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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-K**

 

******Annual Report Pursuant to Section 13or 15(d) of the**

**Securities Exchange Act of 1934**

 

**For the fiscal year ended December 31, 2008**

 

**Commission File Number: 333-140887**

 

**Behringer Harvard Opportunity REIT II, Inc.**

(Exact name of registrant as specified in its charter)

 

| **Maryland**                                                   | ** ** | **20-8198863**                       |
|----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                           |       |                                 |
| **15601 Dallas Parkway, Suite 600, Addison, Texas**       | ** ** | **75001**                            |
| (Address of principal executive offices)                       |       | (Zip Code)                           |

 

**(866) 655-3600**

(Registrant’s telephone number, including areacode)

 

Securities registered pursuant to section 12(b) of the Act:

**None**

 

Securities registered pursuant to section 12(g) of the Act:

**None**

(Title of class)

 

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

 

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

 

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

 

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

 

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

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

 

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

 

Whilethere is no established market for the registrant’s shares of commonstock,  the aggregate market value of theRegistrant’s common stock held by non-affiliates of the Registrant as of June 30,2008 (the last business day of the Registrant’s most recently completed secondfiscal quarter) was approximately $21.4 million assuming a market value of$10.00 per share.

 

Asof March 11, 2009, the registrant had 8,297,353 shares of common stockoutstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Theregistrant incorporates by reference portions of its Definitive Proxy Statementfor the 2009 Annual Meeting of Stockholders, which is expected to be filed nolater than April 30, 2009, into Part III of this Form 10-K tothe extent stated herein. 

 

 

 

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**BEHRINGER HARVARD OPPORTUNITY REITII, INC.**

**FORM 10-K**

**Year Ended December 31, 2008**

 
| ** **      | ** ** | ** **                                                                                                              | ** ** | **Page**   |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|------------|
|            |       |                                                                                                                    |       |       |
|            |       | **PART I**                                                                                                         |       |       |
|            |       |                                                                                                                    |       |       |
| **Item 1.**     | ** ** | **Business**                                                                                                            | ** ** | **3**      |
|            |       |                                                                                                                    |       |       |
| **Item 1A.**    | ** ** | **Risk Factors**                                                                                                        | ** ** | **7**      |
|            |       |                                                                                                                    |       |       |
| **Item 1B.**    | ** ** | **Unresolved Staff Comments**                                                                                           | ** ** | **45**     |
|            |       |                                                                                                                    |       |       |
| **Item  2.**    | ** ** | **Properties**                                                                                                          | ** ** | **46**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item 3.**     | ** ** | **Legal Proceedings**                                                                                                   | ** ** | **47**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item 4.**     | ** ** | **Submission  of Matters to a Vote of Security Holders**                                                                | ** ** | **47**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
|            |       | **PART II**                                                                                                        |       |       |
|            |       |                                                                                                                    |       |       |
| **Item 5.**     | ** ** | **Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities** |       | **48**     |
|            |       |                                                                                                                    |       |       |
| **Item 6.**     | ** ** | **Selected  Financial Data**                                                                                            | ** ** | **52**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item 7.**     | ** ** | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                         |       | **53**     |
|            |       |                                                                                                                    |       |       |
| **Item 7A.**    | ** ** | **Quantitative  and Qualitative Disclosures about Market Risk**                                                         | ** ** | **64**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item 8.**     | ** ** | **Financial  Statements and Supplementary Data**                                                                        | ** ** | **64**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item 9.**     | ** ** | **Changes in  and Disagreements With Accountants on Accounting and Financial Disclosure**                               |       | **64**     |
|            |       |                                                                                                                    |       |       |
| **Item 9A(T).** | ** ** | **Controls and  Procedures**                                                                                            | ** ** | **64**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item 9B.**    | ** ** | **Other  Information**                                                                                                  | ** ** | **65**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
|            |       | **PART III**                                                                                                       |       |       |
|            |       |                                                                                                                    |       |       |
| **Item 10.**    | ** ** | **Directors,  Executive Officers and Corporate Governance**                                                             | ** ** | **66**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item 11.**    | ** ** | **Executive  Compensation**                                                                                             | ** ** | **66**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item 12.**    | ** ** | **Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters**                    | ** ** | **66**     |
|            |       |                                                                                                                    |       |       |
| **Item 13.**    | ** ** | **Certain  Relationships and Related Transactions, and Director Independence**                                          | ** ** | **66**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item 14.**    | ** ** | **Principal  Accounting Fees and Services**                                                                             | ** ** | **66**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| ** **      | ** ** | **PART IV**                                                                                                        | ** ** | ** ** |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Item 15.**    | ** ** | **Exhibits,  Financial Statement Schedules**                                                                            | ** ** | **67**     |
| ** **      | ** ** | ** **                                                                                                              | ** ** | ** ** |
| **Signatures**  | ** ** |                                                                                                                    |       | **68**     |

 

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**Forward-Looking Statements**

 

Thisannual report contains forward-looking statements, including discussion andanalysis of the financial condition of Behringer Harvard Opportunity REIT II, Inc.and our subsidiaries (which may be referred to herein as the “Company,” “we,” “us”or “our”), our anticipated capital expenditures required to complete projects,amounts of anticipated cash distributions to our stockholders in the future,and other matters.  These forward-lookingstatements are not historical facts but are the intent, belief, or currentexpectations of our management based on their knowledge and understanding ofthe business and industry.  Words such as“may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”“would,” “could,” “should” and variations of these words and similarexpressions are intended to identify forward-looking statements.  These statements are not guarantees of futureperformance and are subject to risks, uncertainties, and other factors, some ofwhich are beyond our control, are difficult to predict and could cause actualresults to differ materially from those expressed or forecasted in theforward-looking statements.

 

Forward-lookingstatements that were true at the time made may ultimately prove to be incorrector false.  We caution investors not toplace undue reliance on forward-looking statements, which reflect ourmanagement’s view only as of the date of this Annual Report on Form 10-K.  We undertake no obligation to update orrevise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events or changes to future operating results.  The forward-looking statements should be readin light of the risk factors identified in the Item 1A. “Risk Factors” sectionof 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, theserepresentations, warranties, or covenants should not be relied upon asaccurately describing or reflecting the current state of our affairs.

 

**PART I**

 

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

 

**Organization**

 

BehringerHarvard Opportunity REIT II, Inc. was organized as a Maryland corporationon January 9, 2007 and intends to qualify as a real estate investmenttrust (“REIT”) for federal income tax purposes effective for our taxable yearended December 31, 2008.  We acquireand operate commercial real estate and real estate-related assets.  In particular, we focus generally onacquiring commercial properties with significant possibilities for short-termcapital appreciation, such as those requiring development, redevelopment, orrepositioning, those located in markets and submarkets with high growth potential,and those available from sellers who are distressed or face time-sensitivedeadlines.  We may acquire a wide varietyof commercial properties, including office, industrial, retail, hospitality,recreation and leisure, single-tenant, multifamily, and other realproperties.  These properties may beexisting, income-producing properties, newly constructed properties, orproperties under development or construction and may include multifamilyproperties purchased for conversion into condominiums and single-tenantproperties that may be converted for multifamily use.  Further, 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 mayoriginate or invest in collateralized mortgage-backed securities, mortgage,bridge or mezzanine loans, and Section 1031 tenant-in-common interests(including those issued by affiliates of our advisor), or in entities that makeinvestments similar to the foregoing.  Weexpect to make our investments in or in respect of real estate assets locatedin the United States and other countries based on our view of existing marketconditions.  We completed our firstproperty acquisition on October 28, 2008 and as of December 31, 2008,it is our only real estate acquisition.

 

Substantially all of our business is conducted through BehringerHarvard Opportunity OP II LP, a limited partnership organized in Delaware on January 12,2007 (“Behringer Harvard Opportunity OP II”). As of December 31, 2008, our wholly-owned subsidiary, BHO II, Inc.,a Delaware corporation, was the sole general partner of Behringer HarvardOpportunity OP II and owned a 0.1% partnership interest in Behringer HarvardOpportunity OP II.  As of December 31,2008, our wholly-owned subsidiary, BHO Business Trust II, a Maryland businesstrust, was the sole limited partner of Behringer Harvard Opportunity OP II.

 

Weare externally managed and advised by Behringer Harvard Opportunity Advisors IILP (“Behringer Opportunity Advisors II”), a Texas limited partnership formed inJanuary 2007.  Behringer OpportunityAdvisors II is our affiliate

 

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responsible for managing our affairs on aday-to-day basis and for identifying and making acquisitions and investments onour behalf.

 

Ouroffice is located at 15601 Dallas Parkway, Suite 600, Addison, Texas  75001, and our toll-free telephone number is(866) 655-3600.  The name BehringerHarvard is the property of Behringer Harvard Holdings, LLC (“Behringer HarvardHoldings”), an affiliate of our advisor, and is used by permission.

 

**PublicOffering of Common Stock; Use of Proceeds**

 

On February 26,2007, we filed a Registration Statement on Form S-11 with the Securitiesand Exchange Commission (the “SEC”) to offer up to 125,000,000 shares of commonstock for sale to the public (the “Offering”), of which 25,000,000 shares arebeing offered pursuant to our distribution reinvestment plan (the “DRIP”).  We reserve the right to reallocate the shareswe are offering between our primary offering and the DRIP.  The SEC declared our Registration Statementeffective on January 4, 2008, and we commenced our ongoing initial publicoffering on January 21, 2008.

 

Inconnection with our initial capitalization, on January 19, 2007, we issued22,471 shares of our common stock and 1,000 shares of our convertible stock toBehringer Harvard Holdings.  As of December 31, 2008, we had7,323,180 shares of common stock outstanding, which includes the 22,471 sharesissued to Behringer Harvard Holdings.  Asof December 31, 2008, we had 1,000 shares of convertible stock issued andoutstanding to Behringer Harvard Holdings.

