If the interest in the entity is determinedto not be a VIE under FIN 46R, then the entities are evaluated forconsolidation under the American Institute of Certified Public Accountants’ (“AICPA”)Statement of Position (“SOP”) 78-9, “Accounting for Investments in Real EstateVentures,” and Emerging Issues Task Force (“EITF”) 04-5, “Determining Whether aGeneral Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights.”We have determined that we are not a primary beneficiary of any VIEs.

 

***Cashand Cash Equivalents***

 

We consider investmentsin highly-liquid money market funds with original maturities of three months orless to be cash equivalents.  In theordinary course of our business, cash requirements for substantially all of ourinvestments and obligations are paid on our behalf directly from our Members tothe other party. We have presented these transactions as cash inflows andoutflows in our consolidated statement of cash flows.

 

***Deferred Offering Costs***

 

Amounts include costsrelated to our Preferred Units offering. In connection with our receipt ofoffering proceeds in 2008, these amounts have been recorded in the December 31,2008 consolidated financial statements as an offset to the Preferred Unitsbalance.

 

***Mortgage Note Receivable***

 

Themortgage note receivable is reported at its outstanding principal balance netof any unearned interest income from unamortized loan origination fees. Loanorigination fees are generally deferred and are amortized as adjustments to interest income using astraight-line method that approximates the effective interest method over thelife of the related debt. During 2007 we received origination fees of$378,000. Included are unamortized deferred origination fees of $299,000 and$375,000 as of December 31, 2008 and 2007, respectively.

 

The Mortgage Borrowerremains obligated to pay principal and interest due regardless of its intent orability to sell or refinance the property. In addition, the mortgage notereceivable does not contain a right to participate in expected residual profitfrom the sale or refinancing of the property. As a result, the mortgage notereceivable is accounted for as a loan pursuant to the guidance in Exhibit Iof AICPA Practice Bulletin 1 on accounting of real estate acquisition,development, or construction arrangements.

 

***Impairment of Mortgage Note Receivable***

 

Wereview the terms and conditions underlying the outstanding balance of themortgage note receivable. If we determine that it is probable that all amountsdue under the terms of the note will not be collected, an impairment charge isrecorded to the extent that the investment in the note exceeds our estimate ofthe fair value of the collateral securing such note.

 

Weassess impairment at the individual project basis. In evaluating the mortgagenote receivable for impairment, management makes several estimates andassumptions about the financial condition of the borrower and the guarantor. Inaddition, management makes several estimates and assumptions about the propertyand the additional collateral provided by the guarantor, including but notlimited to, the projected disposition dates, estimated future cash flows, andthe projected sales prices.  A change inthese estimates and assumptions could result in understating or overstating thecarrying value of the mortgage note receivable which could be material to ourconsolidated financial statements.

 

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Noimpairment charges have been recorded in 2008 or 2007.

 

***Concentrationof Credit Risk***

 

In the ordinary course ofour business, we hold cash and cash equivalents and restricted cash depositedin certain financial institutions in excess of federally insured levels.  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.

 

The Federal DepositInsurance Corporation, or “FDIC,” generally only insures limited amounts perdepositor per insured bank.  Beginning October 3, 2008 through December 31,2009, the FDIC will insure up to $250,000 per depositor per insured bank; on January 1,2010, the standard coverage limit will return to $100,000 for most depositcategories.  Unlimited deposit insurancecoverage may be available to our non-interest bearing transaction accounts heldat those institutions participating in FDIC’s Temporary Liquidity GuaranteeProgram through December 31, 2009.

 

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

 

In September 2006,the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”).SFAS No. 157 defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles, and expands disclosuresabout fair value measurements.  Weadopted the provisions of SFAS No. 157 effective January 1, 2008, anddid not have a material effect on our consolidated results of operations orfinancial position.

 

In February 2008,the FASB staff issued Staff Position No. 157-2 “Effective Date of FASBStatement No. 157” (“FSP SFAS No. 157-2”). FSP SFAS No. 157-2 delayed the effective date of SFAS No. 157 fornonfinancial assets and nonfinancial liabilities, except for items that arerecognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  Theprovisions of FSP SFAS No. 157-2 are effective for our fiscal year beginning January 1,2009.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities - Including an Amendment of FASB Statement No. 115.”  The fair value option established by SFAS No. 159permits all entities to choose to measure eligible items at fair value atspecified election dates.  A businessentity will report unrealized gains and losses on items for which the fairvalue option has been elected in earnings (or another performance indicator ifthe business entity does not report earnings) at each subsequent reportingdate.  SFAS No. 159 is effective forfiscal years beginning after November 15, 2007.  We have not elected the fair valuemeasurement option for any financial assets or liabilities at the present time.

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations.”  This Statement replaces SFAS No. 141 “BusinessCombinations” but retains the fundamental requirement that the acquisitionmethod of accounting, or purchase method, be used for all business combinationsand for an acquirer to be identified for each business combination.  This Statement is broader in scope than thatof Statement 141, which applied only to business combinations in which controlwas obtained by transferring consideration. SFAS No. 141(R) applies the same method of accounting (theacquisition method) to all transactions and other events in which one entityobtains control over one or more other businesses.  This Statement also makes certain othermodifications to Statement 141, including a broader definition of a businessand the requirement that acquisition related costs are expensed asincurred.  This statement applies to ourbusiness combinations beginning January 1, 2009.  The acquisition of a real estate property hasbeen determined to meet the definition of a business combination as defined inSFAS No. 141(R).  Therefore, SFAS No. 141(R) mayhave a material effect on our accounting for future consolidated acquisitionsof properties as acquisition costs will no longer be capitalized, but will beexpensed beginning January 1, 2009.

 

# **4.**                                      Private Offering

# ** **

Thelimited liability company agreement of Cameron House REIT has established 125units of Class A, preferred, cumulative, non-voting membership units (“PreferredUnits”).  We commenced a private offeringof the Preferred Units in November 2007.  During 2008,we sold 121 Preferred Units and raised gross offering proceeds totaling$60,500. Additional offering costs associated with the Preferred Units issuanceincurred during 2008 were approximately $24,000 and have been recorded as anoffset to the Preferred Units balance in accordance with Staff AccountingBulletin (“SAB”) Topic 5.A, Miscellaneous Accounting — Expenses of Offering.

 

Included in deferredoffering costs are offering expenses incurred for the Preferred Units as of December 31,2007 of $7,820. In connection with our receipt of offering proceeds in 2008,these amounts have been recorded in the December 31, 2008 financialstatements as an offset to the Preferred Units balance.

 

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ThePreferred Units pay an annual dividend of 12.5% and are senior in priority toall other members’ equity of Cameron House REIT.  Cameron House’s REIT, at its option, mayredeem the Preferred Units, in whole or in part, at any time or from time totime, for cash at a redemption price equal to $500.00 per unit, plus allaccrued and unpaid distributions thereon to and including the date fixed foreredemption, plus a premium per unit as follows: (1) until December 31,2009, $100; (2) from January 1, 2010 to December 31, 2010, $75; (3) fromJanuary 1, 2011 to December 31, 2011, $50; (4) from January 1,2012 to December 2012, $25; and thereafter, no redemption premium.  The Preferred Units are not redeemable by theunit holders and we have no current intent to exercise our redemption option.

 

**5.**                                      **Related Party Arrangements**

 

We are dependent on theMembers and their affiliates for our operational and investment capitalneeds.  We are also ultimately dependent,through Behringer Harvard Multifamily REIT I, on Behringer Harvard MultifamilyAdvisors I and  Behringer HarvardMultifamily Management Services, LLC  forcertain services that are essential to us, including, asset acquisition anddisposition decisions, property management and leasing services and othergeneral administrative responsibilities. In the event that these companies were unable to provide us with therespective capital or services, we would be required to obtain such capital orservices from other sources. We recognize all amounts at the time incurred bythe Members on our behalf in our financial statements with an offset to MembersEquity.

 

**6.**                                      Mortgage Note Receivable

** **

In December 2007,Cameron House REIT committed to make a mortgage loan in the amount of $19.3million to the Mortgage Borrower (the “Mortgage Note”). We funded $12.4 millionof the commitment as of December 31, 2007, and funded the remainingbalance in 2008.  The Mortgage Note bearsinterest at the rate of 9.5% per annum and matures on December 11, 2012.  Through the maturity date, interest ispayable on a monthly basis from a budgeted interest reserve in the amount of$4,593,000 and from available net operational cash flows. At maturity principaland unpaid interest is due.  However, ifCameron REIT does not exercise its option to convert the Mortgage Note into anequity interest in the Partnership Entity, as described below, then the paymentof accrued interest on the Mortgage Note from funds other than the interestreserve will be subordinate to the payment of a 9.5% preferred return payableto the partners in the Project Entity and to the return of their equityinvestment in the Project Entity.  Allunpaid interest on the Mortgage Note will be payable upon final maturity of theMortgage Note.  Generally no prepaymentof the Mortgage Note may be made except (i) prepayment is permitted 150days after the project is completed and (ii) prepayment is required if anyof the interests in the Project Entity that are the subject of the purchaseoption are sold (including pursuant to the exercise of the purchase option) orthere is a sale of the project.

 

The Mortgage Note issecured by a lien pursuant to a deed of trust on the project that issubordinate to the lien granted to the senior lender.  In connection with the making of the MortgageNote, Cameron House REIT agreed with BREOF Cameron that if Cameron House REITexercises any of its remedies under these security arrangements, includingforeclosure or a power of sale, such that Cameron House REIT acquires theProject Entity or the project or receives any proceeds under a power of sale ofthe Project Entity or the project, BREOF Cameron is entitled to share in suchownership or proceeds under substantially the same co-ownership terms of thePartnership Entity, as though Cameron House REIT had exercised the optiondiscussed below.

 

TheMortgage Note is also supported by a guarantee from the commercial developer**which has**guaranteedcompletion of the development of the project in accordance with its plans andspecifications if, for any reason, the Mortgage Borrower abandons the projectbefore its completion or fails to complete the project on the agreed scheduleand pay all construction costs in full, including construction cost overruns inexcess of the construction budget.  Thedeveloper has also guaranteed repayment of the Mortgage Loan should theMortgage Borrower become the subject of a bankruptcy or insolvency proceeding,provided Cameron House REIT does not consent in writing to or otherwise join asa party in such proceeding.  In addition the Project Entity has issued aguaranty of payment and performance in respect of the Mortgage Note.

 

The Project Entity andMortgage Borrower were formed by the commercial developer to purchase, finance,and develop one real estate project; these entities are not consolidated intoour financial statements. Our involvement with them began at the time wecommitted to the Mortgage Note, and our potential loss exposure is limited tothe funded portion of our commitment. The Project Entity and Mortgage Borroweralso owe amounts to other parties, including the senior construction lender.Neither we nor Cameron House REIT have a primary or secondary obligation withrespect to such obligations.

 

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**7.**                                      **Commitments and Contingencies**

 

The Fairfield at CameronHouse project is currently under development and is estimated to be completedin the first calendar quarter of 2010.

 

*Contingentpurchase option. *Cameron House REIT has a contingentpurchase option to acquire a 60% limited partnership interest in the ProjectEntity (the “Purchase Option”).  ThePurchase Option is not currently exercisable and cannot be exercised untildevelopment is complete and the property has been certified for occupancy.Cameron House REIT may exercise the Purchase Option within 90 days ofcompletion of the Fairfield at Cameron House project.  The exercise price will generally becalculated at the conversion amount of the Mortgage Note plus any additionalamounts necessary to adjust the owners’ capital accounts to their statedownership percentages at the time of exercise. Upon exercise, any outstanding principal and interest on the MortgageNote will become second-priority capital in the Project Entity and CameronHouse REIT will be entitled to receive an annual preferred return of 9.5%.

 

*BREOFCameron’s contingent sell option**. *BREOF Cameron has an option to sell itslimited partnership interest in the Project Entity to Cameron House REIT at aprice to be negotiated in the future or in the absence of mutual agreementbetween the parties, the amount that would be distributable to BREOF Cameron ifthe project was sold, as determined by an arbitration process (the “Sell Option”).  The Sell Option is not currently exercisableand cannot be exercised until development is complete and the property has beencertified for occupancy.  The Sell Optionbecomes exercisable upon completion of the project and expires after 90 days.This limited partnership equity balance is approximately $10.3 million(unaudited) as of December 31, 2008 and 2007.

 

*DeveloperPartners’ contingent sell option and BREOF Cameron’s tag-along right. *If Cameron House REITexercises the Purchase Option and is a limited partner in the Project Entity,then the partners owned by the developers (the “Developer Partners”) have aright, commencing on the 13th month following completion of the project andcontinuing until the fourth anniversary of the completion of the project, toinitiate a procedure to ascertain the fair market value of the project and,thus, to ascertain the value of the partnership interests of the DeveloperPartners in the Project Entity.  If suchvalue is not mutually agreed upon by the Developer Partners and Cameron HouseREIT, then such value would equal the distributions that the Developer Partnerswould receive if the project were sold at its fair market value, which would bedetermined by an arbitration process. Once such value is agreed upon or determined, Cameron House REIT has anoption to purchase the Developer Partners’ interests at that price or torequest that the Developer Partners cause the Project Entity to sell theproject for a price that is not less than the determined fair market value. TheDeveloper Partners may then elect whether to proceed with causing a sale of theproject.  If the Developer Partners donot elect to cause a sale of the project or are unable to consummate such asale, then the Developer Partners do not have any additional right to initiate aliquidity event similar to that described in this paragraph.  If Cameron House REIT elects to purchase theDeveloper Partners’ interests as provided above, then the limited partner hasan option to require Cameron House REIT to purchase the limited partner’sinterest for an amount equal to the distributions that the limited partnerwould receive if the project were sold at fair market value as determinedabove.  If BREOF Cameron elects not toexercise this tag-along right, then any partner in the Project Entity mayinitiate the buy/sell procedures described below.

 

*CameronHouse REIT’s Call Right. *If CameronHouse REIT exercises the Purchase Option and is a limited partner in theProject Entity, then Cameron House REIT has a right, commencing upon the earlierof either (i) 48 months after completion of the project or (ii) anelection by BREOF Cameron House not to exercise its tag-along rights inconnection with the exercise of the developer partners’ put right, to initiatea procedure to ascertain the fair market value of the project and, thus, toascertain the value of the partnership interests of all of then-currentpartners in the Project Entity.  If suchvalue is not mutually agreed upon by Cameron House REIT and the other partners,then such value would equal the collective distributions that the otherpartners would receive if the project were sold at its fair market value, whichwould be determined by an arbitration process. Once such value is agreed upon or determined, Cameron House REIT has anoption to purchase the other partners’ interests at that price.  If Cameron House REIT does not elect topurchase the other parties’ interests, then any partner has the right toinitiate buy/sell procedures described below.

 

*Buy/SellRights. *Under the limitedcircumstances described above, any partner in the Project Entity may initiatebuy/sell procedures with respect to their partnership interests.  Under those procedures, a partner could makean offer to purchase the interests of the other partners based on an offerprice for the partnership’s assets and the other partners would either elect tosell their interests based on that price or elect to purchase the offeringpartner’s partnership interests based on that price.  The partnership agreement includes provisionsrequiring some partners to act as a group in connection with the exercise ofthe buy/sell provisions.

 

*****

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Manager andMembers of

Behringer HarvardColumbia Venture, LLC

Addison, Texas

 

We have audited theaccompanying consolidated balance sheets of Behringer Harvard Columbia Venture,LLC and subsidiaries (the “Company”) as of December 31, 2008 and 2007, andthe related consolidated statements of income, members’ equity, and cash flowsfor the year ended December 31, 2008 and for the period from August 6,2007 (date of  inception) through December 31,2007.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  The Company is not required to have,nor were we engaged to perform, an audit of its internal control over financialreporting.  Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2008 and 2007, andthe results of its operations and its cash flows for the year ended December 31,2008 and for the period from August 6, 2007 (date of inception) through December 31,2007, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/Deloitte & Touche LLP

 

Dallas, Texas

March 31, 2009

 

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**Behringer Harvard Columbia Venture, LLC**

**ConsolidatedBalance Sheets**

as of December 31,2008 and 2007

 

 
| ** **                                                                                                                                                                                              | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                                                              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                                                               |       | $          | 198,142    |       | $          | 268,559 |   |
| Accrued interest receivable                                                                                                                                                                             |       | 163,242    |       | 163,242    |       |
| Mortgage note receivable, net                                                                                                                                                                           |       | 19,502,329 |       | 19,382,600 |       |
| Investment in unconsolidated real estate joint venture                                                                                                                                                  |       | 3,532,456  |       | 3,552,938  |       |
| Deferred offering costs                                                                                                                                                                                 |       | —     |       | 9,820      |       |
| **Total assets**                                                                                                                                                                                        |       | $          | 23,396,169 |       | $          | 23,377,159 |   |
|                                                                                                                                                                                                    |       |       |       |       |       |
| **Liabilities, preferred units and members’ equity**                                                                                                                                               | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued liabilities                                                                                                                                                                                     |       | $          | 1,086      |       | $          | 9,820 |   |
|                                                                                                                                                                                                    |       |       |       |       |       |
| **Commitments and contingencies**                                                                                                                                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                    |       |       |       |       |       |
| Preferred units; $500.00 par value per share; 12.5% dividend per  annum; 125 units authorized, 124 units issued and outstanding at December 31,  2008; none issued and outstanding at December 31, 2007 |       | 28,902     |       | —     |       |
|                                                                                                                                                                                                    |       |       |       |       |       |
| Members’ equity                                                                                                                                                                                    |       | 23,366,181 |       | 23,367,339 |       |
| **Total liabilities, preferred units and members’  equity**                                                                                                                                        |       | $          | 23,396,169 |       | $          | 23,377,159 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Columbia Venture, LLC**

**ConsolidatedStatements of Income**

 
| ** **                                                 | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from August 6,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| Interest income                                            |       | $                                       | 2,052,176  |                                                                                                 | $          | 458,193 |   |
|                                                       |       |                                    |       |                                                                                                 |       |
| General and administrative expenses                        |       | 49,724                                  |       | 2,939                                                                                                |       |
|                                                       |       |                                    |       |                                                                                                 |       |
| Equity in loss of unconsolidated real estate joint venture |       | 23,476                                  |       | —                                                                                               |       |
|                                                       |       |                                    |       |                                                                                                 |       |
| **Net income**                                             |       | $                                       | 1,978,976  |                                                                                                 | $          | 455,254 |   |
|                                                       |       |                                    |       |                                                                                                 |       |
| Preferred units dividends                                  |       | (7,750                                  | )          | —                                                                                               |       |
|                                                       |       |                                    |       |                                                                                                 |       |
| Net income attributable to the Members                     |       | $                                       | 1,971,226  |                                                                                                 | $          | 455,254 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Columbia Venture, LLC**

**ConsolidatedStatements of Members’ Equity**

 

 
| ** **                                         | ** ** | **Preferred Units** | ** ** | **Members’ Equity** | ** ** | **Total**  | ** ** |
|----------------------------------------------------|------------|---------------------|------------|--------------------------|------------|------------|------------|
| Balance at August 6, 2007 (date of inception) |       | $                   | —     |                     | $          | —     |       | $ | — |   |
| * *                                           | * *   | * *            | * *   | * *                 | * *   | * *   | * *   |
| Contributions                                      |       | —              |       | 23,510,731               |       | 23,510,731 |       |
| Distributions                                      |       | —              |       | (598,646                 | )          | (598,646   | )          |
| Net income                                         |       | —              |       | 455,254                  |       | 455,254    |       |
|                                               |       |                |       |                     |       |       |       |
| Balance at December 31, 2007                  |       | —              |       | 23,367,339               |       | 23,367,339 |       |
| * *                                           | * *   | * *            | * *   | * *                 | * *   | * *   | * *   |
| Preferred units:                                   |       |                |       |                     |       |       |       |
| Proceeds from issuance                             |       | 62,000              |       | —                   |       | 62,000     |       |
| Offering costs                                     |       | (33,098             | )          | —                   |       | (33,098    | )          |
| Dividends                                          |       | —              |       | (7,750                   | )          | (7,750     | )          |
| Contributions                                      |       | —              |       | 65,505                   |       | 65,505     |       |
| Distributions                                      |       | —              |       | (2,037,889               | )          | (2,037,889 | )          |
| Net income                                         |       | —              |       | 1,978,976                |       | 1,978,976  |       |
|                                               |       |                |       |                     |       |       |       |
| Balance at December 31, 2008                  |       | $                   | 28,902     |                     | $          | 23,366,181 |       | $ | 23,395,083 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Columbia Venture, LLC**