 

Wecommenced operations on April 1, 2008 upon satisfaction of the conditionsof our escrow agreement in all states except Pennsylvania and our acceptance ofinitial subscriptions of common stock. On September 19, 2008, we satisfied the escrow conditions forPennsylvania.  Upon admission of newstockholders, subscription proceeds are used for payment of dealer manager feesand selling commissions and may be utilized as consideration for investmentsand the payment or reimbursement of offering expenses and operatingexpenses.  Until required for suchpurposes, net offering proceeds are held in short-term, liquidinvestments.  We use the net proceedsfrom the Offering primarily to acquire real estate and real estate-relatedassets consistent with our opportunistic investment strategy.  As of December 31, 2008, we had issued7,325,211 shares of our common stock, including 22,471 shares owned byBehringer Harvard Holdings, and 54,416 shares through the DRIP.  As of December 31, 2008, we had redeemed2,031 shares of our common stock and had 7,323,180 shares of our common stockoutstanding.

 

Ourcommon stock is not currently listed on a national securities exchange.  Depending upon the prevailing market conditions,it is our intention to consider beginning the process of liquidating our assetsand distributing the net proceeds to our stockholders within three to six yearsafter the termination of our primary offering. If we do not begin an orderly liquidation within that period, we mayseek to have our shares listed on a national securities exchange.

 

**2008Highlights**

 

During 2008, we completedthe following key transactions:

 

·                 we issued approximately 7.3 million shares ofour common stock (inclusive of distribution reinvestments and without regard toredemptions), resulting in gross proceeds to us of $72.8 million; and

 

·                 we acquired our first real estate asset, a15-story, multi-tenant office building located in Denver, Colorado for acontract purchase price of $34.5 million.

 

**Investment Objectives**

 

Ourprimary investment objectives are:

 

·                  torealize growth in the value of our investments within three to six years of thetermination of the Offering;

 

·                  topreserve, protect and return our investors’ capital contribution;

 

·                  togrow net cash from operations such that more cash is available fordistributions to investors; and

 

·                  toenable our investors to realize a return of their investment by beginning theprocess of liquidating and distributing cash to investors or by listing ourshares for trading on a national securities exchange within three to six yearsafter termination of the Offering.

 

****Acquisitionand Investment Policies****

 

We seek to acquire andoperate real estate and real estate-related assets on an opportunisticbasis.  We may acquire a wide variety ofcommercial properties, including office, industrial, retail, hospitality,recreation and leisure, single-tenant, and multifamily properties, as well asproperty for development or redevelopment. We may also invest in real estate-related assets such as collateralizedmortgage-backed securities, mortgage, bridge or mezzanine loans, Section 1031tenant-in-common

 

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interests, and real estate-related securities.  In each case, we will target assets that havebeen identified as opportunistic investments with significant possibilities forshort-term capital appreciation.  Theseassets will be identified as such because of their property-specificcharacteristics or their market characteristics.  For instance, properties that may benefitfrom unique repositioning opportunities, for development or redevelopment, orthat are located in markets with high growth potential or that are availablefrom distressed sellers may present appropriate investments for us.  ****In addition, current economic circumstances present opportunities toinvest in loans secured by or related to real estate at more attractive ratesof current return than have been available for some time.  Such loan investments may also have capitalgain characteristics, whether as a result of a discount purchase or relatedequity participations. ****Becauseour intended approach to acquiring and operating real estate-related assetsinvolves more risk than comparable real estate programs that have a targetedholding period for investments longer than ours, utilize leverage to a lesserdegree, or employ more conservative investment strategies, we believe that wehave a potential for a higher rate of return than comparable real estateprograms.

**** ****

Weintend to hold our assets for a period of three to six years from thetermination of the Offering.  We believethat holding our assets for this period will enable us to capitalize on thepotential for increased income and capital appreciation of such assets while alsoproviding for a level of liquidity consistent with our investment strategy andfund life.  Though we will evaluate eachof our assets for capital appreciation generally within a targeted holdingperiod of three to six years from the termination of the Offering, we mayconsider investing in properties and other assets with a different holdingperiod in the event such investments provide an opportunity for an attractivereturn in a period that is consistent with the life of this fund.   Further, economic or market conditions mayinfluence us to hold our investments for different periods of time.

 

We typically make our realestate investments in fee title or a long-term leasehold estate throughBehringer Harvard Opportunity OP II or indirectly through limited liabilitycompanies or through investments in joint ventures, partnerships, co-tenancies,or other co-ownership arrangements with the developers of the properties,affiliates of Behringer Opportunity Advisors II, or other persons.

 

****BorrowingPolicies****

 

Thereis no limitation on the amount we may invest in any single property or otherasset or on the amount we can borrow for the purchase of any individualproperty or other investment.  Under ourcharter, the maximum amount of our indebtedness cannot exceed 300% of our “netassets” (as defined by the Statement of Policy Regarding Real Estate InvestmentTrusts adopted by the North American Securities Administrators Association on May 7,2007 (the “NASAA REIT Guidelines”)) as of the date of any borrowing; however,we may exceed that limit if approved by a majority of our independentdirectors.  In addition to our charterlimitation, our board of directors has adopted a policy to generally limit ouraggregate borrowings to approximately 75% of the aggregate value of our assetsunless substantial justification exists that borrowing a greater amount is inour best interests.  Our policylimitation, however, does not apply to individual real estate assets and onlywill apply once we have ceased raising capital under the Offering or anysubsequent offering and invested substantially all of our capital.  As a result, we expect to borrow more than75% of the contract purchase price of each real estate asset we acquire to theextent our board of directors determines that borrowing these amounts isprudent.  Our board of directors mustreview our aggregate borrowings at least quarterly.  As of December 31, 2008, we had anaggregate debt leverage ratio of 22% of the aggregate value of our assets.

 

**Distribution Policy**

 

In order to qualify as aREIT, we are required to distribute at least 90% of our annual REIT taxableincome to our stockholders. Until we generate sufficient cash flow fromoperations or funds from operations (“FFO”) to fully fund the payment ofdistributions, some or all of our distributions will be paid from othersources. As of December 31, 2008, our distributions were partially fundedfrom operating cash flow and the remainder from other financing activities,such as our offering proceeds. In addition, to the extent our investments arein development or redevelopment projects or in properties that have significantcapital requirements, our ability to make distributions may be negativelyimpacted, especially during our early periods of operation. As developmentprojects are completed and begin to generate income, we expect to haveadditional funds available to distribute to you. We cannot assure as to when wewill begin to generate sufficient cash flow solely from operations to makedistributions.

 

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Distributions have and willcontinue to be authorized at the discretion of our board of directors, based onits analysis of our earnings, cash flow, anticipated cash flow, capitalexpenditure requirements, general financial condition, or other factors thatour board of directors deem relevant. 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 or rents atvarious times during our fiscal year, distributions may not reflect our incomeearned in that particular distribution period but may be paid in anticipationof cash flow that we expect to receive during a later period or of receivingfunds in an attempt to make distributions relatively 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 paidbased on daily record and distribution declaration dates so our investors willbe entitled to be paid distributions beginning on the day they purchase shares.

 

Many of the factors that canaffect the availability and timing of cash distributions to stockholders arebeyond our control, and a change in any one factor could adversely affect ourability to pay future distributions. There can be no assurance that future cashflow will support paying our currently established distributions or maintainingdistributions at any particular level or at all. Since we began operations, ourboard of directors has declared distributions as summarized below:

 
| **Period**         | ** ** | **Approximate Amount**

**(Rounded)** | ** ** | **Annualized Percentage Return  Assuming $10.00 Per Share**

**Purchase Price (1)** | ** ** |
|--------------------|------------|--------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
|               |       |                                       |       |                                                                                                                   |       |
| 1st Qtr. 2009 |       | $0.0756148 per share                       |       | 3%                                                                                                                     |       |
|               |       |                                       |       |                                                                                                                   |       |
| 4th Qtr. 2008 |       | $0.0756148 per share                       |       | 3%                                                                                                                     |       |
|               |       |                                       |       |                                                                                                                   |       |
| 3rd Qtr. 2008 |       | $0.0756148 per share                       |       | 3%                                                                                                                     |       |
|               |       |                                       |       |                                                                                                                   |       |
| 2nd Qtr. 2008 |       | $0.0501359 per share                       |       | 3%                                                                                                                     |       |

 

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(1) The average weighted share price may be lowerthan $10.00 per share, and the individual percentage return may be greater thanthe stated percentage, as a result of shares purchased through our distributionreinvestment plan at $9.50 per share and shares issued at discounted purchaseprices, such as volume discounts, pursuant to the terms of the Offering.

 

**Competition**

 

Weare subject to significant competition in seeking real estate investments andtenants.  We compete with many thirdparties engaged in real estate investment activities, including other REITs,specialty finance companies, savings and loan associations, banks, mortgagebankers, insurance companies, mutual funds, institutional investors, investmentbanking firms, lenders, hedge funds, governmental bodies, and other entities.  We also face competition from other realestate investment programs, including other Behringer Harvard programs, forinvestments that may be suitable for us. Many of our competitors have substantially greater financial and otherresources than we have and may have substantially more operating experiencethan either us or Behringer Opportunity Advisors II.  They also may enjoy significant competitiveadvantages that result from, among other things, a lower cost of capital.

 

**Regulations**

 

Ourinvestments are subject to various federal, state, and local laws, ordinances,and regulations (including those of foreign jurisdictions), including, amongother things, zoning regulations, land use controls, environmental controlsrelating to air and water quality, noise pollution, and indirect environmentalimpacts such as increased motor vehicle activity.  We believe that we have all permits andapprovals necessary under current law to operate our investments.

 

**Environmental**

 

As anowner of real estate, we are subject to various environmental laws of federal,state, and local governments.  Compliancewith existing laws has not had a material adverse effect on our financialcondition or results of operations, and management does not believe it willhave such an impact in the future. However, we cannot predict the impact of unforeseen environmentalcontingencies or new or changed laws or regulations on properties in which wehold an interest, or on properties that may be acquired directly or indirectlyin the future.

 

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**SignificantTenants**

 

As of December 31,2008, one of our tenants accounted for 10% or more of our aggregate annual revenuesfrom our consolidated property.  PolicyStudies, Inc., accounted for rental revenue of $130,000, or approximately14%, of our aggregate revenues for the year ended December 31, 2008.

 

**Employees**

 

Wehave no employees.  Behringer OpportunityAdvisors II and other affiliates of Behringer Harvard Holdings perform a fullrange of real estate services for us, including acquisitions, propertymanagement, accounting, legal, asset management, wholesale brokerage, andinvestor relations services.

 

Weare dependent on affiliates of Behringer Harvard Holdings for services that areessential to us, including the sale of shares of our common stock, assetacquisition decisions, property management, and other general administrativeresponsibilities.  In the event thatthese companies were unable to provide these services to us, we would berequired to provide such services ourselves or obtain such services from othersources.

 

**Financial Information About Industry Segments**

 

Ourcurrent business consists of owning, managing, operating, leasing, acquiring,developing, investing in, and disposing of real estate assets.  We internally evaluate all of our real estateassets as one industry segment, and, accordingly, we do not report segmentinformation.

 

**Available Information**

 

Weelectronically file annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K and any amendments to those reports with theSEC.  We also have filed with the SECregistration statements in connection with the Offering.  Copies of our filings with the SEC may beobtained from our website at www.behringerharvard.com or at the SEC’s websiteat www.sec.gov.  Access to these filingsis free of charge.  We are notincorporating our website or any information from the website into this AnnualReport on Form 10-K.

 

**Item 1A.****                                                 ****Risk Factors.**

 

****The factors described below represent the principalrisks of an investment in our shares in our ongoing public offering.  Other factors may exist that we do notconsider to be significant based on information that is currently available orthat we are not currently able to anticipate. Our stockholders or potential investors may be referred to as “you” or “your”in this Item 1A, “Risk Factors” section.****

 

## ***Risks Related to an Investment inBehringer Harvard Opportunity REIT II***

## *** ***

### ***There is no public trading marketfor your shares; therefore, it will be difficult for you to sell yourshares.  If you are able to sell yourshares, you may have to sell them at a substantial discount from the publicoffering price.***

### ** **

There is no public marketfor the shares.  In addition, the priceyou receive for the sale of any shares of our common stock is likely to be lessthan the proportionate value of our investments.  Therefore, you should purchase the sharesonly as a long-term investment.  Theminimum purchase requirements and suitability standards imposed on prospectiveinvestors in the Offering also apply to subsequent purchasers of ourshares.  If you are able to find a buyerfor your shares, you may not sell your shares to such buyer unless the buyermeets the suitability standards applicable to him, which may inhibit yourability to sell your shares.  Our boardof directors may reject any request for redemption of shares or amend, suspendor terminate our share redemption program at any time.  Therefore, it will be difficult for you tosell your shares promptly or at all.  Youmay not be able to sell your shares in the event of an emergency, and, if youare able to sell your shares, you may have to sell them at a substantialdiscount from the public offering price. It is also likely that your shares would not be accepted as the primarycollateral for a loan.

 

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

### ** **

Our ability to achieve ourinvestment 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 in the selection of tenants and thenegotiation of leases.  The currentmarket for properties that meet our investment objectives is highlycompetitive, as is the leasing market for such properties.  The more shares we sell in the Offering, thegreater our challenge will be to invest all of the net offering proceeds onattractive terms.  Except for theinvestments described in this Annual Report on Form 10-K, you will have noopportunity to evaluate the terms of transactions or other economic orfinancial data concerning our investments. You must rely entirely on the oversight of our board of directors, themanagement ability of our advisor and the performance of the propertymanager.  We cannot be sure that our advisorwill be successful in obtaining suitable investments on financially attractiveterms.

 

We could suffer from delaysin locating suitable investments as a result of our reliance on our advisor attimes when management of our advisor is simultaneously seeking to locatesuitable investments for other Behringer Harvard-sponsored programs, some ofwhich have investment objectives and employ investment strategies that aresimilar to ours.  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.

 

Additionally, as a publiccompany, we are subject to the ongoing reporting requirements under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”).  Pursuant to the Exchange Act, we may berequired to file with the SEC financial statements of properties we acquire or,in certain cases, financial statements of the tenants of the acquiredproperties.  To the extent any requiredfinancial statements are not available or cannot be obtained, we will not beable to acquire the property.  As aresult, we may not be able to acquire certain properties that otherwise wouldbe a suitable investment.  We couldsuffer delays in our property acquisitions due to these reporting requirements.

 

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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 delays in the receipt of distributionsattributable to those particular properties.

 

Delays we encounter in theselection, acquisition and development of properties could adversely affectyour returns.  In addition, if we areunable to invest our offering proceeds in real properties in a timely manner,we will hold the proceeds of the Offering in an interest-bearing account,invest the proceeds in short-term, investment-grade investments or, ultimately,liquidate.  In such an event, our abilityto pay distributions to our stockholders and the returns to our stockholderswould be adversely affected.

 

### ***Investors who invest in us at thebeginning of the Offering may realize a lower rate of return than laterinvestors.***

### ** **

Because we have acquiredonly one property and not identified any other investments as of the date ofthis Annual Report on Form 10-K, there can be no assurances as to when wewill begin to generate sufficient cash flow to fully fund the payment ofdistributions.  As a result, investorswho invest in us before we commence significant real estate operations andgenerate significant cash flow may realize a lower rate of return than later investors.  We expect to have little cash flow fromoperations available for distribution until we make substantial investments. Inaddition, to the extent our investments are in development or redevelopmentprojects or in properties that have significant capital requirements, ourability to make distributions may be negatively impacted, especially during ourearly periods of operation. Therefore, until such time as we have sufficientcash flow from operations to fund fully the payment of distributions therefrom,some or all of our distributions will be paid from other sources, such as fromthe proceeds of the Offering or future offerings, cash advances to us by ouradvisor, cash resulting from a waiver of asset management fees, and borrowings,including borrowings secured by our assets, in anticipation of future operatingcash flow.

 

### ***Investors who invest later in theOffering may realize a lower rate of return than investors who invest earlierin the Offering to the extent we fund distributions out of sources other thanoperating cash flow.***

### ** **

To the extent we incur debtto fund distributions earlier in the Offering, the amount of cash available fordistributions in future periods will be decreased by the repayment of suchdebt.  Similarly, if we use offering proceedsto fund distributions, later investors may experience immediate dilution intheir investment because a portion of our net assets would have been used tofund distributions instead of retained in our company and used to make realestate investments.   Earlier investorswill benefit from the investments made with funds raised later in the Offering,while later investors may not share in all of the net offering proceeds raisedfrom earlier investors.

 

### ***We may have to make decisions onwhether to invest in certain properties, without detailed information on theproperty.***

### ** **

To effectively compete forthe acquisition of properties and other investments, our advisor and board ofdirectors may be required to make decisions or post substantial non-refundabledeposits prior to the completion of our analysis and due diligence on propertyacquisitions.  In such cases, theinformation available to our advisor and board of directors at the time ofmaking any particular investment decision, including the decision to pay anynon-refundable deposit and the decision to consummate any particularacquisition, may be limited, and our advisor and board of directors may nothave access to detailed information regarding any particular investmentproperty, such as physical characteristics, environmental matters, zoningregulations or other local conditions affecting the 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.  Inaddition, our advisor and board of directors expect to rely upon independentconsultants in connection with their evaluation of proposed investmentproperties, and no assurance can be given as to the accuracy or completeness ofthe information provided by such independent consultants.

 

### ***This is a blind pool offering, soyou will not have the opportunity to evaluate our investments before we makethem.***

### ** **

Because we have acquiredonly one property and not yet identified any other investments for which toapply proceeds from the Offering as of the date of this Annual Report on Form 10-K,we are not able to provide you with information to evaluate our investmentsprior to acquisition.  We will seek toinvest substantially all of our offering proceeds available for investment,after the payment of fees and expenses, in the acquisition of real estate andreal estate-related assets.  We haveestablished policies relating to the creditworthiness of tenants and managers,but our board of directors will have wide discretion in implementing thesepolicies, and you will not have the opportunity to evaluate potential tenantsor managers.  In light of our desire topurchase properties that we believe present an opportunity for enhanced futurevalue, the creditworthiness of existing tenants may not be a significant factorin determining whether to acquire the property. We anticipate that we will invest in properties that we believe may berepositioned for greater value due, in whole or in part, to the presence oftenants that do not have strong credit. In such cases, our strategy will include repositioning the property toattract new, more creditworthy tenants.

 

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### ***If we are unable to raisesubstantial funds, we will be limited in the number and type of investments wemay make, and the return on your investment in us will fluctuate with theperformance of the specific investments we make.***

### ** **

The Offering is being madeon a “best efforts” basis, meaning that our dealer manager is only required touse its best efforts to sell our shares and has no firm commitment orobligation to purchase any of the shares. As a result, we cannot assure you of the amount of proceeds that will beraised in the Offering.  If we are unable to raise substantial fundsin the Offering, we will make fewer investments resulting in lessdiversification in terms of the number of investments owned, the geographicregions in which our investments are located and the types of investments thatwe acquire.  In such event, the likelihood of our profitability beingaffected by the performance of any one of our investments will increase.  Inthe event we are not able to raise a substantial amount of offering proceeds,we will most likely make our investments through one or more joint ventureswith third parties and may only be able to make one investment.  If we are only able to make one investment,we would not achieve any diversification of our assets.  Additionally, we are not limited in thenumber or size of our investments or the percentage of net proceeds we maydedicate to a single investment.  Yourinvestment in our shares will be subject to greater risk to the extent that welack a diversified portfolio of investments. In addition, if we are unable to raise substantial funds, our fixedoperating expenses, as a percentage of gross income, would be higher, and ourfinancial condition and ability to pay distributions could be adverselyaffected.