**ConsolidatedStatements of Cash Flows**

 

 
| ** **                                                                               | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from August 6,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| **Cash flows from operating activities**                                                 | ** ** | ** **                              | ** ** | ** **                                                                                           | ** ** |
| Net income                                                                               |       | $                                       | 1,978,976  |                                                                                                 | $          | 455,254 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities - |       |                                    |       |                                                                                                 |       |
| Amortization of deferred financing fees                                                  |       | (119,729                                | )          | (26,392                                                                                              | )          |
| Equity in loss of unconsolidated real estate joint venture                               |       | 23,476                                  |       | —                                                                                               |       |
| Changes in operating assets and liabilities:                                             |       |                                    |       |                                                                                                 |       |
| Accrued interest receivable                                                              |       | —                                  |       | (163,242                                                                                             | )          |
| Accrued liabilities                                                                      |       | 1,086                                   |       | —                                                                                               |       |
| **Cash provided by operating activities**                                                |       | 1,883,809                               |       | 265,620                                                                                              |       |
|                                                                                     |       |                                    |       |                                                                                                 |       |
| **Cash flows from investing activities**                                                 | ** ** | ** **                              | ** ** | ** **                                                                                           | ** ** |
| Advances on mortgage note receivable, net                                                |       | —                                  |       | (19,356,208                                                                                          | )          |
| Investment in unconsolidated real estate joint venture                                   |       | (2,994                                  | )          | (3,552,938                                                                                           | )          |
| **Cash used in investing activities**                                                    |       | (2,994                                  | )          | (22,909,146                                                                                          | )          |
|                                                                                     |       |                                    |       |                                                                                                 |       |
| **Cash flows from financing activities**                                                 | ** ** | ** **                              | ** ** | ** **                                                                                           | ** ** |
| Contributions                                                                            |       | 65,505                                  |       | 23,510,731                                                                                           |       |
| Distributions                                                                            |       | (2,037,889                              | )          | (598,646                                                                                             | )          |
| Preferred units:                                                                         |       |                                    |       |                                                                                                 |       |
| Proceeds from issuance                                                                   |       | 62,000                                  |       | —                                                                                               |       |
| Offering costs                                                                           |       | (33,098                                 | )          | —                                                                                               |       |
| Dividends paid                                                                           |       | (7,750                                  | )          | —                                                                                               |       |
| **Cash (used in) provided by financing activities**                                      |       | (1,951,232                              | )          | 22,912,085                                                                                           |       |
|                                                                                     |       |                                    |       |                                                                                                 |       |
| Net change in cash and cash equivalents                                                  |       | (70,417                                 | )          | 268,559                                                                                              |       |
| Cash and cash equivalents at beginning of period                                         |       | 268,559                                 |       | —                                                                                               |       |
| Cash and cash equivalents at end of period                                               |       | $                                       | 198,142    |                                                                                                 | $          | 268,559 |   |
|                                                                                     |       |                                    |       |                                                                                                 |       |
| **Supplemental schedule of noncash financing  activities -**                             | ** ** | ** **                              | ** ** | ** **                                                                                           | ** ** |
| Accrued offering costs                                                                   |       | $                                       | —     |                                                                                                 | $          | 9,820 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Columbia Venture, LLC**

**Notes to Consolidated FinancialStatements**

 

**1.             Organizationand Business**

** **

***Organization***

 

Behringer HarvardColumbia Venture, LLC (which may be referred to as the “Company,” “we,” “us,”or “our”) was effectively organized in Delaware on August 6, 2007.

 

We are a co-investment jointventure between Behringer Harvard Multifamily OP I LP (“Behringer HarvardMultifamily OP I”), which, through its wholly owned subsidiary BehringerHarvard Columbia, LLC, is our manager and 55% owner, and, Behringer HarvardMaster Partnership I LP (“Behringer Harvard Master Partnership I”), our 45%owner.  The 1% general partner ofBehringer Harvard Master Partnership I is Behringer Harvard Institutional GPLP, a related party that is indirectly owned by Behringer Harvard Holdings, LLCand the 99% limited partner of Behringer Harvard Master Partnership I is anunaffiliated social work sector pension fund based in The Netherlands,Stichting Pensioenfonds Zorg en Welijn (“PGGM”). Substantially all of thecapital provided to Behringer Harvard Master Partnership I is from PGGM.

 

Behringer HarvardMultifamily OP I is wholly owned by Behringer Harvard Multifamily REIT I, Inc.(“Behringer Harvard Multifamily REIT I”). Behringer Harvard Multifamily OP Iand Behringer Harvard Master Partnership I are collectively referred to hereinas the Members and hold indirectly and directly, respectively, 100% of ourvoting interests.

 

We were organized to own100% of the voting equity interests and approximately 99% of the economicinterests in one subsidiary, Behringer Harvard Columbia REIT, LLC, (“ColumbiaREIT”). Substantially all of our business is conducted through Columbia REIT.Columbia REIT was organized to make a mortgage loan to West Columbia Pike, LLC(the “Project Entity”) and an equity investment in Fairfield Columbia PikeLimited Partnership (the “Partnership Entity”). Prior to our equity investment,the Partnership Entity was owned by a commercial developer and was organized todevelop and own one apartment community, commonly known as Tower 55 Hundred (“Tower55 Hundred”). Tower 55 Hundred is currently under development in ArlingtonCounty, Virginia, has an estimated construction budget of approximately $99.8million (unaudited), and is expected to be a ten-story high-rise apartmentcommunity (unaudited) with approximately 234 rental units (unaudited) and anunderground parking facility.  Tower 55Hundred project is wholly owned by the Project Entity, which is wholly owned bythe Partnership Entity.

 

Neither we nor ColumbiaREIT have employees and both are supported by related party arrangements.Behringer Harvard Multifamily REIT I is externally managed by Behringer HarvardMultifamily Advisors I LP (“Behringer Harvard Multifamily Advisors I”), a Texaslimited partnership organized in 2006. Behringer Harvard Multifamily Advisors I, through Behringer HarvardMultifamily REIT I, is responsible for managing our affairs on a day-to-daybasis and for identifying and making real estate investments on our behalf.

 

# **2**.             Summaryof Significant Accounting Policies

# ** **

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

 

The preparation ofconsolidated financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates include such items as amortization and accruedliabilities.  Actual results could differfrom those estimates.

 

***IncomeTaxes***

 

Columbia REIT has elected tobe taxed as a real estate investment trust (“REIT”) under Sections 856 through860 of the Internal Revenue Code, and has qualified as a REIT since the periodended December 31, 2007.  To qualifyas a REIT, we must meet a number of organizational and operationalrequirements, including a requirement that we distribute at least 90% of ourREIT taxable income.  As a REIT, wegenerally will not be subject to federal income tax at the corporatelevel.  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. Even if we qualify for taxation 

 

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asa REIT, we may be subject to certain state and local taxes on our income andproperty, and federal income and excise taxes on our undistributed income.

 

Wehave adopted the provisions of FASB Interpretation No. 48 Accounting foruncertainty in income taxes — an interpretation of FASB Statement No. 109 (“FIN48”). Under FIN 48, we recognize the financial statement benefit of anuncertain tax position only after determining that the relevant tax authoritywould more likely than not sustain the position following an audit. To date, weare unaware of any uncertain tax positions.

 

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

 

Our consolidatedfinancial statements include our accounts and the accounts of ColumbiaREIT.  All inter-company transactions,balances and profits are eliminated in consolidation.  Interests in entities acquired are evaluated forconsolidation based on Financial Accounting Standards Board Interpretation (“FIN”)46R “Consolidation of Variable Interest Entities,” which requires theconsolidation of variable interest entities (“VIEs”) in which we are deemed tobe the primary beneficiary.  If theinterest in the entity is determined to not be a VIE under FIN 46R, then theentities are evaluated for consolidation under the American Institute ofCertified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accountingfor Investments in Real Estate Ventures,” and by Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.” We have determined that we are not a primarybeneficiary of any VIEs.

 

The Project Entity andPartnership Entity uses ratios that are different than the stated equitypercentages for obligations and allocation of profits and losses, specifiedcosts and expenses, distributions of cash from operations, and distributions ofcash proceeds from liquidation.

 

***Cashand Cash Equivalents***

 

We consider investmentsin highly-liquid money market funds with original maturities of three months orless to be cash equivalents. In the ordinary course of our business, cashrequirements for substantially all of our investments and obligations are paidon our behalf directly from our Members to the other party. We have presentedthese transactions as cash inflows and outflows in our consolidated statementof cash flows.

 

***Deferred Offering Costs***

 

Amounts include costsrelated to our Preferred Units offering. In connection with our receipt ofoffering proceeds in 2008, these amounts have been recorded in the December 31,2008 consolidated financial statements as an offset to the Preferred Unitsbalance.

 

***Mortgage Note Receivable***

 

Themortgage note receivable is reported at its outstanding principal balance netof any unearned income from unamortized loan origination fees. Loan originationfees are generally deferred and are amortized as adjustments to interest income using astraight-line method that approximates the effective interest method over thelife of the related debt. During 2007 we received origination fees of$599,000.  Included are unamortizeddeferred origination fees of $453,000 and $572,000 as of December 31, 2008and 2007, respectively.

 

The mortgage notereceivable is coterminous with the Project Entity’s construction loan and theProject Entity remains obligated to pay principal and interest due regardlessof its intent or ability to sell or refinance the property. In addition, themortgage note receivable does not contain a right to participate in expectedresidual profit from the sale or refinancing of the property. As a result, themortgage note receivable is accounted for as a loan pursuant to the guidance inExhibit I of AICPA Practice Bulletin 1 on accounting of real estateacquisition, development, or construction arrangements.

 

***Investment in Unconsolidated Real Estate Joint Venture***

 

We account for ourinvestment in real estate joint venture using the equity method of accountingbecause we exercise significant influence over, but do not control the PartnershipEntity. This investment is initially recorded at cost and is adjusted for ourshare of equity in earnings and distributions. The Tower 55 Hundred project isunder development and has no income or losses.

 

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***Impairment of Long Lived Assets and MortgageNote Receivable***

 

For real estate we ownthrough an investment in a real estate venture, at each reporting date wecompare the estimated fair value of our real estate investment to the carryingvalue. An impairment charge is recorded to the extent the fair value of ourreal estate investment is less than the carrying amount and the decline invalue is determined to be other than a temporary decline.

 

Wereview the terms and conditions underlying the outstanding balance of themortgage note receivable. If we determine that it is probable that all amountsdue under the terms of the note will not be collected, an impairment charge isrecorded to the extent that the investment in the note exceeds our estimate ofthe fair value of the collateral securing such note.

 

Weassess impairment at the individual project basis. In evaluating the investmentin real estate venture and mortgage note receivable for impairment, managementmakes several estimates and assumptions about the financial condition of theborrower and the guarantor. In addition, management makes several estimates andassumptions about the property and the additional collateral provided by theguarantor, including but not limited to, the projected disposition dates,estimated future cash flows, and the projected sales prices.  A change in these estimates and assumptionscould result in understating or overstating the carrying value of the mortgagenote receivable which could be material to our consolidated financialstatements.

 

Noimpairment charges have been recorded in 2008 or 2007.

 

***Concentrationof Credit Risk***

 

In the ordinary course ofour business, we hold cash and cash equivalents and restricted cash depositedin certain financial institutions in excess of federally insured levels.  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.

 

The Federal DepositInsurance Corporation, or “FDIC,” generally only insures limited amounts perdepositor per insured bank.  Beginning October 3, 2008 through December 31,2009, the FDIC will insure up to $250,000 per depositor per insured bank; on January 1,2010, the standard coverage limit will return to $100,000 for most depositcategories.  Unlimited deposit insurancecoverage may be available to our non-interest bearing transaction accounts heldat those institutions participating in FDIC’s Temporary Liquidity GuaranteeProgram through December 31, 2009.

 

**3.             New Accounting Pronouncements**

 

In September 2006,the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  We adopted the provisions of SFAS No. 157 effective January 1, 2008, anddid not have a material effect on our consolidated results of operations orfinancial position.

 

In February 2008,the FASB staff issued Staff Position No. 157-2 “Effective Date of FASBStatement No. 157” (“FSP SFAS No. 157-2”).  FSP SFAS No. 157-2 delayed the effectivedate of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually).  The provisions of FSP SFAS No. 157-2 areeffective for our fiscal year beginning January 1, 2009.

 

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities - Including an Amendment of FASB Statement No. 115.”  The fair value option established by SFAS No. 159permits all entities to choose to measure eligible items at fair value atspecified election dates.  A businessentity will report unrealized gains and losses on items for which the fairvalue option has been elected in earnings (or another performance indicator ifthe business entity does not report earnings) at each subsequent reportingdate.  SFAS No. 159 was effectivefor fiscal years beginning after November 15, 2007.  We have not elected the fair value measurementoption for any financial assets or liabilities at the present time.

 

In December 2007,the FASB issued SFAS No. 141(R), “Business Combinations.”  This Statement replaces SFAS No. 141 “BusinessCombinations” but retains the fundamental requirement that the acquisitionmethod of accounting, or purchase method, be used for all business combinationsand for an acquirer to be identified for each business combination.  This Statement is broader in scope than thatof Statement 141, which applied only to business combinations in which controlwas obtained by transferring consideration. SFAS No. 141(R) applies the same method of accounting (theacquisition method) to all transactions and other events in which one entityobtains control over one or more other businesses.  This Statement also makes certain othermodifications to Statement 141, including a broader definition of a businessand the requirement that acquisition related costs are expensed as incurred.  

 

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This statement applies toour business combinations beginning January 1, 2009. The acquisition of areal estate property has been determined to meet the definition of a businesscombination as defined in SFAS No. 141(R). Therefore, SFAS No. 141(R) may have a material effect on ouraccounting for future consolidated acquisitions of properties as acquisitioncosts will no longer be capitalized, but will be expensed beginning January 1,2009.

 

# **4.**             Private Offering

# ** **

The limited liabilitycompany agreement of Columbia REIT has established 125 units of Class A,preferred, cumulative, non-voting membership units (“Preferred Units”).  We commenced a private offering of thePreferred Units in November 2007. During 2008, we sold 124 Preferred Unitsand raised gross offering proceeds totaling $62,000. Additional offering costs associatedwith the Preferred Units issuance incurred during 2008 were approximately $24,000 and havebeen recorded as an offset to the Preferred Units balance in accordance withStaff Accounting Bulletin (“SAB”) Topic 5.A, Miscellaneous Accounting —Expenses of Offering.

 

Included in deferredoffering costs are offering expenses incurred for the Preferred Units as of December 31,2007 of $9,820. In connection with our receipt of offering proceeds in 2008,these amounts have been recorded in the December 31, 2008 financialstatements as an offset to the Preferred Units balance.

 

The Preferred Units payan annual dividend of 12.5% and are senior in priority to all other members’equity of Columbia REIT.  Columbia’sREIT, at its option, may redeem the Preferred Units, in whole or in part, atany time or from time to time, for cash at a redemption price equal to $500.00per unit, plus all accrued and unpaid distributions thereon to and includingthe date fixed fore redemption, plus a premium per unit as follows: (1) untilDecember 31, 2009, $100; (2) from January 1, 2010 to December 31,2010, $75; (3) from January 1, 2011 to December 31, 2011, $50; (4) fromJanuary 1, 2012 to December 2012, $25; and thereafter, no redemptionpremium.  The Preferred Units are notredeemable by the unit holders and we have no current intent to exercise ourredemption option.

 

**5.             Related Party Arrangements**

 

We are dependent on theMembers and their affiliates for our operational and investment capitalneeds.  We are also ultimately dependent,through Behringer Harvard Multifamily REIT I, on Behringer Harvard MultifamilyAdvisors I and  Behringer HarvardMultifamily Management Services, LLC  forcertain services that are essential to us, including, asset acquisition anddisposition decisions, property management and leasing services and othergeneral administrative responsibilities. In the event that these companies were unable to provide us with therespective capital or services, we would be required to obtain such capital orservices from other sources. We recognize all amounts at the time incurred bythe Members on our behalf in our financial statements with an offset to MembersEquity.

 

**6.             MortgageNote Receivable and Investment in Unconsolidated Real Estate Venture**

** **

In October 2007,Columbia REIT committed to make a mortgage loan in the amount of $19,960,000 tothe Project Entity (the “Mortgage Note”). We have fully funded the commitmentas of December 31, 2007.  TheMortgage Note bears interest at the rate of 9.5% per annum and matures on October 10, 2012.Through the maturity date, interest is payable on a monthly basis from abudgeted interest reserve in the amount of $3,791,000 and from net operational cash flows. Atmaturity, principal and unpaid interest is due. Subsequent to project completion, cash payments for interest fromavailable net operational cash flows will be subordinate to the payment of the9.5% preferred return payable to the partners in the Partnership Entity and tothe return of their equity investment in the Partnership Entity.  Generally no prepayment of the Mortgage Notemay be made except (i) prepayment is permitted 150 days after the projectis completed and (ii) prepayment is required if any of the interests inthe Partnership Entity that are the subject of the purchase option are sold(including the exercise of the purchase option) or there is a sale of the Tower55 Hundred project.

 

The Mortgage Note issecured by a lien pursuant to a deed of trust on the Tower 55 Hundred projectthat is subordinate to the lien granted to the senior lender.  The Mortgage Note is also supported by aguarantee from the developer, who has guaranteed completion of the developmentof the Tower 55 Hundred project in accordance with its plans and specificationsif, for any reason the Project Entity abandons the Tower 55 Hundred projectbefore its completion or fails to complete the project on the agreed scheduleand pay all construction costs in full including construction cost overruns inexcess of the construction budget.  The developer has also guaranteedrepayment of the Mortgage Note should the Project Entity become the subject ofa bankruptcy or insolvency proceeding, provided Columbia REIT does not consentin writing to or otherwise join as a party in such proceeding.

 

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InOctober 2007, Columbia REIT funded a 50.1% limited partnership interest inthe Partnership Entity in the amount of $3,552,938. Partnership distributions are made generally to first returncapital contributions to the partners with preferred returns and to pay certain deferred fees to thedeveloper.  Thereafter, returnsare paid to the partners in accordance with their respective percentageinterests.

 

The Project Entity andPartnership Entity use ratios that are different than the stated partnershipinterests for obligations and allocation of profits and losses, specified costsand expenses, distributions of cash from operations, and distributions of cashproceeds from liquidation.

 

The Partnership Entityand the Project Entity were formed by the commercial developer to purchase,finance, and develop one real estate project; these entities are notconsolidated into our financial statements. Our involvement with these entitiesbegan at the time we committed to the Mortgage Note and equity investment andour potential loss exposure is limited to the funded portion of thesecommitments. The entities also owe amounts to other parties,including the senior project lender.Neither we nor Columbia REIT have a primary or secondary obligation withrespect to such obligations.

 

**7.             Commitments and Contingencies**

 

The Tower 55 Hundredproject is currently under development and is estimated to be completed in thethird calendar quarter of 2009.

 

*Contingentconversion option. *Columbia REIT has a contingent conversionoption to convert the Mortgage Note into its limited partnership interest inthe Partnership Entity (the “Conversion Option”).  The Conversion Option is not currentlyexercisable and cannot be exercised until development is complete and theproperty has been certified for occupancy. Columbia REIT may exercise theConversion Option within 90 days of completion of the Tower 55 Hundred projectand the exercise price will be the outstanding balance of the Mortgage Note andunpaid interest.  Upon exercise,outstanding principal and interest on the Mortgage Note will becomesecond-priority capital in the Partnership Entity, Columbia REIT will beentitled to an annual preferred return of 9.5%, and Columbia REIT will continueto hold a stated limited partnership interest of 50.1% and in accordance withthe partnership distribution priorities.

 

*DeveloperPartners’ contingent sell option*.  The partnersowned by the developers (the “Developer Partners”) have a right, commencing onthe date of completion of the Tower 55 Hundred project and continuing until thefourth anniversary of the completion of the Tower 55 Hundred project, toinitiate a procedure to ascertain the fair market value of the Tower 55 Hundredproject and, thus, to ascertain the value of the partnership interests of theDeveloper Partners in the Partnership Entity. If such value is not mutually agreed upon by the Developer Partners andColumbia REIT, then such value would equal the distributions that the DeveloperPartners would receive if the Tower 55 Hundred project were sold at its fairmarket value, which would be determined by an arbitration process.  Once such value is agreed upon or determined,Columbia REIT has an option to purchase the Developer Partners’ interests atthat price or to request that the Developer Partners cause the Project Entityto sell the Tower 55 Hundred project for a price that is not less than thedetermined fair market value.  TheDeveloper Partners may then elect whether to proceed with causing a sale of theTower 55 Hundred project.  If theDeveloper Partners do not elect to cause a sale of the Tower 55 Hundred projector are unable to consummate such a sale, then the Developer Partners do not haveany additional right to initiate a liquidity event similar to that described inthis paragraph.