 

### ***We and our advisor have a limitedoperating history, no established financing sources, and the prior performanceof real estate investment programs sponsored by affiliates of our advisor maynot be indicative of our future results.***

### ** **

We and our advisor have onlylimited operating histories.  You shouldnot rely upon the past performance of other real estate investment programssponsored by affiliates of our advisor to predict our future results.  We were incorporated in January 2007,commenced operations in April 2008, and, as of the date of this AnnualReport on Form 10-K, we have acquired one property.  Accordingly, the prior performance of realestate investment programs sponsored by affiliates of Mr. Behringer andour advisor may not be indicative of our future results.

 

Moreover, neither we nor ouradvisor has any established financing sources other than our offeringproceeds.  Our advisor has been and maycontinue to be funded by capital contributions from Behringer HarvardHoldings.  If our capital resources, orthose of our advisor, are insufficient to support our operations, we will notbe successful.

 

You should consider ourprospects in light of the risks, uncertainties and difficulties frequentlyencountered by companies that are, like us, in their early stage ofdevelopment.  To be successful in thismarket, we must, among other things:

 

·                  identify and acquire investments that further ourinvestment strategies;

 

·                  maintain our network of licensed securities brokersand other agents;

 

·                  attract, integrate, motivate and retain qualifiedpersonnel to manage our day-to-day operations;

 

·                  respond to competition for our targeted real estateproperties and other investments as well as for potential investors in us; and

 

·                  continue to build and expand our operations structureto support our business.

 

We cannotguarantee that we will succeed in achieving these goals, and our failure to doso could cause you to lose all or a portion of your investment.

 

### ***If we lose or are unable toobtain key personnel, our ability to implement our investment strategies couldbe delayed or hindered.***

### ** **

Our success depends to asignificant degree upon the continued contributions of our chairman, certainexecutive officers and other key personnel, of us, our advisor and itsaffiliates, including Robert M. Behringer and Robert S. Aisner, each of whomwould be difficult to replace.  We do nothave employment agreements with our chairman and executive officers, and wecannot guarantee that they will remain affiliated with us.  Although our chairman, several of ourexecutive officers and other key personnel, including Mr. Behringer and Mr. Aisner,have entered into employment agreements with affiliates of our advisor,including Harvard Property Trust, these agreements are terminable at will, andwe cannot guarantee that such persons will remain affiliated with our advisor.If any of our key personnel were to cease their affiliation with us, ouradvisor or its affiliates, our operating results could suffer. Further,although Behringer Harvard Holdings has key person insurance on the lives ofRobert M. Behringer, Gerald J. Reihsen, III, M. Jason Mattox, Robert S.Aisner and Gary S. Bresky, we do not intend to separately maintain key personlife insurance on these individuals, or any other person. We believe that ourfuture success depends, in large part, upon our advisor’s and its affiliates’ability to hire and retain highly skilled

 

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managerial, operational and marketing personnel. Competition forpersons with these skills is intense, and we cannot assure you that our advisorwill be successful in attracting and retaining such skilled personnel. Further,we have established, and intend in the future to establish, strategicrelationships with firms that have special expertise in certain services or asto assets both nationally and in certain geographic regions. Maintaining theserelationships will be important for us to effectively compete for assets. Wecannot assure you that we will be successful in attracting and retaining suchstrategic relationships. If we lose or are unable to obtain the services of keypersonnel or do not establish or maintain appropriate strategic relationships,our ability to implement our investment strategies could be delayed orhindered.

 

*If we internalize our management functions, your interest in us couldbe diluted, and we could incur other significant costs associated with beingself-managed.*

 

Our strategy may involveinternalizing our management functions. If we internalize our management functions, we may elect to negotiate toacquire our advisor’s and property manager’s assets and personnel.  Under our advisory management agreement, weare restricted from hiring or soliciting any employee of our advisor or its affiliatesfor one year from the termination of the agreement.  We are similarlyrestricted under our property management agreement with respect to theemployees of our property manager or its affiliates.  These restrictionscould make it difficult to internalize our management functions withoutacquiring 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.  Suchconsideration could take many forms, including cash payments, promissory notesand shares of our stock.  The payment ofsuch consideration could result in dilution of your interests as a stockholderand could reduce the net income per share and funds from operations per shareattributable to your investment.

 

In addition, while we wouldno longer bear the costs of the various fees and expenses we expect to pay toour advisor under the advisory management agreement, our direct expenses wouldinclude general and administrative costs, including legal, accounting, andother expenses related to corporate governance, Securities and ExchangeCommission reporting and compliance.  Wewould also incur the compensation and benefits costs of our officers and otheremployees and consultants that we now expect will be paid by our advisor or itsaffiliates.  In addition, we may issueequity awards to officers, employees and consultants, which awards woulddecrease net income and funds from operations and may further dilute yourinvestment.  We cannot reasonablyestimate the amount of fees to our advisor we would save and the costs we wouldincur if we became self-managed.  If theexpenses we assume as a result of an internalization are higher than theexpenses we avoid paying to our advisor, our net income per share and fundsfrom operations per share would be lower as a result of the internalizationthan it otherwise would have been, potentially decreasing the amount of fundsavailable to distribute to our stockholders and the value of our shares.

 

As currently organized, wewill not directly employ any employees. If we elect to internalize our operations, we would employ personnel andwould be subject to potential liabilities commonly faced by employers, such asworkers disability and compensation claims, potential labor disputes and otheremployee-related liabilities and grievances.

 

If we internalize ourmanagement functions, we could have difficulty integrating these functions as astand-alone entity.  Currently, ouradvisor and its affiliates perform property management, asset management, andgeneral and administrative functions, including accounting and financialreporting, for multiple entities.  Theyhave a great deal of know-how and can experience economies of scale.  We may fail to properly identify theappropriate mix of personnel and capital needs to operate as a stand-alone entity.  An inability to manage an internalizationtransaction effectively could thus result in our incurring excess costs and/orsuffering deficiencies in our disclosure controls and procedures or ourinternal control over financial reporting. Such deficiencies could cause us to incur additional costs, and ourmanagement’s attention could be diverted from most effectively managing ourproperties.

 

### ***If we continue to pay a portionof distributions from sources other than our cash flow from operations, we willhave less funds available for the acquisition of properties, and your overallreturn may be reduced.***

### ** **

Our organizational documents permit us to makedistributions from any source, such as from the proceeds of the Offering orother offerings, cash advances to us by our advisor, cash resulting from awaiver of asset management fees, and borrowings, including borrowings securedby our assets, in anticipation of future operating cash flow.  If we continue to fund a portion ofdistributions from financings or the net proceeds from the Offering, we willhave less funds available for acquiring properties and other investments, andyour overall return may be reduced. Further, to the extent distributions haveor continue to exceed cash flow from operations, a stockholder’s basis in ourstock will be reduced and, to the extent distributions exceed a stockholder’sbasis, the stockholder may recognize capital gain.

 

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### ***Our rights and the rights of ourstockholders to recover claims against our independent directors are limited,which could reduce your and our recovery against them if they negligently causeus to incur losses.***

### ** **

Maryland law provides that adirector has no liability in that capacity if he performs his duties in goodfaith, in a manner he reasonably believes to be in our best interests and withthe care that an ordinarily prudent person in a like position would use undersimilar circumstances. Our charter provides that no independent director shallbe liable to us or our stockholders for monetary damages and that we willgenerally indemnify them for losses unless they are grossly negligent or engagein willful misconduct. As a result, you and we may have more limited rightsagainst our independent directors than might otherwise exist under common law,which could reduce your and our recovery from these persons if they act in anegligent manner. In addition, we may be obligated to fund the defense costsincurred by our independent directors (as well as by our other directors,officers, employees and agents) in some cases, which would decrease the cashotherwise available for distributions to you.

 

### ***Your investment may be subject toadditional risks if we make international investments.***

### ** **

We expect to purchase realestate assets located outside the United States and may make or purchasemortgage, bridge, mezzanine or other loans or participations in mortgage,bridge, mezzanine or other loans made by a borrower located outside the UnitedStates or secured by property located outside the United States.  These investments may be affected by factorspeculiar to the laws of the jurisdiction in which the borrower or the propertyis located.  These laws may expose us torisks that are different from and in addition to those commonly found in theUnited States.  Foreign investments couldbe subject to the following risks:

 

·                  governmental laws, rules and policies includinglaws relating to the foreign ownership of real property or mortgages and lawsrelating to the ability of foreign persons or corporations to remove profitsearned from activities within the country to the person’s or corporation’scountry of origin;

 

·                  variations in currency exchange rates;

 

·                  adverse market conditions caused by inflation or otherchanges in national or local economic conditions;

 

·                  changes in relative interest rates;

 

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

 

·                  changes in real estate and other tax rates, the taxtreatment of transaction structures and other changes in operating expenses ina particular country where we have an investment;

 

·                  our REIT tax status is not respected in foreigncountries.  Any income or gains fromforeign sources will be subject to foreign taxes, withholding taxes, transfertaxes, and value added taxes;

 

·                  lack of uniform accounting standards (includingavailability of information in accordance with U.S. generally acceptedaccounting principles);

 

·                  changes in land use and zoning laws;

 

·                  more stringent environmental laws or changes in suchlaws;

 

·                  changes in the social stability or other political,economic or diplomatic developments in or affecting a country where we have aninvestment;

 

·                  we, our sponsor and its affiliates have relativelyless experience with respect to investing in real property or other investmentsoutside the United States as compared to domestic investments; and

 

·                  legal and logistical barriers to enforcing ourcontractual rights.

 

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

 

*If our sponsor, our advisoror its affiliates waive certain fees due to them, our results of operations anddistributions may be artificially high.*

 

* *From time to time, our sponsor, our advisoror its affiliates may agree to waive or defer all or a portion of theacquisition, asset management or other fees, compensation or incentives due tothem, pay general administrative expenses or otherwise supplement stockholderreturns in order to increase the amount of cash available to make distributionsto stockholders.  If our sponsor, our advisor or its affiliates choose tono longer waive or defer such fees and incentives, our results of operationswill be lower than in previous periods and your return on your investment couldbe negatively affected.