 

*ColumbiaREIT’s Call Right.*  If the Developer Partners do not exercisetheir put right described above, then Columbia REIT has a right, commencing onthe fourth anniversary of the date of completion of the Tower 55 Hundredproject, to initiate a procedure to ascertain the fair market value of theTower 55 Hundred project and, thus, to ascertain the value of the partnershipinterests of all of then-current partners in the Partnership Entity.  If such value is not mutually agreed upon byColumbia REIT and the other partners, then such value would equal thecollective distributions that the other partners would receive if the Tower 55Hundred project were sold at its fair market value, which would be determinedby an arbitration process.  Once suchvalue is agreed upon or determined, Columbia REIT has an option to purchase theother partners’ interests at that price. If Columbia REIT initiates this procedure but does not elect to purchasethe other parties’ interests, then any partner has the right to initiatebuy/sell procedures described below.

 

*Buy/SellRights.*  Under the limited circumstances describedabove, any partner in the Partnership Entity may initiate buy/sell procedureswith respect to their partnership interests. Under those procedures, a partner could make an offer to purchase theinterests of the other partners based on an offer price for the partnership’sassets and the other partners would either elect to sell their interests basedon that price or elect to purchase the offering partner’s partnership interestsbased on that price.  The partnershipagreement includes provisions requiring the Developer Partners to act as agroup in connection with the exercise of the buy/sell provisions.

 

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**8.****                                                        ****Disclosure of summarizedfinancial information of the unconsolidated real estate joint venture**

 
| ** **                                       | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Balance sheet data:**                          |       |                        |       |                        |       |
|                                             |       |                        |       |                        |       |
| Cash                                             |       | $                           | 30,835     |                        | $          | 52,239 |   |
| Land and construction in progress                |       | 60,516,585                  |       | 32,344,321                  |       |
| Other assets                                     |       | 15,560                      |       | —                      |       |
| **Total assets**                                 |       | $                           | 60,562,980 |                        | $          | 32,396,560 |   |
|                                             |       |                        |       |                        |       |
| Construction loan                                |       | $                           | 30,117,453 |                        | $          | 7,578,946 |   |
| Note payable to Columbia REIT                    |       | 19,954,854                  |       | 19,954,854                  |       |
| Accounts payable, interest payable and other     |       | 6,981,211                   |       | 1,309,822                   |       |
| Partners’ capital                           |       | 3,509,462                   |       | 3,552,938                   |       |
| **Total liabilities and partners’ capital** |       | $                           | 60,562,980 |                        | $          | 32,396,560 |   |

 

The Tower 55 Hundredproject is currently under development, had insignificant net income (loss) forthe period ended December 31, 2007, and incurred a net loss of $23,476 forthe year ended December 31, 2008.

 

*****

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Manager andMembers of

Behringer Harvard JohnsCreek Venture, LLC

Addison, Texas

 

We have audited theaccompanying consolidated balance sheets of Behringer Harvard Johns CreekVenture, LLC and subsidiaries (the “Company”) as of December 31, 2008 and2007, and the related consolidated statements of income, members’ equity, andcash flows for the year ended December 31, 2008 and for the period from August 3,2007 (date of  inception) through December 31,2007.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  The Company is not required to have,nor were we engaged to perform, an audit of its internal control over financialreporting.  Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2008 and 2007, andthe results of its operations and its cash flows for the year ended December 31,2008 and for the period from August 3, 2007 (date of inception) through December 31,2007, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/Deloitte & Touche LLP

 

Dallas, Texas

March 31, 2009

 

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**BehringerHarvard Johns Creek Venture, LLC**

**Consolidated Balance Sheets**

as of December 31,2008 and 2007

 
| ** **                                                                                                                                                                                                         | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Real estate**                                                                                                                                                                                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Land                                                                                                                                                                                                               |       | $          | 3,204,758  |       | $          | 3,204,758 |   |
| Building, improvements and other, net                                                                                                                                                                              |       | 27,783,718 |       | 29,598,700 |       |
| Total real estate                                                                                                                                                                                                  |       | 30,988,476 |       | 32,803,458 |       |
| ** **                                                                                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                                                                          |       | 388,573    |       | 139,806    |       |
| Restricted cash                                                                                                                                                                                                    |       | 201,827    |       | 192,234    |       |
| Accounts receivable, net                                                                                                                                                                                           |       | 27,482     |       | 31,159     |       |
| Prepaid expenses and other assets                                                                                                                                                                                  |       | 4,572      |       | 16,763     |       |
| Deferred financing costs, net                                                                                                                                                                                      |       | 282,041    |       | 343,656    |       |
| **Total assets**                                                                                                                                                                                                   |       | $          | 31,892,971 |       | $          | 33,527,076 |   |
|                                                                                                                                                                                                               |       |       |       |       |       |
| **Liabilities, preferred units and members’ equity**                                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Resident security deposits and prepaid rent                                                                                                                                                                        |       | $          | 94,027     |       | $          | 103,512 |   |
| Accounts payable and accrued expenses                                                                                                                                                                              |       | 110,588    |       | 44,358     |       |
| Interest payable                                                                                                                                                                                                   |       | 127,964    |       | —     |       |
| Mortgage loan                                                                                                                                                                                                      |       | 23,000,000 |       | 23,000,000 |       |
| **Total liabilities**                                                                                                                                                                                              |       | 23,332,579 |       | 23,147,870 |       |
|                                                                                                                                                                                                               |       |       |       |       |       |
| **Commitments and contingencies**                                                                                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                               |       |       |       |       |       |
| Minority interest                                                                                                                                                                                                  |       | 1,784,113  |       | 2,085,194  |       |
|                                                                                                                                                                                                               |       |       |       |       |       |
| Preferred units, $500.00 par value per share;  12.5% dividend per annum; 125 units authorized,  124 units issued and outstanding at December 31, 2008;  none issued and outstanding at December 31, 2007 |       | 28,902     |       | —     |       |
| Members’ equity                                                                                                                                                                                               |       | 6,747,377  |       | 8,294,012  |       |
| **Total liabilities, preferred units and members’  equity**                                                                                                                                                   |       | $          | 31,892,971 |       | $          | 33,527,076 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Johns Creek Venture, LLC**

**Consolidated Statements of Operations**

 
| ** **                             | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from August 3,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| **Revenues**                           | ** ** | ** **                              | ** ** | ** **                                                                                           | ** ** |
| Rent                                   |       | $                                       | 2,799,931  |                                                                                                 | $          | 1,138,799 |   |
| Fees and other                         |       | 236,462                                 |       | 52,163                                                                                               |       |
| **Total revenues**                     |       | 3,036,393                               |       | 1,190,962                                                                                            |       |
|                                   |       |                                    |       |                                                                                                 |       |
| **Operating costs and expenses:**      | ** ** | ** **                              | ** ** | ** **                                                                                           | ** ** |
| General and operating expenses         |       | 843,062                                 |       | 330,736                                                                                              |       |
| Real estate taxes                      |       | 329,082                                 |       | 105,554                                                                                              |       |
| Interest expense                       |       | 1,510,797                               |       | 650,154                                                                                              |       |
| Depreciation and amortization          |       | 1,909,545                               |       | 990,688                                                                                              |       |
| **Total operating costs and expenses** |       | 4,592,486                               |       | 2,077,132                                                                                            |       |
|                                   |       |                                    |       |                                                                                                 |       |
| Net loss before minority interest      |       | (1,556,094                              | )          | (886,170                                                                                             | )          |
|                                   |       |                                    |       |                                                                                                 |       |
| Minority interest                      |       | 301,081                                 |       | 176,646                                                                                              |       |
|                                   |       |                                    |       |                                                                                                 |       |
| **Net loss**                           |       | $                                       | (1,255,012 | )                                                                                                    | $          | (709,524 | ) |
|                                   |       |                                    |       |                                                                                                 |       |
| Preferred units dividends              |       | (7,750                                  | )          | —                                                                                               |       |
|                                   |       |                                    |       |                                                                                                 |       |
| Net loss attributable to the Members   |       | $                                       | (1,262,762 | )                                                                                                    | $          | (709,524 | ) |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Johns Creek Venture, LLC**

**Consolidated Statements of Members’ Equity**

 
| ** **                                         | ** ** | **Preferred Units** | ** ** | **Members’ Equity** | ** ** | **Total**  | ** ** |
|----------------------------------------------------|------------|---------------------|------------|--------------------------|------------|------------|------------|
| Balance at August 3, 2007 (date of inception) |       | $                   | —     |                     | $          | —     |       | $ | — |   |
|                                               |       |                |       |                     |       |       |       |
| Contributions                                      |       | —              |       | 9,210,105                |       | 9,210,105  |       |
| Distributions                                      |       | —              |       | (206,569                 | )          | (206,569   | )          |
| Net loss                                           |       | —              |       | (709,524                 | )          | (709,524   | )          |
|                                               |       |                |       |                     |       |       |       |
| Balance at December 31, 2007                  |       | —              |       | 8,294,012                |       | 8,294,012  |       |
|                                               |       |                |       |                     |       |       |       |
| Preferred units                                    |       |                |       |                     |       |       |       |
| Proceeds from issuance                             |       | 62,000              |       | —                   |       | 62,000     |       |
| Offering costs                                     |       | (33,098             | )          | —                   |       | (33,098    | )          |
| Dividends                                          |       | —              |       | (7,750                   | )          | (7,750     | )          |
| Contributions                                      |       | —              |       | 68,139                   |       | 68,139     |       |
| Distributions                                      |       | —              |       | (352,013                 | )          | (352,013   | )          |
| Net loss                                           |       | —              |       | (1,255,012               | )          | (1,255,012 | )          |
|                                               |       |                |       |                     |       |       |       |
| Balance at December 31, 2008                  |       | $                   | 28,902     |                     | $          | 6,747,376  |       | $ | 6,776,278 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Johns Creek Venture, LLC**

**Consolidated Statements of Cash Flows**

 
| ** **                                                                       | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from August 3,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------|------------|------------------------------------------------------------------------------------------------------|------------|
| **Cash flows from operating activities:**                                        | ** ** | ** **                              | ** ** | ** **                                                                                           | ** ** |
| Net loss                                                                         |       | $                                       | (1,255,012 | )                                                                                                    | $          | (709,524 | ) |
| Adjustments to reconcile net loss to net cash provided by operating  activities: |       |                                    |       |                                                                                                 |       |
| Depreciation and amortization                                                    |       | 1,842,570                               |       | 990,688                                                                                              |       |
| Amortization of deferred financing costs                                         |       | 66,975                                  |       | 26,847                                                                                               |       |
| Minority interest                                                                |       | (301,082                                | )          | (176,646                                                                                             | )          |
| Changes in operating assets and liabilities:                                     |       |                                    |       |                                                                                                 |       |
| Accounts receivable                                                              |       | 3,677                                   |       | (31,159                                                                                              | )          |
| Prepaids and other assets                                                        |       | 2,371                                   |       | (6,943                                                                                               | )          |
| Accounts payable and accrued expenses                                            |       | 71,594                                  |       | 40,320                                                                                               |       |
| Interest payable                                                                 |       | 127,964                                 |       | —                                                                                               |       |
| **Cash provided by operating activities**                                        |       | 559,057                                 |       | 133,583                                                                                              |       |
|                                                                             |       |                                    |       |                                                                                                 |       |
| **Cash flows from investing activities**                                         | ** ** | ** **                              | ** ** | ** **                                                                                           | ** ** |
| Purchases of real estate                                                         |       | (32,947                                 | )          | (31,495,042                                                                                          | )          |
| Change in restricted cash                                                        |       | (9,593                                  | )          | (192,234                                                                                             | )          |
| **Cash used in investing activities**                                            |       | (42,540                                 | )          | (31,687,276                                                                                          | )          |
|                                                                             |       |                                    |       |                                                                                                 |       |
| **Cash flows from financing activities**                                         | ** ** | ** **                              | ** ** | ** **                                                                                           | ** ** |
| Contributions                                                                    |       | 68,139                                  |       | 9,210,105                                                                                            |       |
| Distributions                                                                    |       | (352,013                                | )          | (206,569                                                                                             | )          |
| Distributions to minority interest holders                                       |       | —                                  |       | (37,264                                                                                              | )          |
| Resident security deposits                                                       |       | (5,029                                  | )          | 97,730                                                                                               |       |
| Proceeds from Mortgage loan                                                      |       | —                                  |       | 23,000,000                                                                                           |       |
| Deferred financing costs                                                         |       | —                                  |       | (370,503                                                                                             | )          |
| Preferred units:                                                                 |       |                                    |       |                                                                                                 |       |
| Proceeds from issuance                                                           |       | 62,000                                  |       | —                                                                                               |       |
| Offering costs                                                                   |       | (33,098                                 | )          | —                                                                                               |       |
| Dividends paid                                                                   |       | (7,750                                  | )          | —                                                                                               |       |
| **Cash (used in) provided by financing activities**                              |       | (267,751                                | )          | 31,693,499                                                                                           |       |
|                                                                             |       |                                    |       |                                                                                                 |       |
| Net change in cash and cash equivalents                                          |       | 248,766                                 |       | 139,806                                                                                              |       |
| Cash and cash equivalents at beginning of period                                 |       | 139,806                                 |       | —                                                                                               |       |
| Cash and cash equivalents at end of period                                       |       | $                                       | 388,572    |                                                                                                 | $          | 139,806 |   |
|                                                                             |       |                                    |       |                                                                                                 |       |
| **Supplemental schedule of noncash investing and financing  activities:**        | ** ** | ** **                              | ** ** | ** **                                                                                           | ** ** |
| Purchases of land, building, and other                                           |       | $                                       | —     |                                                                                                 | $          | 2,299,104 |   |
| Issuance of minority interest                                                    |       | $                                       | —     |                                                                                                 | $          | 2,299,104 |   |
| Accrued offering costs                                                           |       | $                                       | —     |                                                                                                 | $          | 9,820 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Johns Creek Venture, LLC**

**Notes to Consolidated Financial Statements**

 

**1.**                                      Organization and Business

** **

***Organization***

 

Behringer Harvard Johns Creek Venture, LLC (which maybe referred to as the “Company,” “we,” “us,” or “our”) was effectively organizedin Delaware on August 3, 2007.

 

We are a co-investmentjoint venture between Behringer Harvard Multifamily OP I LP (“Behringer HarvardMultifamily OP I”), which, through its wholly owned subsidiary BehringerHarvard Johns Creek, LLC, is our manager and 64% owner, and, Behringer HarvardMaster Partnership I LP (“Behringer Harvard Master Partnership I”), our 36%owner.  The 1% general partner ofBehringer Harvard Master Partnership I is Behringer Harvard Institutional GPLP, a related party that is indirectly owned by Behringer Harvard Holdings, LLCand the 99% limited partner of Behringer Harvard Master Partnership I is anunaffiliated social work sector pension fund based in The Netherlands,Stichting Pensioenfonds Zorg en Welijn (“PGGM”). Substantially all of thecapital provided to Behringer Harvard Master Partnership I is from PGGM.

 

Behringer Harvard Multifamily OP I is wholly owned byBehringer Harvard Multifamily REIT I, Inc. (“Behringer Harvard MultifamilyREIT I”). Behringer Harvard Multifamily OP I and Behringer Harvard MasterPartnership I are collectively referred to herein as the Members and hold,indirectly and directly, respectively, 100% of our voting interests.

 

We were organized to own 100% of the voting equityinterests and approximately 99% of the economic interests in one subsidiary,Behringer Harvard Johns Creek REIT, LLC, (“Johns Creek REIT”). Substantiallyall of our business is conducted through Johns Creek REIT. Johns Creek REIT wasorganized to hold, directly and indirectly, an 80% equity interest in JohnsCreek Realty Partners, LLC. Johns Creek Realty Partners, LLC was organized toown 100% of The Reserve at Johns Creek Walk, a three-story 210 unit operatingapartment community located in Fulton County, Georgia. The 20% minority equityinterest in Johns Creek Realty Partners, LLC is held by an unaffiliatedcompany; this company owns the overall mixed-use development which surroundsThe Reserve at Johns Creek Walk apartment community. Leasing of The Reserve atJohns Creek Walk development began in May 2006 and construction wascompleted in December 2006. Occupancy rates for The Reserve at Johns CreekWalk were approximately 90% and 93% (unaudited) as of December 31, 2008and 2007, respectively.

 

Neither we nor JohnsCreek REIT have employees and both are supported by related party arrangements.Behringer Harvard Multifamily REIT I is externally managed by Behringer HarvardMultifamily Advisors I LP (“Behringer Harvard Multifamily Advisors I”), a Texaslimited partnership organized in 2006. Behringer Harvard Multifamily Advisors I, through Behringer HarvardMultifamily REIT I, is responsible for managing our affairs on a day-to-daybasis and for identifying and making real estate investments on our behalf.

 

# **2**.                                      Summary of Significant AccountingPolicies

# ** **

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

 

The preparation ofconsolidated financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates include such items as amortization and accruedliabilities.  Actual results could differfrom those estimates.

 

***IncomeTaxes***

 

Johns Creek REIT has elected to be taxed as a realestate investment trust (“REIT”) under Sections 856 through 860 of the internalRevenue Code, and has qualified as a REIT since the period ended December 31,2007.  To qualify as a REIT, we must meeta number of organizational and operational requirements, including arequirement that we distribute at least 90% of our REIT taxable income.  As a REIT, we generally will not be subjectto federal income tax at the corporate level. We are organized and operate in such a manner as to qualify for taxationas a REIT under the Code, and we intend to continue to operate in such a manner,but no assurance can be given that we will operate in a manner so as to qualifyor remain qualified as a REIT. Even if we qualify for taxation 

 

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as a REIT, we may be subject to certain state andlocal taxes on our income and property, and federal income and excise taxes onour undistributed income.

 

We have adopted the provisions of FASB Interpretation No. 48Accounting for uncertainty in income taxes — an interpretation of FASB StatementNo. 109 (“FIN 48”). Under FIN 48, we recognize the financial statement benefitof an uncertain tax position only after determining that the relevant taxauthority would more likely than not sustain the position following anaudit.  To date, we are unaware of anyuncertain tax positions.

 

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

 

Our consolidated financial statements include ouraccounts and the accounts of Johns Creek REIT and Johns Creek Realty Partners,LLC.  All inter-company transactions,balances and profits are eliminated in consolidation.  Interests in entities acquired are evaluated forconsolidation based on Financial Accounting Standards Board Interpretation (“FIN”)46R “Consolidation of Variable Interest Entities,” which requires theconsolidation of variable interest entities (“VIEs”) in which we are deemed tobe the primary beneficiary.  If theinterest in the entity is determined to not be a VIE under FIN 46R, then theentities are evaluated for consolidation under the American Institute ofCertified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accountingfor Investments in Real Estate Ventures,” and Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.” We have determined that we are not a primarybeneficiary of any VIEs.

 

In the ordinary course of our business, cashrequirements for substantially all of our investments and obligations are paidon our behalf directly from our Members to the other party. We have presentedthese transactions as cash inflows and outflows in our consolidated statementof cash flows.

 

***Real Estate***

 

Included in our consolidated financial statements isThe Reserve at Johns Creek Walk. We allocated the cost of the purchase of TheReserve at Johns Creek Walk to the tangible assets acquired, consisting ofland, inclusive of associated rights, buildings, equipment, and identifiedintangible assets based on their relative fair values in accordance with No. 142,“Goodwill and Other Intangible Assets.” Identified intangible assets consist of the fair value of above-marketand below-market in-place leases.

 

The fair value of any tangible assets that wereacquired, consisted of land and buildings, and was determined by valuing theproperty as if it were vacant, and the “as-if-vacant” value was then allocatedto land and buildings.  Land values are derivedfrom appraisals, and building values are calculated as replacement cost lessdepreciation or management’s estimates of the relative fair value of theseassets using discounted cash flow analyses or similar methods.

 

We have determined the value of above-market andbelow-market in-place leases for acquired properties based on the present value(using an interest rate that reflects the risks associated with the leasesacquired) of the difference between (1) the contractual amounts to be paidpursuant to the in-place leases and (2) management’s estimate of currentmarket lease rates for the corresponding in-place leases, measured over aperiod equal to the determined lease term. We recorded the fair value of above-market and below-market leases asintangible assets or intangible liabilities, respectively, and amortize them asan adjustment to rental income over the determined lease term.

 

The total value of identified real estate intangibleassets that we acquired is further allocated to in-place lease values andtenant relationships based on our evaluation of the specific characteristics ofeach tenant’s lease and our overall relationship with that respectivetenant.  The aggregate value of in-placeleases acquired and tenant relationships was determined by applying a fairvalue model.  The estimates of fair valueof in-place leases includes an estimate of carrying costs during the expectedlease-up periods for the respective spaces considering current market conditions.  In estimating fair value of in-place leases,we considered items such as real estate taxes, insurance and other operatingexpenses as well as lost rental revenue during the expected lease-up period andcarrying costs that would have otherwise been incurred had the leases not beenin place, including tenant improvements and commissions.  The estimates of the fair value of tenantrelationships also include costs to execute similar leases including leasingcommissions, legal and tenant improvements as well as an estimate of thelikelihood of renewal as determined by management on a tenant-by-tenant basis.

 

We amortize the value of in-place leases acquired inthe future to expense over the term of the respective leases.  The value of tenant relationship intangiblesis amortized to expense over the initial term and any anticipated renewalperiods, but in no event does the amortization period for intangible assetsexceed the remaining depreciable life of the building.  Should a tenant 

 

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terminate their lease, the unamortized portion of thein-place lease value and tenant relationship intangibles would be charged toexpense.

 

The values of the land improvements, equipment,building and intangible assets are being depreciated on a straight-line basisover the respective estimated useful lives. Following is our allocation of thepurchase price and related depreciation information:

 

| ** **                                      | ** ** | **Depreciable  Life (years)** | ** ** | **Purchase Price  Allocation** | ** ** | **As of December  31, 2008** | ** ** | **As of December  31, 2007** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|--------------------------------|------------|------------------------------|------------|------------------------------|------------|
|                                            |       |                          |       |                           |       |                         |       |                         |       |
| Land                                            |       |                          |       | $                              | 3,204,758  |                         | $          | 3,204,758                    |       | $ | 3,204,758 |   |
| Equipment                                       |       | 5                             |       | 400,595                        |       | 431,783                      |       | 400,595                      |       |
| Intangible assets                               |       | 1.75                          |       | 1,167,134                      |       | 1,167,134                    |       | 1,167,134                    |       |
| Building and improvements                       |       | 25                            |       | 29,018,058                     |       | 29,018,058                   |       | 29,021,659                   |       |
| Total                                           |       |                          |       | 33,790,545                     |       | 33,821,733                   |       | 33,794,146                   |       |
| Less: accumulated depreciation and amortization |       |                          |       | —                         |       | (2,833,258                   | )          | (990,688                     | )          |
| Total real estate, net                          |       |                          |       | $                              | 33,790,545 |                         | $          | 30,988,475                   |       | $ | 32,803,458 |   |

 

***Impairment of Real Estate***

 

We monitor events and changes in circumstancesindicating that the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances are present, we assess potential impairment by comparing estimatedfuture undiscounted operating cash flows expected to be generated over the lifeof the asset including its eventual disposition, to the carrying amount of theasset.  In the event that the carryingamount exceeds the estimated future undiscounted operating cash flows, werecognize an impairment loss to adjust the carrying amount of the asset toestimated fair value.

 

In evaluating our properties for impairment,management makes several estimates and assumptions, including, but not limitedto, the projected date of disposition of the properties, the estimated futurecash flows of the properties during our ownership and the projected sales priceof each of the properties.  A change inthese estimates and assumptions could result in understating or overstating thecarrying value of our investments which could be material to our consolidatedfinancial statements.

 

Noimpairment charges have been recorded in 2008 or 2007.

 

***Cashand Cash Equivalents***

 

We consider investmentsin highly-liquid money market funds with original maturities of three months orless to be cash equivalents.

 

***RestrictedCash***

 

Restricted cash includesdeposits for real estate taxes and deposits paid by residents.

 

***Accounts Receivable***

 

Accountsreceivable consists of amounts due from residents for rent and utilities.

 

***Deferred Financing******Costs***

 

We incurred costs in connection with obtaining the $23million mortgage loan. These deferred financing costs are recorded at cost andare amortized to interest expense using a straight-line method thatapproximates the effective interest method over the life of the relateddebt.  Accumulated amortization ofdeferred financing fees for year ended December 31, 2008 and 2007 wasapproximately $94,000 and $27,000, respectively.

 

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***Minority Interest***

 

The accounts of Johns Creek Realty Partners, LLC areconsolidated into our financial statements, and present the 20% equity interestin Johns Creek Realty Partners, LLC held by an unaffiliated company as minorityinterest.

 

***Rental Revenue***

 

Rental income is recognized monthly on a straight-linebasis over the respective lease terms - typically 6 to 24 months. Included inrental income are monthly reimbursements due from our residents for utilitiesusage.

 

***Other Assets***

 

Amounts include costs related to our Preferred Unitsoffering. In connection with our receipt of offering proceeds in 2008, theseamounts have been reclassified in the December 31, 2008 consolidatedfinancial statements as an offset to the Preferred Units balance.

 

***Concentrationof Credit Risk***

 

In the ordinary course of our business, we hold cashand cash equivalents and restricted cash deposited in certain financialinstitutions in excess of federally insured levels.  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.

 

The Federal Deposit Insurance Corporation, or “FDIC,”generally only insures limited amounts per depositor per insured bank. Beginning October 3, 2008 through December 31, 2009, the FDIC willinsure up to $250,000 per depositor per insured bank; on January 1, 2010,the standard coverage limit will return to $100,000 for most depositcategories.  Unlimited deposit insurancecoverage may be available to our non-interest bearing transaction accounts heldat those institutions participating in FDIC’s Temporary Liquidity GuaranteeProgram through December 31, 2009.

 

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

 

In September 2006, the FASB issued Statement No. 157,“Fair Value Measurements” (“SFAS No.157”). SFAS No.157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  We adopted the provisionsof SFAS No.157 effective January 1, 2008, and did not have a materialeffect on our consolidated results of operations or financial position.

 

In February 2008, the FASB staff issued StaffPosition No. 157-2 “Effective Date of FASB Statement No. 157” (“FSPSFAS No. 157-2”).  FSP SFAS No. 157-2delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancialliabilities, except for items that are recognized or disclosed at fair value inthe financial statements on a recurring basis (at least annually).  The provisions of FSP SFAS No. 157-2 areeffective for our fiscal year beginning January 1, 2009.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities -Including an Amendment of FASB Statement No. 115.”  The fair value option established by SFAS No. 159permits all entities to choose to measure eligible items at fair value atspecified election dates.  A businessentity will report unrealized gains and losses on items for which the fairvalue option has been elected in earnings (or another performance indicator ifthe business entity does not report earnings) at each subsequent reportingdate.  SFAS No. 159 is effective forfiscal years beginning after November 15, 2007.  We have not elected the fair valuemeasurement option for any financial assets or liabilities at the present time.

 

In December 2007, the FASB issued SFAS No. 141(R),“Business Combinations.”  This Statementreplaces SFAS No. 141 “Business Combinations” but retains the fundamentalrequirement that the acquisition method of accounting, or purchase method, beused for all business combinations and for an acquirer to be identified foreach business combination.  ThisStatement is broader in scope than that of Statement 141, which applied only tobusiness combinations in which control was obtained by transferringconsideration.  SFAS No. 141(R) appliesthe same method of accounting (the acquisition method) to all transactions andother events in which one entity obtains control over one or more otherbusinesses.  This Statement also makescertain other modifications to Statement 141, including a broader definition ofa business and the requirement that acquisition related costs are expensed asincurred.  This statement applies to ourbusiness combinations occurring beginning January 1, 2009.  The acquisition of a real estate property hasbeen determined to meet the definition of a business combination as defined inSFAS No. 141(R).  Therefore, SFAS No. 141(R) mayhave a 

 

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material effect on our accounting for futureconsolidated acquisitions of properties as acquisition costs will no longer becapitalized, but will be expensed beginning January 1, 2009.

 

# **4.**                                      Private Offering

# ** **

The limited liability company agreement of Johns CreekREIT has established 125 units of Class A, preferred, cumulative,non-voting membership units (“Preferred Units”). We commenced a privateoffering of the Preferred Units in November 2007. During 2008, we sold 124Preferred Units and raised gross offering proceeds totaling $62,000. Additionaloffering costs associated with the Preferred Units issuance incurred during2008 were approximately $24,000 and have been recorded as an offset to thePreferred Units balance in accordance with Staff Accounting Bulletin (“SAB”)Topic 5.A, Miscellaneous Accounting — Expenses of Offering.

 

Included in deferred offering costs are offeringexpenses incurred for the Preferred Units as of December 31, 2007 of$9,820. In connection with our receipt of offering proceeds in 2008, theseamounts have been reclassified in the December 31, 2008 consolidatedfinancial statements as an offset to the Preferred Units balance.

 

The Preferred Units pay an annual dividend of 12.5%and are senior in priority to all other members’ equity of Johns CreekREIT.  Johns Creek’s REIT, at its option,may redeem the Preferred Units, in whole or in part, at any time or from timeto time, for cash at a redemption price equal to $500.00 per unit, plus allaccrued and unpaid distributions thereon to and including the date fixed foreredemption, plus a premium per unit as follows: (1) until December 31,2009, $100; (2) from January 1, 2010 to December 31, 2010, $75; (3) fromJanuary 1, 2011 to December 31, 2011, $50; (4) from January 1,2012 to December 2012, $25; and thereafter, no redemption premium. ThePreferred Units are not redeemable by the unit holders and we have no currentintent to exercise our redemption option.

 

**5.****                                     ****Related Party Arrangements**

 

We are dependent on the Members and their affiliatesfor our operational and investment capital needs.  We are also ultimately dependent, throughBehringer Harvard Multifamily REIT I, on Behringer Harvard Multifamily AdvisorsI and  Behringer Harvard Multifamily ManagementServices, LLC  for certain services thatare essential to us, including, asset acquisition and disposition decisions,property management and leasing services and other general administrativeresponsibilities.  In the event thatthese companies were unable to provide us with the respective capital orservices, we would be required to obtain such capital or services from othersources. We recognize all amounts at the time incurred by the Members on ourbehalf in our financial statements with an offset to Members Equity.

 

As compensation for managing the administrativeaffairs of the property, the minority member receives management fees at therate of 3% of net income from operations; amounts are recorded monthly ingeneral and operating expenses. Total management fees incurred and recorded foryear ending December 31, 2008 and during the period from August 3,2007 (inception) through December 31, 2007 were approximately $91,000 and$36,000, respectively. Included in the December 31, 2008 and 2007 balance ofaccounts payable is the unpaid monthly balance of management fees in the amountof $7,800 and $7,800, respectively.

 

Under an arrangement between Behringer HarvardMultifamily REIT I and its advisor, Behringer Harvard Multifamily Advisors I,we paid a financing fee to Behringer Harvard Multifamily Advisors I inconnection with securing the property’s $23 million mortgage loan in 2007. Theamount paid of $230,000 was based on 1% of the financing made available to theproperty.

 

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**6.****                                     ****Acquisition of The Reserve atJohns Creek Walk**

 

Prior to our acquisition, The Reserve at Johns CreekWalk was owned by Abbotts Bridge Apartment Partners, LLC. On August 3,2007, our wholly owned entity, Johns Creek Realty Partners, LLC purchased TheReserve at Johns Creek Walk for a total purchase price of approximately $33.8million, including acquisition costs of $241,000. Johns Creek Realty Partners,LLC funded the purchase price using proceeds from a $23 million mortgage loan,issuing a 20% equity interest to the shareholders of Abbotts Bridge ApartmentPartners, LLC, and paid cash for the remaining amounts. In connection with theacquisition, Johns Creek Realty Partners, LLC was indemnified by the formerowners from all obligations existing on or before the date of purchase.

 

**7.****                                     ****Bank Loan**

 

On August 3, 2007, Johns Creek Realty Partners,LLC (the “Property Entity”) entered into a senior mortgage arrangement with anunaffiliated lending institution, and borrowed $23 million to finance theacquisition (the “Mortgage Loan”).  TheProperty Entity, including its operating receiptslock-box account, serves as collateral for the interest-only Mortgage Loan,which matures in March 2013 and bears interest at a rate of 6.461%; noprincipal payments are due until maturity. The lender has recourse only to theProperty Entity. Breaching the Mortgage Loan’s restrictions on encumbrances,sale, transfer, or refinancing of the property could constitute an event ofdefault and increase the interest rate by 5%; uncured events of default canaccelerate the loan’s maturity date.  Webelieve no events of default have occurred as of December 31, 2008.

 

*****

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Manager andMembers of

Behringer Harvard LoversLane Venture I, LLC

Addison, Texas

 

We have audited theaccompanying consolidated balance sheets of Behringer Harvard Lovers LaneVenture I, LLC and subsidiaries (the “Company”) as of December 31, 2008and 2007, and the related consolidated statements of income, members’ equity,and cash flows for the year ended December 31, 2008 and for the periodfrom June 1, 2007 (date of inception) through December 31, 2007.  These financialstatements are the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on these financial statements based onour audits.

 

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

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2008 and 2007, andthe results of its operations and its cash flows for the year ended December 31,2008 and for the period from June 1, 2007 (date of inception) through December 31,2007, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/Deloitte & Touche LLP

 

Dallas, Texas

March 31, 2009

 

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**Behringer Harvard Lovers Lane Venture I, LLC**

**ConsolidatedBalance Sheets**

as of December 31,2008 and 2007

 

 
| ** **                                                       | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                        |       | $          | 36,040     |       | $          | 80,814 |   |
| Accrued interest receivable                                      |       | 689,755    |       | 185,163    |       |
| Mortgage note receivable, net                                    |       | 6,810,395  |       | 2,917,755  |       |
| Deferred offering costs and other assets                         |       | 50,685     |       | 57,313     |       |
| **Total assets**                                                 |       | $          | 7,586,875  |       | $          | 3,241,045 |   |
|                                                             |       |       |       |       |       |
| **Liabilities, preferred units and members’ equity**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued liabilities                                              |       | $          | 308        |       | $          | 9,820 |   |
|                                                             |       |       |       |       |       |
| **Commitments and contingencies**                                | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                             |       |       |       |       |       |
| Preferred units, $500.00 par value per share;                    |       | 28,902     |       | —     |       |
| 12.5% dividend per annum; 125 units authorized,                  |       |       |       |       |       |
| 124 units issued and outstanding at December 31, 2008;      |       |       |       |       |       |
| none issued and outstanding at December 31, 2007            |       |       |       |       |       |
| Members’ equity                                             |       | 7,557,665  |       | 3,231,225  |       |
| **Total liabilities, preferred units and members’  equity** |       | $          | 7,586,875  |       | $          | 3,241,045 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Lovers Lane Venture I, LLC**

**ConsolidatedStatements of Income**

 

 
| ** **                             | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from June 1,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| Interest income                        |       | $                                       | 533,170    |                                                                                               | $          | 195,646 |   |
|                                   |       |                                    |       |                                                                                               |       |
| General and administrative expenses    |       | 49,205                                  |       | 3,370                                                                                              |       |
|                                   |       |                                    |       |                                                                                               |       |
| **Net income**                         |       | $                                       | 483,965    |                                                                                               | $          | 192,276 |   |
|                                   |       |                                    |       |                                                                                               |       |
| Preferred units dividends              |       | (7,750                                  | )          | —                                                                                             |       |
|                                   |       |                                    |       |                                                                                               |       |
| Net income attributable to the Members |       | $                                       | 476,215    |                                                                                               | $          | 192,276 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Lovers Lane Venture I, LLC**

**ConsolidatedStatements of Members’ Equity**

 

 
| ** **                                       | ** ** | **Preferred Units** | ** ** | **Members’ Equity** | ** ** | **Total** | ** ** |
|--------------------------------------------------|------------|---------------------|------------|--------------------------|------------|-----------|------------|
| Balance at June 1, 2007 (date of inception) |       | $                   | —     |                     | $          | —    |       | $ | — |   |
|                                             |       |                |       |                     |       |      |       |
| Contributions                                    |       | —              |       | 3,045,580                |       | 3,045,580 |       |
| Distributions                                    |       | —              |       | (6,631                   | )          | (6,631    | )          |
| Net income                                       |       | —              |       | 192,276                  |       | 192,276   |       |
|                                             |       |                |       |                     |       |      |       |
| Balance at December 31, 2007                |       | —              |       | 3,231,225                |       | 3,231,225 |       |
|                                             |       |                |       |                     |       |      |       |
| Preferred units:                                 |       |                |       |                     |       |      |       |
| Proceeds from issuance                           |       | 62,000              |       | —                   |       | 62,000    |       |
| Offering costs                                   |       | (33,098             | )          | —                   |       | (33,098   | )          |
| Dividends                                        |       | —              |       | (7,750                   | )          | (7,750    | )          |
| Contributions                                    |       | —              |       | 4,065,828                |       | 4,065,828 |       |
| Distributions                                    |       | —              |       | (215,603                 | )          | (215,603  | )          |
| Net income                                       |       | —              |       | 483,965                  |       | 483,965   |       |
|                                             |       |                |       |                     |       |      |       |
| Balance at December 31, 2008                |       | $                   | 28,902     |                     | $          | 7,557,665 |       | $ | 7,586,567 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Lovers Lane Venture I, LLC**

**ConsolidatedStatements of Cash Flows**

 

 
| ** **                                                                      | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from June 1,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| **Cash flows from operating activities**                                        | ** ** | ** **                              | ** ** | ** **                                                                                         | ** ** |
| Net income                                                                      |       | $                                       | 483,965    |                                                                                               | $          | 192,276 |   |
| Adjustments to reconcile net income to net cash used in operating  activities - |       |                                    |       |                                                                                               |       |
| Amortization of deferred financing fees                                         |       | (27,564                                 | )          | (10,482                                                                                            | )          |
| Changes in operating assets and liabilities:                                    |       |                                    |       |                                                                                               |       |
| Accrued interest receivable                                                     |       | (504,592                                | )          | (185,163                                                                                           | )          |
| Accrued liabilities                                                             |       | 308                                     |       | —                                                                                             |       |
| **Cash used in operating activities**                                           |       | (47,883                                 | )          | (3,369                                                                                             | )          |
|                                                                            |       |                                    |       |                                                                                               |       |
| **Cash flows from investing activities**                                        | ** ** | ** **                              | ** ** | ** **                                                                                         | ** ** |
| Other assets                                                                    |       | (3,192                                  | )          | (47,493                                                                                            | )          |
| Advances on mortgage note receivable                                            |       | (3,865,076                              | )          | (2,907,273                                                                                         | )          |
| **Cash used in investing activities**                                           |       | (3,868,268                              | )          | (2,954,766                                                                                         | )          |
|                                                                            |       |                                    |       |                                                                                               |       |
| **Cash flows from financing activities**                                        | ** ** | ** **                              | ** ** | ** **                                                                                         | ** ** |
| Contributions                                                                   |       | 4,065,828                               |       | 3,045,580                                                                                          |       |
| Distributions                                                                   |       | (215,603                                | )          | (6,631                                                                                             | )          |
| Preferred units:                                                                |       |                                    |       |                                                                                               |       |
| Proceeds from issuance                                                          |       | 62,000                                  |       | —                                                                                             |       |
| Offering costs                                                                  |       | (33,098                                 | )          | —                                                                                             |       |
| Dividends paid                                                                  |       | (7,750                                  | )          | —                                                                                             |       |
| **Cash provided by financing activities**                                       |       | 3,871,377                               |       | 3,038,949                                                                                          |       |
|                                                                            |       |                                    |       |                                                                                               |       |
| Net change in cash and cash equivalents                                         |       | (44,774                                 | )          | 80,814                                                                                             |       |
| Cash and cash equivalents at beginning of period                                |       | 80,814                                  |       | —                                                                                             |       |
| Cash and cash equivalents at end of period                                      |       | $                                       | 36,040     |                                                                                               | $          | 80,814 |   |
|                                                                            |       |                                    |       |                                                                                               |       |
| **Supplemental schedule of noncash financing  activities -**                    | ** ** | ** **                              | ** ** | ** **                                                                                         | ** ** |
| Accrued offering costs                                                          |       | $                                       | —     |                                                                                               | $          | 9,820 |   |
|                                                                                 |            |                                         |            |                                                                                                    |            |  |  |  |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard Lovers LaneVenture I, LLC**

**Notes to Consolidated FinancialStatements**

 

# **1.**                                      Organization and Business

** **

***Organization***

 

BehringerHarvard Lovers Lane Venture I, LLC (which may be referred to as the “Company,” “we,”“us,” or “our”) was effectively organized in Delaware on June 1, 2007.