 

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## *****Risks Related 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 BehringerHarvard real estate programs use investment strategies that are similar toours, our advisor and its and our executive officers will face conflicts ofinterest relating to the purchase and leasing of properties and otherinvestments, and such conflicts may 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. As a result, we may be buying properties and other real estate-relatedinvestments at the same time as one or more of the other BehringerHarvard-sponsored programs managed by officers and employees of our advisorand/or its affiliates, and these other Behringer Harvard-sponsored programs mayuse investment strategies that are similar to ours.  Our executive officers and the executiveofficers of our advisor are also the executive officers of other BehringerHarvard-sponsored REITs and their advisors, the general partners of BehringerHarvard-sponsored partnerships and/or the advisors or fiduciaries of otherBehringer Harvard-sponsored programs, and these entities are and will be undercommon control.  There is a risk that ouradvisor will choose a property that provides lower returns to us than aproperty purchased by another Behringer Harvard-sponsored program.  In the event these conflicts arise, we cannotassure you that our best interests will be met when officers and employeesacting on behalf of our advisor and on behalf of advisors and managers of otherBehringer Harvard-sponsored programs decide whether to allocate any particularproperty to us or to another Behringer Harvard-sponsored program or affiliateof our advisor, which may have an investment strategy that is similar toours.  In addition, we may acquireproperties in geographic areas where other Behringer Harvard-sponsored programsown properties.  If one of the otherBehringer Harvard-sponsored programs attracts a tenant that we are competingfor, we could suffer a loss of revenue due to delays in locating anothersuitable tenant.  Similar conflicts ofinterest may apply if our advisor determines to make or purchase mortgage,bridge or mezzanine loans or participations in mortgage, bridge or mezzanineloans on our behalf because other Behringer Harvard-sponsored programs may becompeting with us for such investments. You will not have the opportunity to evaluate the manner in which theseconflicts of interest are resolved before or after making your investment.

 

### ***Behringer Harvard OpportunityAdvisors II LP and its affiliates, including all of our executive officers andsome of our directors, will face conflicts of interest caused by theircompensation arrangements with us, which could result in actions that are notin the long-term best interests of our stockholders.***

### ** **

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

 

·                  the continuation, renewal or enforcement of ouragreements with our advisor and its affiliates, including the advisorymanagement agreement, the dealer manager agreement and the property managementagreement;

 

·                  public offerings of equity by us, which entitleBehringer Securities to dealer manager fees and will likely entitle our advisorto increased acquisition and asset management fees;

 

·                  property sales, which entitle our advisor to realestate commissions and the possible issuance to Behringer Harvard Holdings, anaffiliate of our advisor, of shares of our common stock through the conversionof our convertible stock;

 

·                  property acquisitions from other BehringerHarvard-sponsored programs, which might entitle affiliates of our advisor toreal estate commissions and possible success-based sale fees in connection withits 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 our managementfunctions, which internalization could result in our retaining some of ouradvisor’s key officers and employees for compensation that is greater than thatwhich they 

 

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currently earn or whichcould require additional payments to affiliates of our advisor to purchase theassets and operations of our advisor;

 

·                  whether and when we seek to list our common stock on anational securities exchange, which listing could entitle Behringer HarvardHoldings, an affiliate of our advisor, to the issuance of shares of our commonstock through the conversion of our convertible stock; and

 

·                  whether and when we seek to sell the company or itsassets, which sale could entitle our advisor or Behringer Harvard Holdings, oneof its affiliates, to real estate commissions and to the issuance of shares ofour common stock through the conversion of our convertible 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, theadvisor will refund these fees to the extent they are based on budgeted amountsthat prove too high once development, construction, or improvements arecompleted, but the fact that these fees are initially calculated in part basedon budgeted amounts could influence our advisor to overstate the estimatedcosts of development, construction, or improvements in order to accelerate thecash flow it receives.

 

In addition, the conversionfeature of our convertible stock could cause us to make different investment ordisposition decisions than we would otherwise make, in order to avoid the stockconversion.  Moreover, our advisor hasthe right to terminate the advisory management agreement for any reason upon 60days’ notice and thereby trigger the conversion of the convertible stock, whichcould have the effect of delaying, deferring or preventing a change of controlthat might otherwise be in our stockholders’ best interests.

 

### ***Our advisor will face conflictsof interest relating to joint ventures, tenant-in-common investments or otherco-ownership arrangements that we enter with other Behringer Harvard-sponsoredprograms, which could result in a disproportionate benefit to another BehringerHarvard-sponsored program.***

### ** **

We are likely to enter intojoint ventures, tenant-in-common investments or other co-ownership arrangementswith other Behringer Harvard-sponsored programs, including Behringer HarvardOpportunity REIT I, Behringer Harvard Multifamily REIT I, Behringer HarvardShort-Term Fund I, Behringer Harvard Mid-Term Fund I, Behringer Harvard REIT Iand Behringer Harvard REIT II, for the acquisition, development or improvementof properties as well as the acquisition of real estate-relatedinvestments.  The executive officers ofour advisor are also the executive officers of other Behringer Harvard-sponsoredREITs and their advisors, the general partners of other BehringerHarvard-sponsored partnerships and/or the advisors or fiduciaries of otherBehringer Harvard-sponsored programs. These executive officers will face conflicts of interest in determiningwhich Behringer Harvard-sponsored program should enter into any particularjoint venture, tenant-in-common or co-ownership arrangement.  These persons may also have a conflict instructuring the terms of the relationship between our interests and the interestsof the Behringer Harvard-sponsored co-venturer, co-tenant or partner as well asconflicts of interest in managing the joint venture.

 

In the event that we enter into a joint venture,tenant-in-common investment or other co-ownership arrangements with anotherBehringer Harvard-sponsored program or joint venture, our advisor and itsaffiliates may have a conflict of interest when determining when and whether tobuy or sell a particular real estate property, and you may face certainadditional risks.  For example, it isanticipated that Behringer Harvard Short-Term Fund I will never have an activetrading market.  Therefore, if we becomelisted for trading on a national securities exchange, we may develop more divergentgoals and objectives from such joint venturer with respect to the sale ofproperties 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 desireto sell the properties at such time. Even if the terms of any joint venture agreement between us and anotherBehringer Harvard-sponsored program grant us a right of first refusal to buysuch properties, we may not have sufficient funds to exercise our right offirst refusal under these circumstances.

 

Because Mr. Behringerand his affiliates control us and other Behringer Harvard-sponsored programs,agreements and transactions among the parties with respect to any jointventure, tenant-in-common investment or other co-ownership arrangement betweenor among such parties will not have the benefit of arm’s-length negotiation ofthe type normally conducted between unrelated co-venturers.  Under these joint ventures, neitherco-venturer may have the power to control the venture, and under certaincircumstances, an impasse could be reached regarding matters pertaining to theco-ownership arrangement, which might have a negative influence on the jointventure and decrease potential returns to you. In the event that a co-venturer has a right of first refusal to buy outthe other co-venturer, it may be unable to finance such buy-out at thattime.  If our interest is subject to abuy/sell right, we may not have sufficient cash, available borrowing capacityor other capital resources to allow us to elect to purchase an interest of aco-venturer subject to the buy/sell right, in which case we 

 

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may be forced to sell our interest as the result of the exercise ofsuch right when we would otherwise prefer to keep our interest.  Furthermore, we may not be able to sell ourinterest in a joint venture if we desire to exit the venture for any reason orif our interest is likewise subject to a right of first refusal of ourco-venturer or partner, our ability to sell such interest may be adverselyimpacted by such right.

 

### ***Our advisor’s executive officersand key personnel and the executive officers and key personnel of BehringerHarvard-affiliated entities that conduct our day-to-day operations and theOffering will face competing demands on their time, and this may cause ourinvestment returns to suffer.***

### ** **

We rely upon the executiveofficers of our advisor and the executive officers and employees of BehringerHarvard-affiliated entities to conduct our day-to-day operations and theOffering.  These persons also conduct theday-to-day operations of other Behringer Harvard-sponsored programs and mayhave 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. During times of intense activity in other programs and ventures, theymay devote less time and resources to our business than is necessary orappropriate.  If this occurs, the returnson our investments may suffer.

 

### ***Our officers face conflicts ofinterest related to the positions they hold with entities affiliated with ouradvisor, which could diminish the value of the services they provide to us.***

### ** **

Each of our executiveofficers, including Mr. Aisner who serves as our President, ChiefExecutive Officer and a director, is also an officer of our advisor, ourproperty manager, our dealer manager and other entities affiliated with ouradvisor, including the advisors and fiduciaries to other BehringerHarvard-sponsored programs.  As a result,these individuals owe fiduciary duties to these other entities and theirinvestors, which may conflict with the fiduciary duties that they owe to us andour stockholders.  Their loyalties tothese other entities and investors could result in action or inaction that isdetrimental to our business, which could harm the implementation of ourbusiness strategy and our investment and leasing opportunities.  Conflicts with our business and interests aremost 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 to our advisor, and (6) ourrelationship with our dealer manager and property manager.  If we do not successfully implement ourbusiness strategy, we may be unable to generate the cash needed to makedistributions to you and to maintain or increase the value of our assets.

 

### ***Your investment will be dilutedupon conversion of the convertible stock.***

### ** **

Behringer Harvard Holdings,an affiliate of our advisor, purchased 1,000 shares of our convertible stockfor an aggregate purchase price of $1,000. Under limited circumstances, these shares may be converted into sharesof our common stock, resulting in dilution of our stockholders’ interest inus.  Our convertible stock will convertinto shares of common stock on one of two events.  First, it will convert if 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 10% cumulative, non-compounded,annual return at that price. Alternatively, the convertible stock will convert if we list our sharesof common stock on a national securities exchange and, on the 31st trading dayafter listing, the value of our company based on the average trading price ofour shares of common stock since the listing, plus prior distributions, combineto meet the same 10% return threshold for our common stockholders.  Each of these two events is a “TriggeringEvent.”  Upon a Triggering Event, ourconvertible stock will, unless our advisory management agreement with ouradvisor has been terminated or not renewed on account of a material breach byour advisor, generally convert into shares of common stock with a value equalto the lesser of (A) 20% of the excess of our enterprise value plus theaggregate value of distributions paid to date on then outstanding shares of ourcommon stock over the aggregate issue price of those outstanding shares plus a10% cumulative, non-compounded, annual return on the issue price of thoseoutstanding shares or (B) 15% of the excess of our enterprise value plusthe aggregate value of distributions paid to date on then outstanding shares ofour common stock over the aggregate issue price of those outstanding sharesplus a 6% cumulative, non-compounded, annual return on the issue price of thoseoutstanding shares. However, if our advisory management agreement with ouradvisor expires without renewal or is terminated (other than because of amaterial breach by our advisor) prior to a Triggering Event, then upon aTriggering Event the holder of the convertible stock will be entitled to aprorated portion of the number of shares of common stock determined by theforegoing calculation, where such proration is based on the percentage of timewe were advised by our advisor.  As aresult, following conversion, the holder of the convertible stock will beentitled to a portion of amounts distributable to our stockholders, which suchamounts distributable to the holder could be significant.