 

Weare a co-investment joint venture between Behringer Harvard Multifamily OP I LP(“Behringer Harvard Multifamily OP I”), which, through its wholly ownedsubsidiary Behringer Harvard Lovers Lane I, LLC, is our manager and 55% owner,and, Behringer Harvard Master Partnership I LP (“Behringer Harvard MasterPartnership I”), our 45% owner.  The 1%general partner of Behringer Harvard Master Partnership I is Behringer HarvardInstitutional GP LP, a related party that is indirectly owned by BehringerHarvard Holdings, LLC and the 99% limited partner of Behringer Harvard MasterPartnership I is an unaffiliated social work sector pension fund based in TheNetherlands, Stichting Pensioenfonds Zorg en Welijn (“PGGM”). Substantially allof the capital provided to Behringer Harvard Master Partnership I is from PGGM.

 

BehringerHarvard Multifamily OP I is wholly owned by Behringer Harvard Multifamily REITI, Inc. (“Behringer Harvard Multifamily REIT I”). Behringer HarvardMultifamily OP I and Behringer Harvard Master Partnership I are collectivelyreferred to herein as the Members and hold, indirectly and directly,respectively, 100% of our voting interests.

 

Wewere organized to own 100% of the voting equity interests and approximately 99%of the economic interests in one subsidiary, Behringer Harvard Lovers Lane REITI, LLC. Substantially all of our business is conducted through BehringerHarvard Lovers Lane REIT I, LLC (“Lovers REIT”). The REIT was organized to makea mortgage loan to GS Lovers Lane Prop Sub, LP (the “Project Entity”) and toacquire an option to purchase the Project Entity or the property it owns. TheProject Entity is owned by a commercial developer and was organized to developand own one apartment community, commonly known as Grand Reserve (the “GrandReserve”). The Grand Reserve was an operating apartment community at the timewe made our investment in GS Lovers Lane Prop Sub, LP. During 2007, theproperty ceased renewing leases, achieved zero occupancy as of December 31,2007, and has since been demolished. The Grand Reserve is currently underdevelopment in Dallas, Texas, has an estimated construction budget ofapproximately $38.7 million (unaudited), and is expected to be a two storytownhome community (unaudited) with approximately 149 rental units (unaudited).

 

DuringApril 2007, Behringer Harvard Multifamily OP I entered into aninterest-bearing loan to the Project Entity for the Grand Reserve project.  In connection with our formation, BehringerHarvard Multifamily OP I assigned the loan and the contingent option topurchase the Grand Reserve property to our wholly-owned subsidiary, Lovers REITin return for 55% of our members’ equity and cash of $1,348,000 which wascontributed by our other equity member, Behringer Harvard Master Partnership ILP. The funded balance of the loan at the time of the assignment was$2,995,000.

 

Neitherwe nor Lovers REIT have employees and both are supported by related partyarrangements. Behringer Harvard Multifamily REIT I is externally managed byBehringer Harvard Multifamily Advisors I LP (“Behringer Harvard MultifamilyAdvisors I”), a Texas limited partnership organized in 2006.  Behringer Harvard Multifamily Advisors I,through Behringer Harvard Multifamily REIT I, is responsible for managing ouraffairs on a day-to-day basis and for identifying and making real estateinvestments on our behalf.

 

# **2**.                                      Summary of Significant AccountingPolicies

# ** **

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

 

Thepreparation of consolidated financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amountsof revenues and expenses during the reporting period.  These estimates include such items asamortization and accrued liabilities. Actual results could differ from those estimates.

 

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***IncomeTaxes***

 

LoversREIT has elected to be taxed as a real estate investment trust (“REIT”) underSections 856 through 860 of the Internal Revenue Code, and has qualified as aREIT since the period ended December 31, 2007.  To qualify as a REIT,we must meet a number of organizational and operational requirements, includinga requirement that we distribute at least 90% of our REIT taxable income. As a REIT, we generally will not be subject to federal income tax at thecorporate level.  We are organized and operate in such a manner as toqualify for taxation as a REIT under the Code, and we intend to continue tooperate in such a manner, but no assurance can be given that we will operate ina manner so as to qualify or remain qualified as a REIT. Even if we qualify fortaxation as a REIT, we may be subject to certain state and local taxes on ourincome and property, and federal income and excise taxes on our undistributedincome.

 

OnMay 18, 2006, the State of Texas enacted a new law which replaced theexisting state franchise tax with a “margin tax,” effective January 1,2007.  We have evaluated the current anddeferred income tax related to the Texas margin tax and we have no significanttax liability or benefit as of December 31, 2008 and the period ended2007. In addition, we recognized no current tax expense for the year ended December 31,2008 and 2007 related to the Texas margin tax.

 

Wehave adopted the provisions of FASB Interpretation No. 48 Accounting foruncertainty in income taxes — an interpretation of FASB Statement No. 109 (“FIN48”). Under FIN 48, we recognize the financial statement benefit of anuncertain tax position only after determining that the relevant tax authoritywould more likely than not sustain the position following an audit. To date, weare unaware of any uncertain tax positions.

 

***Principles of Consolidation and Basis of Presentation***

 

Ourconsolidated financial statements include our accounts and the accounts of LoversREIT.  All inter-company transactions,balances and profits are eliminated in consolidation.  Interests in entities acquired are evaluated forconsolidation based on Financial Accounting Standards Board Interpretation (“FIN”)46R “Consolidation of Variable Interest Entities,” which requires theconsolidation of variable interest entities (“VIEs”) in which we are deemed tobe the primary beneficiary.  If theinterest in the entity is determined to not be a VIE under FIN 46R, then theentities are evaluated for consolidation under the American Institute ofCertified Public Accountants’ (“AICPA”) Statement of Position (“SOP”) 78-9, “Accountingfor Investments in Real Estate Ventures,” and Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.” We have determined that we are not a primarybeneficiary of any VIEs.

 

***Cash and Cash Equivalents***

 

Weconsider investments in highly-liquid money market funds with originalmaturities of three months or less to be cash equivalents.  In the ordinary course of our business, cashrequirements for substantially all of our investments and obligations are paidon our behalf directly from our Members to the other party. We have presentedthese transactions as cash inflows and outflows in our consolidated statementof cash flows.

 

***Deferred Offering Costs***

 

Amountsinclude costs related to our Preferred Units offering. In connection with ourreceipt of offering proceeds in 2008, these amounts have been recorded in the December 31,2008 consolidated financial statements as an offset to the Preferred Unitsbalance.

 

***Mortgage NoteReceivable***

 

Themortgage note receivable is reported at its outstanding principal balance netof any unearned income from unamortized loan origination fees. Loan originationfees are generally deferred and are amortized as adjustments to interest incomeusing a straight-line method that approximates the effective interest methodover the life of the related debt. During 2007 we received origination fees of$87,000 and in 2008 we received fees of $122,000. Included are unamortizeddeferred origination fees of $171,000 and $77,000 as of December 31, 2008and 2007, respectively.

 

TheProject Entity remains obligated to pay principal and interest due regardlessof its intent or ability to sell or refinance the property. In addition, themortgage note receivable does not contain a right to participate in expectedresidual profit from the sale or refinancing of the property. As a result, themortgage note receivable is accounted for as a loan pursuant to the guidance inExhibit I of AICPA Practice Bulletin 1 on accounting of real estateacquisition, development, or construction arrangements.

 

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***Impairment ofMortgage Note Receivable***

 

Wereview the terms and conditions underlying the outstanding balances of themortgage note receivable. If we determine that it is probable that all amountsdue under the terms of the note will not be collected, an impairment charge isrecorded to the extent that the investment in the note exceeds our estimate ofthe fair value of the collateral securing such note.

 

Weassess impairment at the individual project basis. In evaluating the mortgagenote receivable for impairment, management makes several estimates andassumptions about the financial condition of the borrower and the guarantor. Inaddition, management makes several estimates and assumptions about the propertyand the additional collateral provided by the guarantor, including but notlimited to, the projected disposition dates, estimated future cash flows, andthe projected sales prices.  A change inthese estimates and assumptions could result in understating or overstating thecarrying value of the mortgage note receivable which could be material to ourconsolidated financial statements.

 

Noimpairment charges have been recorded in 2008 and 2007.

 

***Concentrationof Credit Risk***

 

Inthe ordinary course of our business, we hold cash and cash equivalents andrestricted cash deposited in certain financial institutions in excess offederally insured levels.  We regularlymonitor the financial stability of these financial institutions and believethat we are not exposed to any significant credit risk in cash and cashequivalents or restricted cash.

 

TheFederal Deposit Insurance Corporation, or “FDIC,” generally only insureslimited amounts per depositor per insured bank. Beginning October 3, 2008 through December 31, 2009, the FDICwill insure up to $250,000 per depositor per insured bank; on January 1,2010, the standard coverage limit will return to $100,000 for most depositcategories.  Unlimited deposit insurancecoverage may be available to our non-interest bearing transaction accounts heldat those institutions participating in FDIC’s Temporary Liquidity GuaranteeProgram through December 31, 2009.

 

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

 

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  We adopted the provisions of SFAS No. 157effective January 1, 2008, and did not have a material effect on ourconsolidated results of operations or financial position.

 

InFebruary 2008, the FASB staff issued Staff Position No. 157-2 “EffectiveDate of FASB Statement No. 157” (“FSP SFAS No. 157-2”).  FSP SFAS No. 157-2 delayed the effectivedate of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually).  The provisions of FSP SFAS No. 157-2 areeffective for our fiscal year beginning January 1, 2009.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an Amendment of FASBStatement No. 115.”  The fair valueoption established by SFAS No. 159 permit all entities to choose tomeasure eligible items at fair value at specified election dates.  A business entity will report unrealizedgains and losses on items for which the fair value option has been elected inearnings (or another performance indicator if the business entity does notreport earnings) at each subsequent reporting date.  SFAS No. 159 was effective for fiscalyears beginning after November 15, 2007. We have not elected the fair value measurement option for any financialassets or liabilities at the present time.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  This Statement replacesSFAS No. 141 “Business Combinations” but retains the fundamentalrequirement that the acquisition method of accounting, or purchase method, beused for all business combinations and for an acquirer to be identified foreach business combination.  ThisStatement is broader in scope than that of Statement 141, which applied only tobusiness combinations in which control was obtained by transferringconsideration.  SFAS No. 141(R) appliesthe same method of accounting (the acquisition method) to all transactions andother events in which one entity obtains control over one or more otherbusinesses.  This Statement also makescertain other modifications to Statement 141, including a broader definition ofa business and the requirement that acquisition related costs are expensed asincurred.  This statement applies to ourbusiness combinations beginning January 1, 2009.  The acquisition of a real estate property hasbeen determined to meet the definition of a business combination as defined inSFAS No. 141(R).  Therefore, SFAS No. 141(R) mayhave a 

 

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materialeffect on our accounting for future consolidated acquisitions of properties asacquisition costs will no longer be capitalized, but will be expensed beginningJanuary 1, 2009.

 

# **4.**                                      Private Offering

# ** **

Thelimited liability company agreement of Lovers REIT has established 125 units ofClass A, preferred, cumulative, non-voting membership units (“PreferredUnits”). We commenced a private offering of the Preferred Units in November 2007and have issued no Preferred Units as of December 31, 2007. During 2008,we sold 124 Preferred Units and raised gross offering proceeds totaling$62,000. Additional offering costs associated with the Preferred Units issuanceincurred during 2008 were approximately $24,000 and have been recorded as anoffset to the Preferred Units balance in accordance with Staff AccountingBulletin (“SAB”) Topic 5.A, Miscellaneous Accounting — Expenses of Offering.

 

Includedin deferred offering costs are offering expenses incurred for the PreferredUnits as of December 31, 2007 of $9,820. In connection with our receipt ofoffering proceeds in 2008, these amounts have been recorded in the December 31,2008 consolidated financial statements as an offset to the Preferred Unitsbalance.

 

ThePreferred Units pay an annual dividend of 12.5% and are senior in priority toall other members’ equity of Lovers REIT. Lovers REIT, at its option, mayredeem the Preferred Units, in whole or in part, at any time or from time totime, for cash at a redemption price equal to $500.00 per unit, plus allaccrued and unpaid distributions thereon to and including the date fixed foreredemption, plus a premium per unit as follows: (1) until December 31,2009, $100; (2) from January 1, 2010 to December 31, 2010, $75; (3) fromJanuary 1, 2011 to December 31, 2011, $50; (4) from January 1,2012 to December 2012, $25; and thereafter, no redemption premium. ThePreferred Units are not redeemable by the unit holders and we have no currentintent to exercise our redemption option.

 

**5.**                                      **Related Party Arrangements**

 

Weare dependent on the Members and their affiliates for our operational andinvestment capital needs.  We are alsoultimately dependent, through Behringer Harvard Multifamily REIT I, onBehringer Harvard Multifamily Advisors I and Behringer Harvard Multifamily Management Services, LLC  for certain services that are essential tous, including, asset acquisition and disposition decisions, property managementand leasing services and other general administrative responsibilities.  In the event that these companies were unableto provide us with the respective capital or services, we would be required toobtain such capital or services from other sources. We recognize all amounts atthe time incurred by the Members on our behalf in our financial statements withan offset to Members Equity.

 

Anaffiliate of Behringer Harvard Multifamily OP I LP has entered into a juniormezzanine loan receivable with a aggregate commitment of $2,184,000.  The junior mezzanine loan receivable bearsinterest at an annual rate of 10% and with final maturity date of April 2012.   As of December 31, 2008 and 2007,$1,000 had been advanced.

 

**6.**                                      Mortgage Note Receivable

** **

LoversREIT has committed to make a mortgage loan in the amount of $7,488,000 (the “MortgageNote”) to GS Lovers Lane Property Sub, LP (the “Project Entity”).  We funded a total of $6,982,000 and$2,995,000 under the commitment as of December 31, 2008 and 2007,respectively. The Mortgage Note matures on the earlier of (i) April 12,2012 and (ii) the maturity date of the construction loan for the project (whichis currently April 23, 2011), including any extensions thereof.  The maturity date may be accelerated to (i) 180days after the expiration of the put option described below or (ii) thedate that the senior loan is paid in full. Generally no prepayment of the Mortgage Note may be made except (i) inconnection with the sale of the Project Entity or the Grand Reserve project (inwhich case prepayment is required) or (ii) 150 days after the project iscompleted or deemed complete by the senior lender.

 

TheMortgage Note accrues interest at a rate of 10% per annum.  Until the completion of the project, nopayments will be due and all interest will accrue.  Thereafter, any unpaid accrued interest onthe notes is payable on a monthly basis from net cash flow to the extent netcash flow from the Grand Reserve project is sufficient to make suchpayments.  If net cash flow isinsufficient to make such payments, then the interest will continue to accrueand will be payable on a monthly basis when and to the extent net cash flowfrom the Grand Reserve project is sufficient to make such payments.  All accrued and unpaid interest on theMortgage Note will be payable upon final maturity of the Mortgage Note.

 

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TheMortgage Note is secured by a second priority interest lien on the GrandReserve project.  The Mortgage Note isalso supported by a guarantee from an affiliate of the commercial developerthat has guaranteed (i) full repayment of the Mortgage Note if neither thepurchase option nor put option described below is exercised, (ii) theconstruction and completion of the Grand Reserve project in the event theProject Entity abandons the project or fails to complete the project on theagreed schedule, (iii) the payment of any costs that exceed the approvedbudget for construction of the project, and (iv) prompt payment of theMortgage Note in the event that the Project Entity files a voluntary bankruptcyor insolvency proceeding prior to the completion of the project.  In connection with the purchase optiondescribed below, the guarantor has also guaranteed certain obligations of theowner of the Project Entity under the option agreement.

 

TheProject Entity was formed by the commercial developer to purchase, finance, anddevelop one real estate project; this entity is not consolidated into ourfinancial statements. Our involvement with the Project Entity began at the timewe committed to the Mortgage Note, and our potential loss exposure is limitedto the funded portion of our commitment. The Project Entity and certain of itsaffiliates also owe amounts to other parties, including the senior projectlender. Neither we nor  Lovers REIT havea primary or secondary obligation with respect to such obligations.

 

**7.**                                      **Commitments and Contingencies**

 

TheGrand Reserve project is currently under development and is estimated to becompleted in the first calendar quarter of 2010.

 

*Contingentpurchase option*.  The LoversREIT has a contingent option to acquire the completed Grand Reserve project orthe Project Entity (the “Purchase Option”). The Purchase Option is notcurrently exercisable and cannot be exercised until development is complete andthe property has been certificated for occupancy. The Purchase Option becomesexercisable for a period of 120 days after the earlier of (i) one yearafter the date the project is completed or (ii) the date it receivesnotice that 90% of the units are leased and occupied.  The exercise price will be an amount equal tothe sum of (i) the lower of (a) the total project costs plus intereston the Mortgage Note and a junior mezzanine loan made by Behringer HarvardMultifamily OP I and (b) $38,686,000 plus interest on the Mortgage Noteand a junior mezzanine loan made by Behringer Harvard Multifamily OP I, plus (ii) $8,750per apartment unit in the Grand Reserve project, plus (iii) $1,161,000.

 

*Partnershipcontingent sell option.*  Thepartners of the Project Entity have an option to sell the completed GrandReserve project to Lovers REIT (the “Sell Option”). The Sell Option is notcurrently exercisable and cannot be exercised until development is complete andthe property has been certified for occupancy. The Sell Option becomesexercisable for a period of one year after the earlier of (i) theexpiration of the Purchase Option or (ii) the date it receives notice fromLovers REIT that it waives its purchase option. The exercise price will beequal to the lesser of (i) the total project costs plus interest on theMortgage Note and a junior mezzanine loan made by Behringer Harvard MultifamilyOP I and (ii) $38,686,000 plus interest on the Mortgage Note and a juniormezzanine loan made by Behringer Harvard Multifamily OP I.

 

*LoversREIT Right of First Offer*.  Ifneither the purchase option nor put right described above is exercised, thenthe owner of the Project Entity may cause the Project Entity to sell the GrandReserve project, subject to a right of first offer by Lovers REIT.

 

LoversREIT may terminate the above options if the project is not completed by February 28,2010.

 

*****

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Manager andMembers of

Behringer Harvard SatoriVenture, LLC

Addison, Texas

 

We have audited the accompanyingconsolidated balance sheets of Behringer Harvard Satori Venture, LLC andsubsidiaries (the “Company”) as of December 31, 2008 and 2007, and therelated consolidated statements of income, members’ equity, and cash flows forthe year ended December 31, 2008 and for the period from June 26,2007 (date of  inception) through December 31,2007.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

We conducted our auditsin accordance with the standards of the Public Company Accounting OversightBoard (United States). Those standards require that we plan and perform theaudits to obtain reasonable assurance about whether the financial statementsare free of material misstatement.  The Company is not required to have,nor were we engaged to perform, an audit of its internal control over financialreporting.  Our audits included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting.  Accordingly, we express no such opinion.  An audit alsoincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating the overallfinancial statement presentation.  We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2008 and 2007, andthe results of its operations and its cash flows for the year ended December 31,2008 and for the period from June 26, 2007 (date of inception) through December 31,2007, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/Deloitte & Touche LLP

 

Dallas, Texas

March 31, 2009

 

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**Behringer Harvard Satori Venture, LLC**

**ConsolidatedBalance Sheets**

as of December 31,2008 and 2007

 

 
| ** **                                                       | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                       | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                        |       | $          | 165,290    |       | $          | — |   |
| Accrued interest receivable                                      |       | —     |       | 190,603    |       |
| Mortgage note receivable, net                                    |       | 14,604,849 |       | 12,217,558 |       |
| Investment in unconsolidated real estate joint venture           |       | 7,373,438  |       | 7,364,304  |       |
| Deferred offering costs                                          |       | —     |       | 9,820      |       |
| **Total assets**                                                 |       | $          | 22,143,577 |       | $          | 19,782,285 |   |
|                                                             |       |       |       |       |       |
| **Liabilities, preferred units and members’ equity**        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued liabilities                                              |       | $          | 598        |       | $          | 9,820 |   |
|                                                             |       |       |       |       |       |
| **Commitments and contingencies**                                | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                             |       |       |       |       |       |
| Preferred units, $500.00 par value per share;                    |       | 28,902     |       | —     |       |
| 12.5% dividend per annum; 125 units authorized,                  |       |       |       |       |       |
| 124 units issued and outstanding at December 31, 2008;      |       |       |       |       |       |
| none issued and outstanding at December 31, 2007            |       |       |       |       |       |
| Members’ equity                                             |       | 22,114,077 |       | 19,772,465 |       |
| **Total liabilities, preferred units and members’  equity** |       | $          | 22,143,577 |       | $          | 19,782,285 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

 

 

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**Behringer Harvard Satori Venture, LLC**

**ConsolidatedStatements of Income**

 

| ** **                             | ** ** | **Year ended  December 31,   2008** | ** ** | **For the period  from June 26,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|----------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|
| Interest income                        |       | $                                             | 1,508,140  |                                                                                                                              | $          | 197,752 |   |
|                                   |       |                                          |       |                                                                                                                              |       |
| General and administrative expenses    |       | 49,088                                        |       | 2,938                                                                                                                             |       |
|                                   |       |                                          |       |                                                                                                                              |       |
| **Net income**                         |       | $                                             | 1,459,052  |                                                                                                                              | $          | 194,814 |   |
|                                   |       |                                          |       |                                                                                                                              |       |
| Preferred units dividends              |       | (7,750                                        | )          | —                                                                                                                            |       |
|                                   |       |                                          |       |                                                                                                                              |       |
| Net income attributable to the Members |       | $                                             | 1,451,302  |                                                                                                                              | $          | 194,814 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

 

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**Behringer Harvard Satori Venture, LLC**

**ConsolidatedStatements of Members’ Equity**

 
| ** **                                        | ** ** | **Preferred Units** | ** ** | **Members’ Equity** | ** ** | **Total**  | ** ** |
|---------------------------------------------------|------------|---------------------|------------|--------------------------|------------|------------|------------|
| Balance at June 26, 2007 (date of inception) |       | $                   | —     |                     | $          | —     |       | $ | — |   |
| * *                                          | * *   | * *            | * *   | * *                 | * *   | * *   | * *   |
| Contributions                                     |       | —              |       | 19,799,276               |       | 19,799,276 |       |
| Distributions                                     |       | —              |       | (221,625                 | )          | (221,625   | )          |
| Net income                                        |       | —              |       | 194,814                  |       | 194,814    |       |
|                                              |       |                |       |                     |       |       |       |
| Balance at December 31, 2007                 |       | —              |       | 19,772,465               |       | 19,772,465 |       |
| * *                                          | * *   | * *            | * *   | * *                 | * *   | * *   | * *   |
| Preferred units:                                  |       |                |       |                     |       |       |       |
| Proceeds from issuance                            |       | 62,000              |       | —                   |       | 62,000     |       |
| Offering costs                                    |       | (33,098             | )          | —                   |       | (33,098    | )          |
| Dividends                                         |       | —              |       | (7,750                   | )          | (7,750     | )          |
| Contributions                                     |       | —              |       | 2,414,463                |       | 2,414,463  |       |
| Distributions                                     |       | —              |       | (1,524,153               | )          | (1,524,153 | )          |
| Net income                                        |       | —              |       | 1,459,052                |       | 1,459,052  |       |
|                                              |       |                |       |                     |       |       |       |
|                                              |       |                |       |                     |       |       |       |
| Balance at December 31, 2008                 |       | $                   | 28,902     |                     | $          | 22,114,077 |       | $ | 22,142,979 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

 

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**Behringer Harvard Satori Venture, LLC**

**ConsolidatedStatements of Cash Flows**

 

 

| ** **                                                                                    | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from June 26,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| **Cash flows from operating activities**                                                      | ** ** | ** **                                   | ** ** | ** **                                                                                               | ** ** |
| Net income                                                                                    |       | $                                            | 1,459,052  |                                                                                                     | $          | 194,814 |   |
| Adjustments to reconcile net income to net cash provided by (used in)  operating activities - |       |                                         |       |                                                                                                     |       |
| Amortization of deferred financing fees                                                       |       | (44,325                                      | )          | (7,149                                                                                                   | )          |
| Changes in operating assets and liabilities:                                                  |       |                                         |       |                                                                                                     |       |
| Accrued interest receivable                                                                   |       | 190,603                                      |       | (190,603                                                                                                 | )          |
| Accrued liabilities                                                                           |       | 598                                          |       | —                                                                                                   |       |
| **Cash provided by (used in) operating activities**                                           |       | 1,605,928                                    |       | (2,938                                                                                                   | )          |
|                                                                                          |       |                                         |       |                                                                                                     |       |
| **Cash flows from investing activities**                                                      | ** ** | ** **                                   | ** ** | ** **                                                                                               | ** ** |
| Advances on mortgage note receivable, net                                                     |       | (2,342,966                                   | )          | (12,210,409                                                                                              | )          |
| Investment in unconsolidated real estate joint venture                                        |       | (9,134                                       | )          | (7,364,304                                                                                               | )          |
| **Cash used in investing activities**                                                         |       | (2,352,100                                   | )          | (19,574,713                                                                                              | )          |
|                                                                                          |       |                                         |       |                                                                                                     |       |
| **Cash flows from financing activities**                                                      | ** ** | ** **                                   | ** ** | ** **                                                                                               | ** ** |
| Contributions                                                                                 |       | 2,414,463                                    |       | 19,799,276                                                                                               |       |
| Distributions                                                                                 |       | (1,524,153                                   | )          | (221,625                                                                                                 | )          |
| Preferred units:                                                                              |       |                                         |       |                                                                                                     |       |
| Proceeds from issuance                                                                        |       | 62,000                                       |       | —                                                                                                   |       |
| Offering costs                                                                                |       | (33,098                                      | )          | —                                                                                                   |       |
| Dividends paid                                                                                |       | (7,750                                       | )          | —                                                                                                   |       |
| **Cash provided by financing activities**                                                     |       | 911,462                                      |       | 19,577,651                                                                                               |       |
|                                                                                          |       |                                         |       |                                                                                                     |       |
| Net change in cash and cash equivalents                                                       |       | 165,290                                      |       | —                                                                                                   |       |
| Cash and cash equivalents at beginning of period                                              |       | —                                       |       | —                                                                                                   |       |
| Cash and cash equivalents at end of period                                                    |       | $                                            | 165,290    |                                                                                                     | $          | — |   |
|                                                                                          |       |                                         |       |                                                                                                     |       |
| **Supplemental schedule of noncash financing  activities -**                                  | ** ** | ** **                                   | ** ** | ** **                                                                                               | ** ** |
| Accrued offering costs                                                                        |       | $                                            | —     |                                                                                                     | $          | 9,820 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

 

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**Behringer Harvard SatoriVenture, LLC**

**Notes to Consolidated FinancialStatements**

 

**1.             Organizationand Business**

** **

***Organization***

 

BehringerHarvard Satori Venture, LLC (which may be referred to as the “Company,” “we,” “us,”or “our”) was effectively organized in Delaware on June 26, 2007.

 

Weare a co-investment joint venture between Behringer Harvard Multifamily OP I LP(“Behringer Harvard Multifamily OP I”), which, through its wholly owned subsidiaryBehringer Harvard Satori, LLC, our manager and 55% owner, and, BehringerHarvard Master Partnership I LP (“Behringer Harvard Master Partnership I”), our45% owner.  The 1% general partner ofBehringer Harvard Master Partnership I is Behringer Harvard Institutional GPLP, a related party that is indirectly owned by Behringer Harvard Holdings, LLCand the 99% limited partner of Behringer Harvard Master Partnership I is anunaffiliated social work sector pension fund based in The Netherlands, StichtingPensioenfonds Zorg en Welijn (“PGGM”). Substantially all of the capitalprovided to Behringer Harvard Master Partnership I is from PGGM.

 

BehringerHarvard Multifamily OP I is wholly owned by Behringer Harvard Multifamily REITI, Inc. (“Behringer Harvard Multifamily REIT I”). Behringer HarvardMultifamily OP I and Behringer Harvard Master Partnership I are collectivelyreferred to herein as the Members and hold, indirectly and directly,respectively, 100% of our voting interests.

 

Wewere organized to own 100% of the voting equity interests and approximately 99%of the economic interests in one subsidiary, Behringer Harvard Satori REIT,LLC, (“Satori REIT”). Substantially all of our business is conducted throughSatori REIT. Satori REIT was organized to make a mortgage loan to SunriseInvestors LLLP (the “Project Entity”) and an equity investment in SatoriHolding, LLC (the “Holding Entity”). Prior to our equity investment, theHolding Entity was wholly owned by a commercial developer and was organized todevelop and own one apartment community, commonly known as Satori (“Satori”).Satori is located in Broward County, Florida, is currently under development,has an estimated construction budget of approximately $98.5 million(unaudited), and is expected to be an apartment community of approximately 279rental units (unaudited) within buildings of three- to nine-story structures(unaudited). The Satori Apartment Community is also expected to have a parkingstructure. The Project Entity is directly and indirectly a wholly ownedsubsidiary of the Holding Entity.

 

Neitherwe nor Satori REIT have employees and both are supported by related partyarrangements. Behringer Harvard Multifamily REIT I is externally managed byBehringer Harvard Multifamily Advisors I LP (“Behringer Harvard MultifamilyAdvisors I”), a Texas limited partnership organized in 2006.  Behringer Harvard Multifamily Advisors I,through Behringer Harvard Multifamily REIT I, is responsible for managing ouraffairs on a day-to-day basis and for identifying and making real estateinvestments on our behalf.

 

# **2**.             Summaryof Significant Accounting Policies

# ** **

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

 

Thepreparation of consolidated financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period.  These estimates include such items asamortization and accrued liabilities. Actual results could differ from those estimates.

 

 

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***IncomeTaxes***

 

SatoriREIT has elected to be taxed as a real estate investment trust (“REIT”) underSections 856 through 860 of the Internal Revenue Code, and has qualified as aREIT since the period ended December 31, 2007.  To qualify as a REIT, we must meet a numberof organizational and operational requirements, including a requirement that wedistribute at least 90% of our REIT taxable income.  As a REIT, we generally will not be subjectto federal income tax at the corporate level. We are organized and operate in such a manner as to qualify for taxationas a REIT under the Code, and we intend to continue to operate in such amanner, but no assurance can be given that we will operate in a manner so as toqualify or remain qualified as a REIT. Even if we qualify for taxation as aREIT, we may be subject to certain state and local taxes on our income andproperty, and federal income and excise taxes on our undistributed income.

 

Wehave adopted the provisions of FASB Interpretation No. 48 Accounting foruncertainty in income taxes — an interpretation of FASB Statement No. 109 (“FIN48”). Under FIN 48, we recognize the financial statement benefit of anuncertain tax position only after determining that the relevant tax authoritywould more likely than not sustain the position following an audit. To date, weare unaware of any uncertain tax positions.

 

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

 

Ourconsolidated financial statements include our accounts and the accounts SatoriREIT.  All inter-company transactions,balances and profits are eliminated in consolidation.  Interests in entities acquired are evaluated forconsolidation based on Financial Accounting Standards Board Interpretation (“FIN”)46R “Consolidation of Variable Interest Entities,” which requires theconsolidation of variable interest entities (“VIEs”) in which we are deemed tobe the primary beneficiary.  If theinterest in the entity is determined to not be a VIE under FIN 46R, then theentities are evaluated for consolidation under the American Institute ofCertified Public Accountants (“AICPA”) Statement of Position (“SOP”) 78-9, “Accountingfor Investments in Real Estate Ventures,” and Emerging Issues Task Force (“EITF”)04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.” We have determined that we are not a primarybeneficiary of any VIEs.

 

ThePartnership Entity uses ratios that are different than the stated equitypercentages for obligations and allocation of profits and losses, specifiedcosts and expenses, distributions of cash from operations, and distributions ofcash proceeds from liquidation.

 

***Cashand Cash Equivalents***

 

Weconsider investments in highly-liquid money market funds with originalmaturities of three months or less to be cash equivalents. In the ordinarycourse of our business, cash requirements for substantially all of ourinvestments and obligations are paid on our behalf directly from our Members tothe other party. We have presented these transactions as cash inflows andoutflows in our consolidated statement of cash flows.

 

***Deferred Offering Costs***

 

Amountsincurred related to our Preferred Units offering.  In connection with our receipt of offeringproceeds in 2008, these amounts have been recorded in the December 31,2008 financial statements as an offset to the Preferred Units balance.

 

 ***Mortgage Note Receivable***

 

Themortgage note receivable is reported at its outstanding principal balance netof any unearned income from unamortized loan origination fees. Loan originationfees are generally deferred and are amortized as adjustments to interest incomeusing a straight-line method that approximates the effective interest methodover the life of the related debt. During 2007 we received origination fees of$222,000. Included are unamortized loan origination fees of $170,000, and$214,000 as of December 31, 2008 and 2007, respectively.

 

Themortgage note receivable is coterminous with the Project Entity’s constructionloan and the Project Entity remains obligated to pay principal and interest dueregardless of its intent or ability to sell or refinance the property. Inaddition, the mortgage note receivable does not contain a right to participatein expected residual profit from the sale or refinancing of the property. As aresult, the mortgage note receivable is accounted for as a loan pursuant to theguidance in Exhibit I of AICPA Practice Bulletin 1 on accounting of realestate acquisition, development, or construction arrangements.

 

 

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***Investment in Unconsolidated Real Estate Joint Venture***

 

Weaccount for our investment in real estate joint venture using the equity methodof accounting because we exercise significant influence over, but do notcontrol the Project Entities. This investment is initially recorded at cost andis adjusted for our share of equity in earnings and distributions. The SatoriApartment Community project is under development and has no income or losses.

 

***Impairment of Long Lived Assets and MortgageNote Receivable***

 

Forreal estate we own through an investment in a real estate joint venture, ateach reporting date we compare the estimated fair value of our real estateinvestment to the carrying value. An impairment charge is recorded to theextent the fair value of our real estate investment is less than the carryingamount and the decline in value is determined to be other than a temporarydecline.

 

Wereview the terms and conditions underlying the outstanding balance of themortgage note receivable. If we determine that it is probable that all amountsdue under the terms of the note will not be collected, an impairment charge isrecorded to the extent that the investment in the note exceeds our estimate ofthe fair value of the collateral securing such note.

 

Weassess impairment at the individual project basis. In evaluating the investmentin real estate venture and mortgage note receivable for impairment, managementmakes several estimates and assumptions about the financial condition of theborrower and the guarantor. In addition, management makes several estimates andassumptions about the property and the additional collateral provided by theguarantor, including but not limited to, the projected disposition dates,estimated future cash flows, and the projected sales prices.  A change in these estimates and assumptionscould result in understating or overstating the carrying value of the mortgagenote receivable which could be material to our consolidated financialstatements.

 

Noimpairment charges have been recorded in 2008 or 2007.

 

 

**3.             New Accounting Pronouncements**

 

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS No. 157”). SFAS No. 157 defines fair value,establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair valuemeasurements.  We adopted the provisionsof SFAS No. 157 effective January 1, 2008, and did not have amaterial effect on our consolidated results of operations or financialposition.

 

InFebruary 2008, the FASB staff issued Staff Position No. 157-2 “EffectiveDate of FASB Statement No. 157” (“FSP SFAS No. 157-2”).  FSP SFAS No. 157-2 delayed the effectivedate of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statements on a recurring basis (at least annually).  The provisions of FSP SFAS No. 157-2 areeffective for our fiscal year beginning January 1, 2009.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an Amendment of FASBStatement No. 115.”  The fair valueoption established by SFAS No. 159 permits all entities to choose tomeasure eligible items at fair value at specified election dates.  A business entity will report unrealizedgains and losses on items for which the fair value option has been elected inearnings (or another performance indicator if the business entity does not reportearnings) at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15,2007.  We have not elected the fair valuemeasurement option for any financial assets or liabilities at the present time.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  This Statement replacesSFAS No. 141 “Business Combinations” but retains the fundamentalrequirement that the acquisition method of accounting, or purchase method, beused for all business combinations and for an acquirer to be identified foreach business combination.  ThisStatement is broader in scope than that of Statement 141, which applied only tobusiness combinations in which control was obtained by transferringconsideration.  SFAS No. 141(R) appliesthe same method of accounting (the acquisition method) to all transactions andother events in which one entity obtains control over one or more otherbusinesses.  This Statement also makescertain other modifications to Statement 141, including a broader definition ofa business and the requirement that acquisition related costs are expensed asincurred.  This statement applies to ourbusiness combinations occurring beginning January 1, 2009. The acquisitionof a real estate property has been determined to meet the definition of abusiness combination as defined in SFAS No. 141(R).  Therefore, SFAS No. 141(R) may havea material effect on our accounting for future consolidated acquisitions ofproperties as acquisition costs will no longer be capitalized, but will beexpensed beginning January 1, 2009.

 

# ** **

 

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# **4.**             Private Offering

# ** **

Thelimited liability company agreement of Satori REIT has established 125 units ofClass A, preferred, cumulative, non-voting membership units (“PreferredUnits”).  We commenced a private offeringof the Preferred Units in November 2007. During 2008, we sold 124 Preferred Units and raised gross offeringproceeds totaling $62,000. Additional offering costs associated with thePreferred Units issuance incurred during 2008 were approximately $24,000 andhave been recorded as an offset to the Preferred Units balance in accordancewith Staff Accounting Bulletin (“SAB”) Topic 5.A, Miscellaneous Accounting —Expenses of Offering.

 

Includedin deferred offering costs are offering expenses incurred for the PreferredUnits as of December 31, 2007 of $9,820. In connection with our receipt ofoffering proceeds in 2008, these amounts have been reclassified in the December 31,2008 consolidated financial statements as an offset to the Preferred Unitsbalance.

 

ThePreferred Units pay an annual dividend of 12.5% and are senior in priority toall other members’ equity of Satori REIT. Satori’s REIT, at its option, mayredeem the Preferred Units, in whole or in part, at any time or from time totime, for cash at a redemption price equal to $500.00 per unit, plus allaccrued and unpaid distributions thereon to and including the date fixed foreredemption, plus a premium per unit as follows: (1) until December 31,2009, $100; (2) from January 1, 2010 to December 31, 2010, $75; (3) fromJanuary 1, 2011 to December 31, 2011, $50; (4) from January 1,2012 to December 2012, $25; and thereafter, no redemption premium.  The Preferred Units are not redeemable by theunit holders and we have no current intent to exercise our redemption option.

 

**5.             Related Party Arrangements**

 

Weare dependent on the Members and their affiliates for our operational andinvestment capital needs.  We are alsoultimately dependent, through Behringer Harvard Multifamily REIT I, onBehringer Harvard Multifamily Advisors I and Behringer Harvard Multifamily Management Services, LLC  for certain services that are essential tous, including, asset acquisition and disposition decisions, property managementand leasing services and other general administrative responsibilities.  In the event that these companies were unableto provide us with the respective capital or services, we would be required toobtain such capital or services from other sources. We recognize all amounts atthe time incurred by the Members on our behalf in our financial statements withan offset to Members Equity.

 

**6.             MortgageNote Receivable and Investment in Unconsolidated Real Estate Venture**

** **

In November 2007,Satori REIT committed to make a mortgage loan in the amount of $14,775,000 tothe Project Entity and the Holding Entity (the “Mortgage Note”). We funded$12,432,034 of the commitment as of December 31, 2007, and funded theremaining balance in 2008. The Mortgage Note bears interest at the rate of 10%per annum and matures on October 29, 2012. Through maturity, interest is payable on a monthly basis from a budgetedinterest reserve in the amount of $3,230,000 and from available net operationalcash flows.  At maturity, principal andunpaid interest is due.  Generally, noprepayment of the Mortgage Note may be made without Satori REIT’s approvalexcept after the project’s completion or the interest reserve is fully paid.

 

TheMortgage Note is secured by a lien pursuant to a mortgage on the project thatis subordinate to the lien on the project granted to the senior lender.  The Mortgage Note is also supported by aguarantee from the developer, which has guaranteed completion of thedevelopment of the project in accordance with its plans and specifications if,for any reason, the Project Entity abandons the project before its completion,fails to complete the project on time (except for certain excused delays) orfails to pay all costs in full for the construction.  The developer is liable for construction costoverruns in excess of the construction budget, with limited exceptions for (i) constructioninterest, construction period property taxes and property insurance if anexcused delay occurs when constructing the project and (ii) certain costsarising from aspects of the project approved by Satori REIT or to bring theproject into compliance with laws first enacted after constructioncommenced.  The developer has alsoguaranteed repayment of the Mortgage Note should the Project Entity become thesubject of a bankruptcy or insolvency proceeding, provided such proceeding isvoluntary or, if involuntary, not dismissed within 90 days of the filing.