 

Our advisor and Mr. Behringer can influence whether we terminatethe advisory management agreement or allow it to expire without renewal, orwhether our common stock is listed for trading on a national securitiesexchange.  Accordingly,

 

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our advisor can influence both the conversionof the convertible stock issued to Behringer Harvard Holdings, its affiliate,and the resulting dilution of other stockholders’ interests.

 

*Becausewe rely on affiliates of Behringer Harvard Holdings for the provision ofadvisory, property management and dealer manager services, if Behringer HarvardHoldings is unable to meet its obligations we may be required to findalternative providers of these services, which could result in a significantand costly****disruption of our business.*

* *

Behringer Harvard Holdings, through one ormore of its subsidiaries, owns and controls our advisor, our property managerand our dealer manager. The operations of our advisor, our property manager andour dealer manager rely substantially on Behringer Harvard Holdings. In lightof the common ownership of these entities and their reliance on BehringerHarvard Holdings, we consider the financial condition of Behringer HarvardHoldings when assessing the financial condition of our advisor, our propertymanager and our dealer manager. In the event that Behringer Harvard Holdingsbecomes unable to meet its obligations as they because due, we might berequired to find alternative service providers, which could result in asignificant disruption of our business and would likely adversely affect thevalue of your investment in us.

 

## ***Risks Related to Our Business inGeneral***

## *** ***

### ***A limit on the number of shares aperson may own may discourage 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 our board of directors, noperson may own more than 9.8% of our outstanding shares of common or preferredstock.  This restriction may 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 otherwise providestockholders with the opportunity to receive a control premium for their shares.

 

### ***Our charter permits our board ofdirectors to issue stock with terms that may subordinate the rights of theholders of our current common stock or discourage a third party from acquiringus.***

### ** **

Our charter permits ourboard of directors to issue up to 400,001,000 shares of capital stock.  Our board of directors, without any action byour stockholders, may (1) increase or decrease the aggregate number ofshares, (2) increase or decrease the number of shares of any class orseries we have authority to issue or (3) classify or reclassify anyunissued common stock or preferred stock and establish the preferences,conversion or other rights, voting powers, restrictions, limitations as todistributions, qualifications, or terms or conditions of redemption of any suchstock.  Thus, our board of directorscould authorize 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 certainbusiness combinations, which may 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 combinationsinclude a merger, consolidation, share exchange, or, in circumstances specifiedin the statute, an asset transfer or issuance or reclassification of equitysecurities.  An interested stockholder isdefined as:

 

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

 

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

 

A person is not aninterested stockholder under the statute if the board of directors approved inadvance the transaction by which he otherwise would have become an interestedstockholder.  However, in approving atransaction, the board of directors may provide that its approval is subject tocompliance, at or after the time of approval, with any terms and conditionsdetermined by the board.

 

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

 

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

 

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

 

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

 

### ***Maryland law also limits theability of a third party to buy a large stake in us and exercise voting powerin 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 interested stockholders, that is, by theacquirer, by officers or by directors who are employees of the corporation, areexcluded from the vote on whether to accord voting rights to the controlshares.  “Control shares” are votingshares of stock that would entitle the acquirer to exercise voting power inelecting directors within specified ranges of voting power.  Control shares do not include shares theacquiring person is then entitled to vote as a result of having previouslyobtained stockholder approval.  A “controlshare acquisition” means the acquisition of control shares.  The control share acquisition statute doesnot apply (1) to shares acquired in a merger, consolidation or share exchangeif the corporation is a party to the transaction or (2) to acquisitionsapproved or exempted by a corporation’s charter or bylaws.  Our bylaws contain a provision exempting fromthe Control Share Acquisition Act any and all acquisitions by any person ofshares of our stock.  We can offer noassurance that this provision will not be amended or eliminated at any time inthe future.  This statute could have theeffect of discouraging offers from third parties to acquire us and increasingthe difficulty of successfully completing this type of offer by anyone otherthan our affiliates or any of their affiliates.

 

### ***Our charter includes ananti-takeover provision that may discourage a stockholder from launching atender 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.  The offering stockholder must provide ourcompany notice of such tender offer at least ten business days beforeinitiating 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, thenon-complying stockholder shall be responsible for all of our company’sexpenses in connection with that stockholder’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 bereduced if we are required to register as an investment company under theInvestment Company Act.***

### ** **

We are notregistered as an investment company under the Investment Company Act of 1940,as amended (“Investment Company Act”), based on exceptions that we believe areavailable to us.  If we were obligated to register as an investmentcompany, we would have to comply with a variety of substantive requirementsunder the Investment Company Act imposing, among other things:

 

·                  limitations on capital structure;

 

·                  restrictions on specified investments;

 

·                  prohibitions on transactions with affiliates; and

 

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

 

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In order to beexcluded from regulation under the Investment Company Act, we intend to engageprimarily in the business of buying mortgages and other liens on or interestsin real estate.  The position of the staff of the SEC’s Division ofInvestment Management generally requires us to maintain at least 55% of ourassets directly in qualifying real estate interests in order for us to maintainour exception to the Investment Company Act.  Generally, mezzanine loans,second mortgages, commercial mortgage-backed securities (“CMBS”), tenant-in-commoninterests (“TICs”) and interests in joint ventures that own qualifying assetsmay constitute qualifying real estate interests under this exception if certainconditions are met.  Our ownership of mezzanine loans, second mortgages,CMBS, TICs and real estate joint venture interests, therefore, will be limitedby provisions of the Investment Company Act and SEC staffinterpretations.  Generally, the SEC’s Division of Investment Managementhas taken no formal position as to whether CMBS should be treated as qualifyingassets and no recent formal position as to whether TICs should be treated asqualifying assets.

 

To maintaincompliance with our exception to the Investment Company Act, we may be unableto sell assets we would otherwise want to sell and may need to sell assets wewould otherwise wish to retain.  In addition, we may have to acquireadditional income- or loss-generating assets that we might not otherwise haveacquired.

 

If we wererequired to register as an investment company but failed to do so, we could beprohibited from engaging in our business and criminal and civil actions couldbe brought against us.  In addition, our contracts could be unenforceable,and a court could appoint a receiver to take control of us and liquidate ourbusiness.

 

### ***Rapid changes in the values ofpotential investments in CMBS or other real estate-related investments may makeit more difficult for us to maintain our qualification as a REIT or exceptionfrom the Investment Company Act.***

### ** **

If the marketvalue or income potential of our real estate-related investments, includingpotential investments in CMBS, declines as a result of increased interestrates, prepayment rates or other factors, we may need to increase our realestate investments and income and/or liquidate our non-qualifying assets inorder to maintain our REIT qualification or our exception from registrationunder the Investment Company Act.  If the decline in real estate assetvalues and/or income 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 controlover changes in our policies and operations.***

### ** **

Our board of directorsdetermines our major policies, including our policies regarding financing,growth, debt capitalization, REIT qualification and distributions.  Our board of directors may amend or revisethese and other policies without a vote of the stockholders.  Our charter sets forth the stockholder votingrights required to be set forth therein under the NASAA REIT Guidelines.  Under our charter and the Maryland GeneralCorporation Law, our stockholders currently have a right to vote only on thefollowing matters:

 

·                  the election or removal of directors;

 

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

 

·                  change our name;

 

·                  increase or decrease the aggregate number of ourshares;

 

·                  increase or decrease the number of our shares of anyclass or series that we have the authority to issue;

 

·                  classify or reclassify any unissued shares by settingor changing the preferences, conversion or other rights, restrictions,limitations as to distributions, qualifications or terms and conditions ofredemption of such shares;

 

·                  effect reverse stock splits; and

 

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

 

·                  our liquidation and dissolution; and

 

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

 

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

 

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*Our board of directors may change our investment policies andobjectives generally and at the individual investment level without stockholderapproval, which could alter the nature of your investment.*

 

Our charter requires thatour independent directors review our investment policies at least annually todetermine that the policies we are following are in the best interest of thestockholders.  In addition to our investmentpolicies and objectives, we may also change our stated strategy for anyinvestment in an individual property. These policies may change over time. The methods of implementing our investment policies may also vary, asnew investment techniques are developed. Our investment policies, the methods for their implementation, and ourother objectives, policies and procedures may be altered by our board ofdirectors without the approval of our stockholders.  As a result, the nature of your investmentcould change without your consent.

 

### ***You may not be able to sell yourshares under our share redemption program and, if you are able to sell yourshares under the program, you may not be able to recover the amount of yourinvestment in our shares.***

### ** **

Our board of directors canamend, suspend or terminate our share redemption program at any time.  Our board of directors may reject any requestfor redemption of shares.  Further, thereare many limitations on your ability to sell your shares pursuant to the shareredemption program.  Any stockholderrequesting repurchase of their shares pursuant to our share redemption programwill be required to certify to us that such stockholder acquired the shares byeither (1) a purchase directly from us or (2) a transfer from theoriginal investor by way of (i) a bona fide gift not for value to, or forthe benefit of, a member of the investor’s immediate or extended family, (ii) a transfer to a custodian, trustee or other fiduciary for the account of theinvestor or his or her immediate or extended family in connection with anestate planning transaction, including by bequest or inheritance upon death or (iii) operationof law.