 

InNovember 2007, Satori REIT funded a stated 50% membership equity interestin the Holding Entity in the amount of $7,350,000. Pursuant to the operating agreement,distributions are made generally to first return capital contributions to themembers with preferred returns and topay certain deferred fees to the developer.  Thereafter, returns are paid to the membersin accordance with their respective percentage interests.

 

 

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TheProject Entity and Holding Entity use ratios that are different than the statedpartnership interest for obligations and allocation of profits and losses,specified costs and expenses, distributions of cash from operations, anddistributions of cash proceeds from liquidation.

 

TheHolding Entity and its subsidiaries were formed by the commercial developer topurchase, finance, and develop one real estate project; these entities are notconsolidated into our financial statements. Our involvement with these entitiesbegan at the time we committed to the Mortgage Note and equity investment, andour potential loss exposure is limited to the funded portion of thesecommitments. These entities also owe amounts to other parties, including thesenior project lender. Neither we nor Satori REIT have a primary or secondaryobligation with respect to such obligations.

 

**7.             Commitments and Contingencies**

 

Satoriproject is currently under development and is estimated to be completed in thethird calendar quarter of 2009.

 

*Contingentconversion option. *Satori REIT has a contingent conversionoption to convert the Mortgage Note into its membership interest in the HoldingEntity (the “Conversion Option”).  The ConversionOption is currently not exercisable and cannot be exercised until thedevelopment is complete and the property is certified for occupancy. SatoriREIT may exercise the Conversion Option within 90 days of completion of theSatori project and the exercise price will be the outstanding balance of theMortgage Note and unpaid interest.  Uponexercise, any outstanding principal and interest on the Mortgage Note willbecome second-priority capital contributed in the Holding Entity, where SatoriREIT will be entitled to a preferred return of 9.5%, and Satori REIT willcontinue to hold a membership interest of 50%.

 

*DeveloperMember’s contingent sell option*.  The member owned by the developer (the “DeveloperMember”) has a right, commencing on the date of completion of the project andcontinuing until the third anniversary of the completion of the project, toinitiate a procedure to ascertain the fair market value of the project and,thus, to ascertain the value of the membership interests of the members of theHolding Entity.  If such value is notmutually agreed upon by the Developer Member and Satori REIT, then such valuewould equal the distributions that the Developer Member would receive if theproject were sold at its fair market value, which would be determined by anarbitration process.  Once such value isagreed upon or determined, Satori REIT has an option to purchase the DeveloperMember’s 50% interest at that price or to request that the Developer Member causesthe Project Entity to sell the project for a price that is not less than thedetermined fair market value.  TheDeveloper Member may then elect whether to proceed with causing a sale of theproject.  If the Developer Member doesnot elect to cause a sale of the project or is unable to consummate such asale, then the Developer Member may recommence this procedure from thebeginning.

 

*SatoriREIT’s**Call Right. *IfDeveloper Member does not commence its put right proceedings described above orthe project is not sold pursuant to such proceedings, Satori REIT has a right,commencing on the third anniversary of the date of completion of the project,to initiate those same proceedings by ascertaining the fair market value of theproject and, thus, to ascertain the value of the membership interests of all ofthe members of the Holding Entity.  Ifsuch value is not mutually agreed upon by the Developer Member and Satori REIT,then such value would equal the distributions that the Developer Member wouldreceive if the project were sold at its fair market value, which would bedetermined by an arbitration process. Once such value is agreed upon or determined, Satori REIT has an optionto purchase the Developer Member’s interest at that price or to request thatthe Developer Member causes the Project Entity to sell the project for a pricethat is not less than the determined fair market value.  The Developer Member may then elect whetherto proceed with causing a sale of the project. If the Developer Member does not elect to cause a sale of the project oris unable to consummate such a sale, then Satori REIT may recommence thisprocedure from the beginning.

 

*Buy/SellRights*.  Each member of the HoldingEntity has a right, commencing on the third anniversary of the date ofcompletion of the project and not during any time that the put right or callright proceedings described above are ongoing, to initiate buy/sell procedureswith respect to its membership interest. Under those procedures, a member could make an offer to purchase theinterests of the other member based on an offer price for the company’s assetsand the other member would either elect to sell its interest based on thatprice or elect to purchase the offering member’s membership interests based onthat price.

 

 

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**8.****                                     ****Disclosure of summarizedfinancial information of the unconsolidated real estate joint venture**

 

 

| ** **                                       | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| **Balance sheet data:**                          |       |                             |       |                             |       |
|                                             |       |                             |       |                             |       |
| Cash                                             |       | $                                | 17,760     |                             | $          | 485,287 |   |
| Land and construction in progress                |       | 77,522,937                       |       | 25,637,019                       |       |
| Other assets                                     |       | 12,362                           |       | 8,864                            |       |
| **Total assets**                                 |       | $                                | 77,553,059 |                             | $          | 26,131,170 |   |
|                                             |       |                             |       |                             |       |
| Construction loan                                |       | $                                | 41,864,192 |                             | $          | — |   |
| Note payable to Satori REIT                      |       | 14,775,000                       |       | 12,432,034                       |       |
| Accounts payable, interest payable and other     |       | 11,063,867                       |       | 3,849,136                        |       |
| Partners’ capital                           |       | 9,850,000                        |       | 9,850,000                        |       |
| **Total liabilities and partners’ capital** |       | $                                | 77,553,059 |                             | $          | 26,131,170 |   |

 

TheSatori project is currently under development and had insignificant net income(loss) for the year or period ended December 31, 2008 and 2007.

 

*****

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

To the Manager andMembers of

Behringer Harvard St.Rose Venture, LLC

Addison, Texas

 

We have audited theaccompanying consolidated balance sheets of Behringer Harvard St. Rose Venture,LLC and subsidiaries (the “Company”) as of December 31, 2008 and 2007, andthe related consolidated statements of income, members’ equity, and cash flowsfor the year ended December 31, 2008 and for the period from July 9,2007 (date of  inception) through December 31,2007.  These financial statements are the responsibility of the Company’smanagement.  Our responsibility is to express an opinion on thesefinancial statements based on our audits.

 

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

 

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of the Company as of December 31, 2008 and 2007, andthe results of its operations and its cash flows for the year ended December 31,2008 and for the period from July 9, 2007 (date of inception) through December 31,2007, in conformity with accounting principles generally accepted in the UnitedStates of America.

 

/s/Deloitte & Touche LLP

 

Dallas, Texas

March 31, 2009

 

 

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**Behringer Harvard St. Rose Venture, LLC**

**ConsolidatedBalance Sheets**

as of December 31,2008 and 2007

 

 
| ** **                                                                                                                                                                                                         | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| **Assets**                                                                                                                                                                                                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash and cash equivalents                                                                                                                                                                                          |       | $          | 6,160,613  |       | $          | 78,069 |   |
| Accrued interest receivable                                                                                                                                                                                        |       | 5,315      |       | 237,343    |       |
| Mortgage notes receivable, net                                                                                                                                                                                     |       | 14,087,362 |       | 4,585,927  |       |
| Investment in unconsolidated real estate joint venture                                                                                                                                                             |       | 5,179,585  |       | —     |       |
| Deferred offering costs                                                                                                                                                                                            |       | —     |       | 9,820      |       |
| **Total assets**                                                                                                                                                                                                   |       | $          | 25,432,875 |       | $          | 4,911,159 |   |
|                                                                                                                                                                                                               |       |       |       |       |       |
| **Liabilities, preferred units and members’ equity**                                                                                                                                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Accrued liabilities                                                                                                                                                                                                |       | $          | 8,099      |       | $          | 9,820 |   |
| Due to Members                                                                                                                                                                                                     |       | —     |       | 663        |       |
| **Total liabilities**                                                                                                                                                                                              |       | 8,099      |       | 10,483     |       |
|                                                                                                                                                                                                               |       |       |       |       |       |
| **Commitments and contingencies**                                                                                                                                                                                  | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                                                                                                                                                                               |       |       |       |       |       |
| Preferred units, $500.00 par value per share;

12.5% dividend per annum; 125 units authorized,

124 units issued and outstanding at December 31, 2008;

none issued and outstanding at December 31, 2007 |       | 28,902     |       | —     |       |
| Members’ equity                                                                                                                                                                                               |       | 25,395,874 |       | 4,900,676  |       |
| **Total liabilities, preferred units and members’  equity**                                                                                                                                                   |       | $          | 25,432,875 |       | $          | 4,911,159 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard St. Rose Venture, LLC**

**ConsolidatedStatements of Income**

 

 
| ** **                             | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from July 9,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|----------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| Interest income                        |       | $                                       | 700,530    |                                                                                               | $          | 248,899 |   |
|                                   |       |                                    |       |                                                                                               |       |
| General and administrative expenses    |       | 78,194                                  |       | 4,796                                                                                              |       |
|                                   |       |                                    |       |                                                                                               |       |
| **Net income**                         |       | $                                       | 622,336    |                                                                                               | $          | 244,103 |   |
|                                   |       |                                    |       |                                                                                               |       |
| Preferred units dividends              |       | (7,750                                  | )          | —                                                                                             |       |
|                                   |       |                                    |       |                                                                                               |       |
| Net income attributable to the Members |       | $                                       | 614,586    |                                                                                               | $          | 244,103 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard St. Rose Venture, LLC**

**ConsolidatedStatements of Members’ Equity**

 

 
| ** **                                       | ** ** | **Preferred Units** | ** ** | **Members’ Equity** | ** ** | **Total**  | ** ** |
|--------------------------------------------------|------------|---------------------|------------|--------------------------|------------|------------|------------|
| Balance at July 9, 2007 (date of inception) |       | $                   | —     |                     | $          | —     |       | $ | — |   |
| * *                                         | * *   | * *            | * *   | * *                 | * *   | * *   | * *   |
| Contributions                                    |       | —              |       | 4,719,905                |       | 4,719,905  |       |
| Distributions                                    |       | —              |       | (63,332                  | )          | (63,332    | )          |
| Net income                                       |       | —              |       | 244,103                  |       | 244,103    |       |
|                                             |       |                |       |                     |       |       |       |
|                                             |       |                |       |                     |       |       |       |
| Balance at December 31, 2007                |       | —              |       | 4,900,676                |       | 4,900,676  |       |
|                                             |       |                |       |                     |       |       |       |
| Preferred units:                                 |       |                |       |                     |       |       |       |
| Proceeds from issuance                           |       | 62,000              |       | —                   |       | 62,000     |       |
| Offering costs                                   |       | (33,098             | )          | —                   |       | (33,098    | )          |
| Dividends                                        |       | —              |       | (7,750                   | )          | (7,750     | )          |
| Contributions                                    |       | —              |       | 19,958,018               |       | 19,958,018 |       |
| Distributions                                    |       | —              |       | (77,406                  | )          | (77,406    | )          |
| Net income                                       |       | —              |       | 622,336                  |       | 622,336    |       |
|                                             |       |                |       |                     |       |       |       |
|                                             |       |                |       |                     |       |       |       |
| Balance at December 31, 2008                |       | $                   | 28,902     |                     | $          | 25,395,875 |       | $ | 25,424,776 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard St. Rose Venture, LLC**

**ConsolidatedStatements of Cash Flows**

 

 
| ** **                                                                                    | ** ** | **Year ended  December 31,  2008** | ** ** | **For the period  from July 9,  2007 (date of  inception)  through  December 31,  2007** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| **Cash flows from operating activities**                                                      | ** ** | ** **                              | ** ** | ** **                                                                                         | ** ** |
| Net income                                                                                    |       | $                                       | 622,336    |                                                                                               | $          | 244,103 |   |
| Adjustments to reconcile net income to net cash provided  by (used in) operating activities - |       |                                    |       |                                                                                               |       |
| Amortization of deferred financing fees                                                       |       | (129,521                                | )          | (11,556                                                                                            | )          |
| Changes in operating assets and liabilities:                                                  |       |                                    |       |                                                                                               |       |
| Accrued interest receivable                                                                   |       | 232,028                                 |       | (237,343                                                                                           | )          |
| Due to Members                                                                                |       | (663                                    | )          | —                                                                                             |       |
| Accrued liabilities                                                                           |       | 599                                     |       | —                                                                                             |       |
| **Cash provided by (used in) operating activities**                                           |       | 724,779                                 |       | (4,796                                                                                             | )          |
|                                                                                          |       |                                    |       |                                                                                               |       |
| **Cash flows from investing activities**                                                      | ** ** | ** **                              | ** ** | ** **                                                                                         | ** ** |
| Issuance of mortgage notes receivable, net                                                    |       | (9,371,914                              | )          | (4,574,371                                                                                         | )          |
| Investment in unconsolidated real estate joint venture                                        |       | (5,172,085                              | )          | —                                                                                             |       |
| **Cash used in investing activities**                                                         |       | (14,543,999                             | )          | (4,574,371                                                                                         | )          |
|                                                                                          |       |                                    |       |                                                                                               |       |
| **Cash flows from financing activities**                                                      | ** ** | ** **                              | ** ** | ** **                                                                                         | ** ** |
| Contributions                                                                                 |       | 19,958,018                              |       | 4,719,905                                                                                          |       |
| Distributions                                                                                 |       | (77,406                                 | )          | (62,669                                                                                            | )          |
| Preferred units:                                                                              |       |                                    |       |                                                                                               |       |
| Proceeds from issuance                                                                        |       | 62,000                                  |       | —                                                                                             |       |
| Offering costs                                                                                |       | (33,098                                 | )          | —                                                                                             |       |
| Dividends paid                                                                                |       | (7,750                                  | )          | —                                                                                             |       |
| **Cash provided by financing activities**                                                     |       | 19,901,764                              |       | 4,657,236                                                                                          |       |
|                                                                                          |       |                                    |       |                                                                                               |       |
| Net change in cash and cash equivalents                                                       |       | 6,082,544                               |       | 78,069                                                                                             |       |
| Cash and cash equivalents at beginning of period                                              |       | 78,069                                  |       | —                                                                                             |       |
| Cash and cash equivalents at end of period                                                    |       | $                                       | 6,160,613  |                                                                                               | $          | 78,069 |   |
|                                                                                          |       |                                    |       |                                                                                               |       |
| **Supplemental schedule of noncash financing  activities:**                                   | ** ** | ** **                              | ** ** | ** **                                                                                         | ** ** |
| Investment in unconsolidated real estate joint venture                                        |       | $                                       | 7,500      |                                                                                               | $          | — |   |
| Deferred offering costs                                                                       |       | $                                       | —     |                                                                                               | $          | 9,820 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**Behringer Harvard St.Rose Venture, LLC**

**Notes to Consolidated FinancialStatements**

 

**1.****                                     ****Organization and Business**

 

***Organization***

 

Behringer Harvard St.Rose Venture, LLC (which may be referred to as the “Company,” “we,” “us,” or “our”)was effectively organized in Delaware on July 9, 2007.

 

We are a co-investmentjoint venture between Behringer Harvard Multifamily OP I LP (“Behringer HarvardMultifamily OP I”), which, through its wholly owned subsidiary BehringerHarvard St. Rose, LLC, is our manager and 55% owner, and, Behringer HarvardMaster Partnership I LP (“Behringer Harvard Master Partnership I”), our 45%owner.  The 1% general partner ofBehringer Harvard Master Partnership I is Behringer Harvard Institutional GPLP, a related party that is indirectly owned by Behringer Harvard Holdings, LLCand the 99% limited partner of Behringer Harvard Master Partnership I is anunaffiliated social work sector pension fund based in The Netherlands,Stichting Pensioenfonds Zorg en Welijn (“PGGM”). Substantially all of thecapital provided to Behringer Harvard Master Partnership I is from PGGM.

 

Behringer HarvardMultifamily OP I is wholly-owned by Behringer Harvard Multifamily REIT I, Inc.(“Behringer Harvard Multifamily REIT I”). Behringer Harvard Multifamily OP Iand Behringer Harvard Master Partnership I are collectively referred to hereinas the Members and, indirectly and directly, respectively, hold 100% of ourvoting interests.

 

We were organized to own100% of the voting equity interests and approximately 99% of the economicinterests in one subsidiary, Behringer Harvard St. Rose REIT, LLC (“St. RoseREIT”). Substantially all of our business is conducted through St. Rose REIT.St. Rose REIT was organized to invest in the St. Rose Project (as describedbelow), which investment has been made in the form of a  mortgage loan to SW 131 St. Rose MezzanineBorrower LLC (the “Mortgage Borrower”) and an equity investment in SW 130 St.Rose Limited Partnership (the “Partnership Entity”). Prior to our equityinvestment, the Partnership Entity was wholly owned by a commercial real estate developer and was organized to developand own one apartment community, St. Rose ( the “St. Rose Project”). The St.Rose Project is currently under development in Henderson, Nevada, has anestimated construction budget of approximately $70.1 million (unaudited), andis expected to be a 24 building (unaudited), three-story garden apartmentcommunity (unaudited) with approximately 430 rental units (unaudited).  The St. Rose Project is wholly owned by SW132 Senior Borrower LLC (the “Project Entity”), which is wholly owned by theMortgage Borrower.

 

Neither we nor St. RoseREIT have employees and both are supported by related party arrangements.Behringer Harvard Multifamily REIT I is externally managed by Behringer HarvardMultifamily Advisors I LP (“Behringer Harvard Multifamily Advisors I”), a Texaslimited partnership organized in 2006. Behringer Harvard Multifamily Advisors I, through Behringer HarvardMultifamily REIT I, is responsible for managing our affairs on a day-to-daybasis and for identifying and making real estate investments on our behalf.

 

**2****.****                                     ****Summaryof Significant Accounting Policies**

 

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

 

The preparation ofconsolidated financial statements in conformity with GAAP requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe consolidated financial statements and the reported amounts of revenues andexpenses during the reporting period. These estimates include such items as amortization and accruedliabilities.  Actual results could differfrom those estimates.

 

***IncomeTaxes***

 

St.Rose REIT has elected to be taxed as a real estate investment trust (“REIT”)under Sections 856 through 860 of the Internal Revenue Code, and has qualifiedas a REIT since the period ended December 31, 2007.  To qualify as a REIT, we must meet a numberof organizational and operational requirements, including a requirement that wedistribute at least 90% of our REIT taxable income.  As a REIT, we generally will not be subjectto federal income tax at the corporate level. We are organized and operate in such a manner as to qualify for taxationas a REIT under the Code, and we intend to continue to operate in such amanner, but no assurance can be given that we will operate in a manner so as toqualify or remain qualified as a REIT. Even if we qualify for taxation 

 

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asa REIT, we may be subject to certain state and local taxes on our income andproperty, and federal income and excise taxes on our undistributed income.

 

Wehave adopted the provisions of FASB Interpretation No. 48 Accounting foruncertainty in income taxes — an interpretation of FASB Statement No. 109 (“FIN48”). Under FIN 48, we recognize the financial statement benefit of anuncertain tax position only after determining that the relevant tax authoritywould more likely than not sustain the position following an audit. To date, weare unaware of any uncertain tax positions.

 

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

 

Ourconsolidated financial statements include our accounts and the accounts of St.Rose REIT.  All inter-companytransactions, balances and profits are eliminated in consolidation.  Interests in entities acquired are evaluatedbased on Financial Accounting Standards Board Interpretation (“FIN”) 46R “Consolidationof Variable Interest Entities,” which requires the consolidation of variableinterest entities (“VIEs”) in which we are deemed to be the primarybeneficiary.  If the interest in theentity is determined to not be a VIE under FIN 46R, then the entities are evaluatedfor consolidation under the American Institute of Certified Public Accountants’(“AICPA”) Statement of Position (“SOP”) 78-9, “Accounting for Investments inReal Estate Ventures,” and Emerging Issues Task Force (“EITF”) 04-5, “DeterminingWhether a General Partner, or the General Partners as a Group, Controls aLimited Partnership or Similar Entity When the Limited Partners Have CertainRights.” We have determined that we are not a primary beneficiary of any VIEs.

 

ThePartnership Entity uses ratios that are different than the stated partnershipinterests for obligations and allocation of profits and losses, specified costsand expenses, distributions of cash from operations, and distributions of cashproceeds from liquidation.