 

In addition, ourshare redemption program contains other restrictions and limitations.  Shares will be redeemed on a quarterly basis,pro rata among all stockholders requesting redemption in such quarter, with apriority given to redemptions upon the death or disability of a stockholder orredemptions sought upon a stockholder’s confinement to a long-term carefacility; next, to stockholders who demonstrate, in the discretion of our boardof directors, another involuntary, exigent circumstance, such as bankruptcy;next, to stockholders subject to a mandatory distribution requirement undersuch stockholder’s IRA; and, finally, to other redemption requests.  You must hold your shares for at least oneyear prior to seeking redemption under the share redemption program, exceptthat our board of directors may waive this one-year holding requirement withrespect to redemptions sought upon the death or disability of a stockholder orredemptions sought upon a stockholder’s confinement to a long-term carefacility or for other exigent circumstances and that if a stockholder isredeeming all of his or her shares the board of directors may waive theone-year holding requirement with respect to shares purchased pursuant to thedistribution reinvestment plan. We will not redeem more than 5% of the weightedaverage number of shares outstanding during the twelve-month period immediatelyprior 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 repurchase shares.  Generally, the cash available for redemptionwill be limited to proceeds from our distribution reinvestment plan plus 1% ofthe operating cash flow from the previous fiscal year (to the extent positive).

 

Further, our boardof directors 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 purchaseshares of our common stock, you should not assume that you will be able to sellany of your shares back to us pursuant to our share redemption program.

 

### ***If you are able to resell yourshares to us pursuant to our share redemption program, you will likely receivesubstantially less than the amount paid to acquire the shares from us or thefair market value of your shares depending upon how long you owned the shares.***

### ** **

Other than redemptionsfollowing the death or disability of a stockholder or redemptions sought upon astockholder’s confinement to a long-term care facility, the purchase price forshares we repurchase under our redemption program will equal (1) prior tothe time we begin having appraisals performed by an independent third party,the amount by which (a) the lesser of (1) 90% of the average issueprice for all of your shares (as adjusted for any stock dividends,combinations, splits, recapitalizations and the like with respect to our commonstock) or (2) 90% of the offering price of shares in our most recentoffering exceeds (b) the aggregate amount of net sale proceeds per share,if any, distributed to investors prior to the redemption date as a result ofthe sale of one or more of our investments; or (2) after we beginobtaining appraisals performed by an independent third party, the lesser of (1) 100%of the average issue price per share for all of your shares (as adjusted forany stock dividends, combinations, splits, recapitalizations and the like withrespect to our common stock) or (2) 90% of the estimated value of a shareof our common stock, as determined by the most recent appraisal.  Accordingly, you may receive less by sellingyour shares back to us than you would receive if our investments were sold fortheir estimated values and such proceeds were distributed in our liquidation.

 

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### ***We may not successfully implementour exit strategy, in which case you may have to hold your investment for anindefinite period.***

### ** **

Depending upon thenprevailing market conditions, it is our intention to consider beginning theprocess of liquidating our assets and distributing the net proceeds to ourstockholders within three to six years after the termination of theOffering.  If we do not begin an orderlyliquidation within that period, we may seek to have our shares listed on anational securities exchange.  If we donot begin the process of liquidating or listing our shares within this timeperiod, our charter requires that we hold a stockholders meeting to vote on aproposal for our orderly liquidation unless a majority of our board ofdirectors and a majority of our independent directors vote to defer such ameeting beyond the sixth anniversary of the termination of the Offering.

 

Market conditionsand other factors could cause us to delay the commencement of our liquidationor to delay the listing of our shares on a national securities exchange beyondsix years from the termination of the Offering. If so, our board of directors and our independent directors may concludethat it is not in our best interest to hold a stockholders meeting for thepurpose of voting on a proposal for our orderly liquidation.  Our charter permits our board of directors,with the concurrence of a majority of our independent directors, to defer sucha stockholder vote indefinitely. Therefore, if we are not successful in implementing our exit strategy,your shares will continue to be illiquid and you may, for an indefinite periodof time, be unable to convert your investment into cash easily with minimumloss.

 

### ***We established the offering pricefor the shares on an arbitrary basis; as a result, the offering price of theshares is not related to any independent valuation.***

### ** **

Our board of directors hasarbitrarily determined the offering price of the shares, and such price bearsno relationship to our book or asset values, or to any other establishedcriteria for valuing outstanding shares. Because the offering price is not based upon any independent valuation,the offering price may not be indicative of the proceeds that you would receiveupon liquidation.

 

### ***Because the dealer manager is anaffiliate of our advisor, investors will not have the benefit of an independentreview of us, which is customarily performed in underwritten offerings.***

### ** **

The dealer manager,Behringer Securities, is an affiliate of our advisor and will not make an independentreview of us or the Offering. Accordingly, you do not have the benefit of an independent review of theterms of the Offering.  Further, the duediligence investigation of us by the dealer manager cannot be considered to bean independent review and, therefore, may not be as meaningful as a reviewconducted by an unaffiliated broker-dealer or investment banker.

 

### ***We may incur costs associatedwith changing our name if we are no longer permitted to use “Behringer Harvard”in our name.***

### ** **

We have entered into alicense agreement with Behringer Harvard Holdings for use of the name “BehringerHarvard.”  Pursuant to the agreement,when an affiliate of Behringer Harvard Holdings no longer serves as one of ourofficers or directors, Behringer Harvard Holdings may terminate our licenseagreement and may require us to change our name to eliminate the use of thewords “Behringer Harvard.”  We will berequired to pay any costs associated with changing our name.

 

### ***Your interest in BehringerHarvard Opportunity REIT II will be diluted if we or Behringer HarvardOpportunity OP II issues additional securities.***

### ** **

Stockholders do not havepreemptive rights to any shares issued by us in the future.  Our charter currently has authorized400,001,000 shares of capital stock, of which 350,000,000 shares are designatedas common stock, 1,000 shares are designated as convertible stock and50,000,000 are designated as preferred stock. Subject to any limitations set forth under Maryland law, our board ofdirectors may amend our charter to increase the number of authorized shares ofcapital stock, increase or decrease the number of shares of any class or seriesof stock designated, and may classify or reclassify any unissued shares withoutthe necessity of obtaining stockholder approval.  Shares will be issued in the discretion ofour board of directors.  Stockholderswill likely experience dilution of their equity investment in us in the eventthat we: (1) sell shares in the Offering or sell additional shares in thefuture, including those issued pursuant to the distribution reinvestment plan, (2) sellsecurities that are convertible into shares of our common stock, (3) issueshares of our common stock in a private offering of securities to institutionalinvestors, (4) issue shares of common stock upon the conversion of ourconvertible stock, (5) issue shares of common stock upon the exercise ofany options granted to our independent directors or employees of our advisorand BHO II Management, our management company and an affiliate of our advisor,or their affiliates, (6) issue shares to our advisor, its successors orassigns, in payment of an outstanding fee obligation as set forth under ouradvisory management agreement, or (7) issue shares of our common stock tosellers of properties acquired by us in connection with an exchange of limitedpartnership interests of Behringer Harvard Opportunity OP II.  In addition, the partnership agreement forBehringer Harvard Opportunity OP II contains provisions that allow, undercertain circumstances, other entities, including

 

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other Behringer Harvard-sponsored programs, to merge into or cause theexchange or conversion of their interest for interests of Behringer HarvardOpportunity OP II.  Because the limitedpartnership interests of Behringer Harvard Opportunity OP II may be exchangedfor shares of our common stock, any merger, exchange or conversion betweenBehringer Harvard Opportunity OP II and another entity ultimately could resultin the issuance of a substantial number of shares of our common stock, therebydiluting the percentage ownership interest of other stockholders.

 

### ***Payment of fees to our advisorand its affiliates will reduce cash available for investment and payment ofdistributions.***

### ** **

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 ourinvestments, and the management and leasing of our properties, the servicing ofour mortgage, bridge, mezzanine or other loans, the administration of our otherinvestments and the disposition of our assets. They will be paid substantial fees for these services.  These fees will reduce the amount of cashavailable for investment or distributions to stockholders.

 

### ***We may be restricted in ourability to replace our property manager 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 misconduct,negligence, or malfeasance by the property manager in performing itsduties.  Our board of directors may findthe performance of our property manager to be unsatisfactory.  However, unsatisfactory performance by theproperty manager may not constitute “misconduct, negligence, or malfeasance.”  As a result, we may be unable to terminatethe property management agreement at the desired time, which may have anadverse effect on the management and profitability of our properties.

 

### ***Distributions may be paid fromcapital and there can be no assurance that we will be able to achieve expectedcash flows necessary to continue to pay initially established distributions ormaintain distributions at any particular level, or that distributions willincrease over time.***

### ** **

There are manyfactors that can affect the availability and timing of cash distributions tostockholders.  Distributions generallywill be based upon such factors as the amount of cash available or anticipatedto be available, real estate securities, mortgage, bridge or mezzanine loansand other investments, current and projected cash requirements and taxconsiderations.  Because we may receiveincome from interest or rents at various times during our fiscal year,distributions paid may not reflect our income earned in that particulardistribution period.  The amount of cashavailable for distributions will be affected by many factors, such as ourability to buy properties as offering proceeds become available, the incomefrom those properties and mortgages and yields on securities of other realestate programs that we invest in, and our operating expense levels, as well asmany other variables.  Actual cashavailable for distributions may vary substantially from estimates.  We can give no assurance that we will be ableto achieve our anticipated cash flow or that distributions will increase overtime.  Nor can we give any assurance thatrents from the properties will increase, that the securities we buy willincrease in value or provide constant or increased distributions over time,that loans we make will be repaid or paid on time, or that future acquisitionsof real properties, mortgage, bridge or mezzanine loans or our investments insecurities will increase our cash available for distributions tostockholders.  Our actual results maydiffer significantly from the assumptions used by our board of directors inestablishing the distribution rates to stockholders.