 

***Cashand Cash Equivalents***

 

Weconsider investments in highly-liquid money market funds with originalmaturities of three months or less to be cash equivalents. In the ordinarycourse of our business, cash requirements for substantially all of ourinvestments and obligations are paid on our behalf directly from our Members tothe other party. We have presented these transactions as cash inflows andoutflows in our consolidated statement of cash flows.

 

***Deferred Offering Costs***

 

Amountsinclude costs related to our Preferred Units offering. In connection with ourreceipt of offering proceeds in 2008, these amounts have been recorded in the December 31,2008 consolidated financial statements as an offset to the Preferred Unitsbalance.

 

***Mortgage Note Receivable***

 

Themortgage note receivable is reported at its outstanding principal balance netof unearned income from unamortized deferred loan origination fees and costs.Loan origination fees and costs are generally deferred and are amortized asadjustments to interest income using a straight-line method that approximatesthe effective interest method over the life of the related debt. During 2007 wereceived origination fees of $141,000; the net deferred balance as of December 31,2007 was $129,000.  As of December 31,2008, amounts incurred for deferred financing costs and related accumulatedamortization was $7,500 and $0 respectively. As of December 31, 2007,amounts incurred for deferred financing costs and related accumulatedamortization were $26,000 and $2,000, respectively.

 

During2008, we received origination fees of $631,000; the net deferred balance as ofDecember 31, 2008 was $631,000. As of December 31, 2008, amounts incurred fordeferred financing costs and related accumulated amortization were $7,300 and$0, respectively.

 

TheMortgage Borrower remains obligated to pay principal and interest dueregardless of its intent or ability to sell or refinance the property. Inaddition, the mortgage note receivable does not contain a right to participatein expected residual profit from the sale or refinancing of the property. As aresult, the mortgage note receivable is accounted for as a loan pursuant to theguidance in Exhibit I of AICPA Practice Bulletin 1 on accounting of realestate acquisition, development, or construction arrangements.

 

***Investment in Unconsolidated Real Estate Venture***

 

Weaccount for our investment in real estate joint venture using the equity methodof accounting because we exercise significant influence over, but do notcontrol the Project Entities. This investment is initially recorded at cost andis adjusted for our share of equity in earnings and distributions.  We report our share of income and lossesbased on our ownership interests in the entities.  The St. Rose Project is under development andhas no income or losses.

 

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***Impairment of Long Lived Assets and MortgageNote Receivable***

 

Forreal estate we own through an investment in a real estate joint venture, ateach reporting date we compare the estimated fair value of our real estateinvestment to the carrying value. An impairment charge is recorded to theextent the fair value of our real estate investment is less than the carryingamount and the decline in value is determined to be other than a temporarydecline.

 

Wereview the terms and conditions underlying the outstanding balance of themortgage note receivable. If we determine that it is probable that all amountsdue under the terms of the note will not be collected, an impairment charge isrecorded to the extent that the investment in the note exceeds our estimate ofthe fair value of the collateral securing such note.

 

Weassess impairment at the individual project basis. In evaluating the investmentin real estate venture and mortgage note receivable for impairment, managementmakes several estimates and assumptions about the financial condition of theborrower and the guarantor. In addition, management makes several estimates andassumptions about the property and the additional collateral provided by theguarantor, including but not limited to, the projected disposition dates,estimated future cash flows, and the projected sales prices.  A change in these estimates and assumptionscould result in understating or overstating the carrying  value of the mortgage note receivable whichcould be material to our consolidated financial statements.

 

Noimpairment charges have been recorded in 2008 or 2007.

 

***Concentration of Credit Risk***

 

Inthe ordinary course of our business, we hold cash and cash equivalents andrestricted cash deposited in certain financial institutions in excess offederally insured levels.  We regularlymonitor the financial stability of these financial institutions and believethat we are not exposed to any significant credit risk in cash and cashequivalents or restricted cash.

 

TheFederal Deposit Insurance Corporation, or “FDIC,” generally only insureslimited amounts per depositor per insured bank. Beginning October 3, 2008 through December 31, 2009, the FDICwill insure up to $250,000 per depositor per insured bank; on January 1,2010, the standard coverage limit will return to $100,000 for most depositcategories.  Unlimited deposit insurancecoverage may be available to our non-interest bearing transaction accounts heldat those institutions participating in FDIC’s Temporary Liquidity GuaranteeProgram through December 31, 2009.

 

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

 

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes aframework for measuring fair value in generally accepted accounting principles,and expands disclosures about fair value measurements.  We adopted the provisions of SFAS No. 157effective January 1, 2008, and did not have a material effect on ourconsolidated results of operations or financial position.

 

In February 2008,the FASB staff issued Staff Position No. 157-2 “Effective Date of FASBStatement No. 157” (“FSP SFAS No. 157-2”). FSP SFAS No. 157-2 delayed the effective date of SFAS No. 157 for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually).  The provisions of FSP SFAS No. 157-2 are effective for our fiscal yearbeginning January 1, 2009.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities - Including an Amendment of FASBStatement No. 115.”  The fair valueoption established by SFAS No. 159 permit all entities to choose tomeasure eligible items at fair value at specified election dates.  A business entity will report unrealizedgains and losses on items for which the fair value option has been elected inearnings (or another performance indicator if the business entity does notreport earnings) at each subsequent reporting date.  SFAS No. 159 was effective for fiscalyears beginning after November 15, 2007. We have not elected the fair value measurement option for any financialassets or liabilities at the present time.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  This Statement replacesSFAS No. 141 “Business Combinations” but retains the fundamentalrequirement that the acquisition method of accounting, or purchase method, beused for all business combinations and for an acquirer to be identified foreach business combination.  This Statementis broader in scope than that of Statement 141, which applied only to businesscombinations in which control was obtained by transferring consideration.  SFAS No. 141(R) applies the samemethod of accounting (the acquisition method) to all transactions and otherevents in which one entity obtains control over one or more otherbusinesses.  This Statement also makescertain other modifications to 

 

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Statement141, including a broader definition of a business and the requirement thatacquisition related costs are expensed as incurred.  This statement applies to our businesscombinations beginning after January 1, 2009. The acquisition of a realestate property has been determined to meet the definition of a businesscombination as defined in SFAS No. 141(R). Therefore, SFAS No. 141(R) may have a material effect on ouraccounting for future consolidated acquisitions of properties as acquisitioncosts will no longer be capitalized, but will be expensed beginning January 1,2009.

 

**4.****                                     ****Private Offering**

 

Thelimited liability company agreement of St. Rose REIT has established 125 unitsof Class A, preferred, cumulative, non-voting membership units (“PreferredUnits”). We commenced a private offering of the Preferred Units in November 2007and issued no Preferred Units as of December 31, 2007. During 2008, wesold 124 Preferred Units and raised gross offering proceeds totaling $62,000. Additionaloffering costs associated with the Preferred Units issuance incurred during2008 were approximately $24,000 and have been recorded as an offset to thePreferred Units balance in accordance with Staff Accounting Bulletin (“SAB”)Topic 5.A, Miscellaneous Accounting — Expenses of Offering.

 

Includedin deferred offering costs are offering expenses incurred of $9,820 for thePreferred Units as of December 31, 2007. In connection with our receipt ofoffering proceeds in 2008, these amounts have been reclassified in the December 31,2008 consolidated financial statements as an offset to the Preferred Unitsbalance.

 

ThePreferred Units pay an annual dividend of 12.5% and are senior in priority toall other members’ equity of St. Rose REIT. St. Rose REIT, at its option, may redeem the Preferred Units, in wholeor in part, at any time or from time to time, for cash at a redemption priceequal to $500.00 per unit, plus all accrued and unpaid distributions thereon toand including the date fixed fore redemption, plus a premium per unit asfollows: (1) until December 31, 2009, $100; (2) from January 1,2010 to December 31, 2010, $75; (3) from January 1, 2011 to December 31,2011, $50; (4) from January 1, 2012 to December 2012, $25; andthereafter, no redemption premium.  The PreferredUnits are not redeemable by the unit holders and we have no current intent toexercise our redemption option.

 

**5.****                                     ****Related Party Arrangements**

 

Weare dependent on the Members and their affiliates for our operational andinvestment capital needs.  We are alsoultimately dependent, through Behringer Harvard Multifamily REIT I, onBehringer Harvard Multifamily Advisors I and Behringer Harvard Multifamily Management Services, LLC  for certain services that are essential tous, including, asset acquisition and disposition decisions, property managementand leasing services and other general administrative responsibilities.  In the event that these companies were unableto provide us with the respective capital or services, we would be required toobtain such capital or services from other sources. We recognize all amounts atthe time incurred by the Members on our behalf in our financial statements withan offset to Members Equity.

 

**6.**                                      Mortgage Note Receivable and Investmentin Unconsolidated Real Estate Venture

** **

Asof December 31, 2008, St. Rose REIT has funded $14,718,000 of $21,043,000under a senior mortgage note commitment and a seperately issued junior mortgagenote commitment (collectively referred to herein as the “Mortgage Note”).  The Mortgage Note accrues interest at therate of 13% per annum.  The MortgageNote  matures on December 30, 2013.Any unpaid accrued interest on the Mortgage Note is payable on a monthly basis,first, from a budgeted interest reserve account in the amount of $6,414,000and, then, from net cash flow from the St. Rose Project if sufficient to makepayments.  If net cash flow isinsufficient to make payments, then the interest will continue to accrue andwill be payable on a monthly basis when and to the extent that net cash flowfrom the St. Rose Project is sufficient to make payments. All accrued andunpaid interest on the Mortgage Note will be payable upon final maturity of theMortgage Note.   Generally no prepayment of the Mortgage Note may be made until 150 daysafter the project is completed.

 

TheMortgage Note is secured by a lien pursuant to a deed of trust on the St. RoseProject that is subordinate to the lien granted to the senior lender.  The Mortgage Note is also supported by aguarantee from affiliates of the commercial developer that have guaranteed (i) constructionand completion of the St. Rose Project if, for any reason, the Project Entityabandons the project or fails to complete the project on the agreed scheduleand (ii) the payment of any costs that exceed the approved budget forconstruction of the project (provided, however, that the following expenseswill not be calculated as “cost overruns” to be repaid by the guarantors:operating deficits, taxes and solely to the extent increased by “acts of God,”construction interest). They have also guaranteed full and prompt payment ofthe Mortgage Borrower’s obligations in connection with the Mortgage Note in theevent that the Mortgage Borrower files a voluntary bankruptcy or insolvencyproceeding prior to the completion of the project.

 

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InJuly 2007, St. Rose REIT had entered into a separate mortgage loancommitment for $11,356,000 also related to the St. Rose Project but with anaffiliate of the Mortgage Borrower. This mortgage loan had an annual interestrate of 10.75% with a final maturity date of December 2012. As of December 31,2007, $4,691,000 had been advanced under this commitment.  In December 2008, this mortgage loan wascancelled and restructured as the Mortgage Note. The statement of cash flowsfor the year ended December 31, 2008 presents this restructuring on a netbasis in advances of mortgage note receivable.

 

OnDecember 31, 2008, St. Rose REIT funded an equity investment in thePartnership Entity in the amount of $5,172,000 in return for a 50% limitedpartnership interest. The equity investment was made in the form of a capitalcontribution to the Partnership Entity, which contribution constitutes 75.1% ofthe initial capital contributed to the partnership. Pursuant to the provisionsof the partnership agreement, St. Rose REIT’s pro-rata share of any additionalcontributions required by the partnership is 50% of such additional capital andthat of the other partner, which is the general partner and an affiliate of thedeveloper, is 50%.  Pursuant to theprovisions of the partnership agreement, distributions are made generally toreturn capital contributions to the partners with preferred returns and to paycertain deferred fees to the developer. Thereafter, distributions are paid 40% to the general partner and 60% tothe limited partner (St. Rose REIT).

 

Theland and certain of the construction in progress for the Partnership Entitywere purchased from an affiliate of its general partner for approximately $18.3million.  The purchase was paid in cashand funded from the proceeds of the Mortgage Note and cash contributions to thePartnership Entity. Accordingly, the assets have been recorded based on thecash consideration paid.

 

Summarizedfinancial information for the investment in unconsolidated real estate jointventure is as follows:

 

 

| ** **                                       | ** ** | **December 31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Balance sheet data:**                          | ** ** | ** **                  | ** ** | ** **                  | ** ** |
|                                             |       |                        |       |                        |       |
| Cash                                             |       | $                           | —     |                        | $          | — |   |
| Land  and construction in progress               |       | 22,734,775                  |       | —                      |       |
| Other  assets                                    |       | —                      |       | —                      |       |
| **Total assets**                                 |       | $                           | 22,734,775 |                        | $          | — |   |
|                                             |       |                        |       |                        |       |
| Construction  loan                               |       | $                           | 1,000      |                        | $          | — |   |
| Notes payable to St. Rose REIT                   |       | 14,718,320                  |       | —                      |       |
| Accounts  payable, accrued interest and other    |       | 1,130,608                   |       |                        |       |
| Partners’ capital                           |       | 6,884,847                   |       | —                      |       |
| **Total liabilities and partners’ capital** |       | $                           | 22,734,775 |                        | $          | — |   |

 

 

 

TheSt. Rose Project is currently under development and had insignificant netincome (loss) for the period ended December 31, 2007 and the year ended December 31,2008.

 

ThePartnership Entity and its subsidiaries were formed to purchase, finance, anddevelop one real estate project; they are not consolidated into our financialstatements. Our involvement with the Partnership Entity began at the time wecommitted to the Mortgage Note and equity investment and our potential lossexposure is limited to the funded portion of our limited partnership interestand Mortgage Note commitments. The Partnership Entity, also owe amounts toother parties, including senior construction lenders. Neither we nor St. RoseREIT I have a primary or secondary obligation with respect to such obligations.

 

**7.****                                     ****Commitments and Contingencies**

 

TheSt. Rose Project is currently under development and is estimated to becompleted in the second calendar quarter of 2011.

 

*Landfor the Project*. The Project Entity owns approximately 24 acres ofland in the City of Henderson, Clark County, Nevada, a portion of which isintended to be used for commercial development (the “Commercial Tract”) and aportion of which is intended to be used for the St. Rose Project (the “ResidentialTract”).  The Project Entity holds theCommercial Tract in trust for an 

 

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affiliateof the commercial developer (“SW 122”). The entire land parcel is encumbered bya mortgage securing a $2,950,000 loan made to SW 122 by Bank of America, N.A.(the “SW 122 Loan”). Similarly, the Project Entity has granted a lien againstthe land as security for an approximately $38,600,000 construction loan to theProject Entity from Bank of America, N.A. (“St. Rose Senior Lender”).  The parties intend for a subdivision plat tobe recorded that will legally separate the land into the Commercial Tract andResidential Tract.  At such time, (i) theProject Entity will convey the Commercial Tract to SW 122, (ii) St. RoseSenior Lender will release its lien against the Commercial Tract as securityfor the construction loan for the St. Rose Project and its lien against theResidential Tract for the SW 122 Loan and (iii) St. Rose REIT will, asmortgage lender to the Project Entity, release its lien against the CommercialTract.  SW 122 is responsible for allcosts related to ownership of the Commercial Tract.  If the Commercial Tract and Residential Tractare not legally subdivided by March 31, 2009, the general partner of thePartnership Entity (which is in affiliate of the commercial developer) willcause SW 122 to repay its $2,950,000 loan from St. Rose Senior Lender.

 

*DeveloperPartner’s contingent sell option*. The partners owned by thedevelopers (the “Developer Partners”) have a right, commencing on the date ofcompletion of the St. Rose Project and continuing until the second anniversaryof the completion of the St. Rose Project, to initiate a procedure to ascertainthe fair market value of the St. Rose Project and, thus, to ascertain the valueof the partnership interests of the Development Partners in the PartnershipEntity. If such value is not mutually agreed upon by St. Rose REIT and theDevelopment Partners, then such value would equal the distributions that theDevelopment Partners  would receive ifthe St. Rose Project were sold at its fair market value, which would bedetermined by a bid process, or if qualified bids are not received or theDeveloper Partner elects to forego the qualified bid process, then by anarbitration process.  Once such value isagreed upon or determined, St. Rose REIT has an option to purchase theDeveloper Partners’ interest at that price or to request that the DeveloperPartners cause the Project Entity to sell the St. Rose Project (or cause thePartnership Entity to sell its interests in the Mortgage Borrower and theProject Entity) for a price that is not less than the determined fair marketvalue. If the Developer Partners are unable to consummate such a sale, then theDeveloper Partners and St. Rose REIT may each initiate buy/sell proceduresdescribed below.

 

*St.Rose REIT’s Call Right.* If the Developer Partners do not initiatetheir pricing procedures and  putright  as described above, then St. RoseREIT has a right, commencing on the first day after the second anniversary ofthe date of completion and continuing until the third anniversary of thecompletion of the St. Rose Project, to initiate a procedure to ascertain thefair market value of the St. Rose Project and, thus, to ascertain the value ofthe partnership interests of all of then-current partners in the PartnershipEntity. If such value is not mutually agreed upon by St. Rose REIT and theother partners, then such value would equal the collective distributions thatthe other partners would receive if the St. Rose Project were sold at its fairmarket value, which would be determined by a bid process, or if qualified bidsare not received or the Developer Partner elects to forego the qualified bidprocess, then by an arbitration process. Once such value is agreed upon or determined,St. Rose REIT has an option to purchase the Developer Partner’s interest atthat price or to request that the Developer Partner cause the Project Entity tosell the St. Rose Project (or cause the Partnership Entity to sell itsinterests in the Mortgage Borrower and the Project Entity) for a price that isnot less than the determined fair market value. If the Developer Partner isunable to consummate such a sale, then the Developer Partner and St. Rose REITmay each initiate buy/sell procedures described below.

 

*Buy/SellRights.*Under the limited circumstances described above orif, after the third anniversary of the date of completion neither party hasinitiated the pricing procedures described above, then either partner in thePartnership Entity may initiate buy/sell procedures with respect to theirpartnership interests. Under those procedures, a partner could make an offer topurchase the interests of the other partner based on an offer price for thepartnership’s assets and the other partner would either elect to sell itsinterest based on that price or elect to purchase the offering partner’spartnership interests based on that price.

 

**8.****                                     ****Subsequent Events**

 

TheCommercial Tract and Residential Tract were legally subdivided in March 2009and the Project Entity conveyed the Commercial Tract to SW 122.  The St. Rose Senior Lender released its lienon the Commercial Tract as security for the Construction Loan and its lien onthe Residential Tract for the SW 122 Loan, and the Project Entity released itstitle to the Commercial Tract in March 2009.

 

*****

 

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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.

 
| Dated:     March 31,  2009 | By:    | /s/ Robert S. Aisner         |
|----------------------------------------------------------|--------|------------------------------|
|                                                     |   | Robert S. Aisner             |
|                                                     |   | Chief Executive Officer  and |
|                                                     |   | Director                     |

 

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

 
| March 31, 2009 | /s/ Robert S. Aisner                                            |
|---------------------|-----------------------------------------------------------------|
|                | Robert S. Aisner                                                |
|                | Chief Executive Officer  and                                    |
|                | Director                                                        |
|                | (Principal Executive  Officer)                                  |
|                |                                                            |
| March 31, 2009 | /s/ Gary S. Bresky                                              |
|                | Gary S. Bresky                                                  |
|                | Chief Financial Officer                                         |
|                | (Principal Financial  Officer and Principal Accounting Officer) |
|                |                                                            |
| March 31, 2009 | /s/ Robert J. Chapman                                           |
|                | Robert J. Chapman                                               |
|                | President                                                       |
|                |                                                            |
| March 31, 2009 | /s/ Robert M. Behringer                                         |
|                | Robert M. Behringer                                             |
|                | Chairman of the Board                                           |
|                |                                                            |
| March 31, 2009 | /s/ E. Alan Patton                                              |
|                | E. Alan Patton                                                  |
|                | Director                                                        |
|                |                                                            |
| March 31, 2009 | /s/ Roger D. Bowler                                             |
|                | Roger D. Bowler                                                 |
|                | Director                                                        |
|                |                                                            |
| March 31, 2009 | /s/ Sami S. Abbasi                                              |
|                | Sami S. Abbasi                                                  |
|                | Director                                                        |
|                |                                                            |
| March 31, 2009 | /s/ Jonathan L. Kempner                                         |
|                | Jonathan L. Kempner                                             |
|                | Director                                                        |

 

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