 

Many of the factors that can affect the availabilityand timing of cash distributions to stockholders are beyond our control, and achange in any one factor could adversely affect our ability to pay futuredistributions.  For instance:

 

·                  If one or more tenants defaults or terminates itslease, there could be a decrease or cessation of rental payments, which wouldmean less cash available for distributions.

 

·                  Any failure by a borrower under our mortgage, bridgeor mezzanine loans to repay the loans or interest on the loans will reduce ourincome and distributions to stockholders.

 

·                  Cash available for distributions may be reduced if weare required to spend money to correct defects or to make improvements toproperties.

 

·                  Cash available to make distributions may decrease ifthe assets we acquire have lower yields than expected.

 

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

 

·                  If we lend money to others, such funds may not berepaid in accordance with the loan terms or at all, which could reduce cashavailable for distributions.

 

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·                  Federal income tax laws require REITs to distribute atleast 90% of their taxable income to stockholders.  This limits the earnings that we may retainfor corporate growth, such as property acquisition, development or expansionand makes us more dependent upon additional debt or equity financing thancorporations that are not REITs.  If weborrow more funds in the future, more of our operating cash will be needed tomake debt payments and cash available for distributions may therefore decrease.

 

·                  In connection with future property acquisitions, wemay issue additional shares of common stock, operating partnership units orinterests in other entities that own our properties.  We cannot predict the number of shares ofcommon stock, units or interests which we may issue, or the effect that theseadditional shares might have on cash available for distributions to you.  If we issue additional shares, they couldreduce the cash available for distributions to you.

 

·                  We make distributions to our stockholders to complywith the distribution requirements of the Code and to eliminate, or at leastminimize, exposure to federal income taxes and the nondeductible REIT excisetax.  Differences in 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 forworking capital.  We cannot assure youthat sufficient cash will be available to make distributions to you.

 

### ***Until proceeds from the Offeringare invested and generating operating cash flow sufficient to makedistributions to our stockholders, we have and may continue to make some or allof our distributions from sources other than cash flow from operations,including the proceeds of the Offering, cash advanced to us by our advisor,cash resulting from a deferral of asset management fees and/or from borrowings(including borrowings secured by our assets) in anticipation of futureoperating cash flow, which may reduce the amount of capital we ultimatelyinvest and negatively impact the value of your investment.***

### ** **

We expect that cash distributions to ourstockholders generally will be paid from cash available or anticipated from thecash flow from our investments in properties, real estate securities, mortgage,bridge or mezzanine loans and other real estate-related assets.  However, until proceeds from the Offering areinvested and generating operating cash flow sufficient to make distributions toour stockholders, we have and may continue to make some or all of ourdistributions from the proceeds of the Offering, cash advanced to us by ouradvisor, cash resulting from a waiver or deferral of asset management feesand/or from borrowings (including borrowings secured by our assets) inanticipation of future cash flow.  Inaddition, to the extent our investments are in development or redevelopmentprojects, or in properties that have significant capital requirements, ourability to make distributions may be negatively impacted, especially during ourearly period of operation.  Once ourdevelopment projects are completed and begin to generate income, we intend touse such increased income to make distributions to our stockholders.  Accordingly, the amount of distributions paidat any time may not reflect current cash flow from our operations.  To the extent distributions are paid from theproceeds of the Offering, cash advanced to us by our advisor, cash resultingfrom a deferral of asset management fees and/or from borrowings (includingborrowings secured by our assets) in anticipation of future cash flow, we willhave less capital available to invest in properties and other realestate-related assets, which may negatively impact our ability to makeinvestments and substantially reduce current returns and capital appreciation.  In that event, we may not be able to use91.1% of the gross proceeds raised in the Offering (89.0% with respect to grossproceeds from our primary offering and 100% with respect to gross proceeds fromour distribution reinvestment plan) for investment in real estate, loans and otherinvestments, paying acquisition fees and expenses incurred in making suchinvestments and for any capital reserves we may establish until such time as wehave sufficient cash flows from operations to fund fully our distributions.

 

*Development projects in which we invest maynot be completed successfully or on time, and guarantors of the projects maynot have the financial resources to perform their obligations under theguaranties they provide.*

 

We may make equity investments in, acquireoptions to purchase interests in or make mezzanine loans to the owners of realestate development projects.  Our returnon these investments is dependent upon the projects being completedsuccessfully, on budget and on time.  Tohelp ensure performance by the developers of properties that are underconstruction, completion of these properties is generally guaranteed either bya completion bond or performance bond. Our advisor may rely upon the substantial net worth of the contractor ordeveloper or 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 bond.  For a particularinvestment, we may obtain guaranties that the project will be completed ontime, on budget and in accordance with the plans and specifications and thatthe mezzanine loan will be repaid. However, we may not obtain such guaranties and cannot ensure that theguarantors will have the financial resources to perform their obligations underthe guaranties they provide.  We intendto manage these risks by 

 

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ensuring, to the best of our ability, that we invest in projects withreputable, experienced and resourceful developers.  If we are unable to manage these riskseffectively, our results of operations, financial condition and ability to makedistributions to you will be adversely affected.

 

*Under certain circumstances, a subsidiaryREIT may be required to sell its capital stock rather than its assets.*

 

Under certain circumstances, a subsidiaryREIT may be required to sell its capital stock rather than any assets held bythat subsidiary REIT, which may limit the number of persons willing to acquireindirectly any assets held by that subsidiary REIT.  As a result, we may not be able to realize areturn on our investment in a joint venture, such as a co-investment venturewith our Co-Investment Partner, at the time or on the terms we desire.

 

### ***Adverse economic conditions willnegatively affect our returns and profitability.***

### ** **

Our operatingresults may be affected by many factors, including a continued or exacerbatedgeneral economic slowdown experienced by the nation as a whole or by the localeconomies where our properties and the properties underlying our other realestate-related investments are located. These factors include:

 

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

 

·                  job transfers and layoffs may cause tenant vacanciesto increase;

 

·                  increasing concessions, reduced rental rates orcapital improvements may be required to maintain occupancy levels; and

 

·                  increased insurance premiums may reduce fundsavailable for distribution or, to the extent such increases are passed throughto tenants, may lead to tenant defaults. Also, increased insurance premiums may make it difficult to increaserents to tenants on turnover, which may adversely affect our ability toincrease our returns.

 

The length andseverity of any economic downturn cannot be predicted.  Our operations could be negatively affectedto the extent that an economic downturn is prolonged or becomes more severe.

 

### ***The public programs sponsored byaffiliates of our advisor have experienced losses in the past, and we mayexperience similar losses.***

### ** **

Historically, the public programssponsored by affiliates of our advisor have experienced losses during the earlyperiods of their operation.  Many ofthese losses can be attributed to the initial start-up costs and operatingexpenses incurred prior to purchasing properties or making other investmentsthat generate revenue.  In addition,depreciation and amortization expense substantially reduce income.  It is likely that we will experience similarlosses during the early periods of our operation.  As a result, we cannot assure you that wewill be profitable or that we will realize growth in the value of our realestate investments.

 

### ***We are uncertain of our sourcesfor funding of future capital needs, which could adversely affect the value ofour investments.***

### ** **

Substantially all of thegross proceeds of the Offering will be used to make investments in real estateand real estate-related assets and to pay various fees and expenses related tothe Offering.  We will establish capitalreserves on a property-by-property basis, as we deem appropriate.  In addition to any reserves we establish, alender may require escrow of capital reserves in excess of our establishedreserves.  If these reserves areinsufficient to meet our cash needs, we may have to obtain financing fromeither affiliated or unaffiliated sources to fund 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.

 

### ***The failure of any bank in whichwe deposit our funds could reduce the amount of cash we have available to paydistributions and make additional investments.***

### ** **

We have diversified our cashand cash equivalents between several banking institutions in an attempt tominimize exposure to any one of these entities. However, the Federal Deposit Insurance Corporation, or “FDIC,” onlyinsures limited amounts per depositor per insured bank.  Beginning October 3, 2008 through December 31,2009, the FDIC is insuring up to $250,000 per depositor per insured bank; on January 1,2010, the standard insured deposit limit will return to $100,000 for mostdeposit categories.  Unlimited depositinsurance coverage will be available to our non-interest bearing transactionaccounts held at those institutions participating in the FDIC’s temporaryLiquidity Guarantee Program through December 31, 2009.  At December 31, 2008, we had cash andcash equivalents and restricted cash deposited in certain financialinstitutions in excess of federally insured levels.  If any of the banking institutions in whichwe have deposited funds ultimately fails, we

 

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may lose our deposits overthe federally insured levels.  The lossof our deposits could reduce the amount of cash we have available to distributeor invest and could result in a decline in the value of your investment.

 

### ***Future financing could beimpacted by negative capital market conditions.***

### ** **

During 2008, the U.S. creditmarkets and the sub-prime residential mortgage market experienced severedislocations and liquidity disruptions. Sub-prime mortgage loans have experienced increasing rates ofdelinquency, foreclosure and loss.  Theseand other related events continue to have a significant impact on the capitalmarkets associated not only with sub-prime mortgage-backed securities,asset-backed securities and collateralized debt obligations, but also with theU.S. housing, credit and financial markets as a whole.  Consequently, there is greater uncertaintyregarding our ability to access the credit market in order to attract financingon reasonable terms.  Our ability toborrow funds to finance future acquisitions could be adversely affected by ourinability to secure permanent financing on reasonable terms, if at all.

 

*The recent market disruptions mayadversely affect our operating results and financial condition.*

 

The global financial marketsare currently undergoing pervasive and fundamental disruptions.  The continuation or intensification of suchvolatility may continue to have an adverse impact on the availability of creditto 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 that the economic “slowdown”has resulted in a recession, and many economists believe that the recession maylast several more quarters.  To theextent that turmoil in the financial markets continues or intensifies, it hasthe potential to materially affect:

 

·                  the value of our investment;

 

·                  the availability or the terms of financingthat we may anticipate utilizing;

 

·                  our ability to make principal and interestpayments on, or refinance, any outstanding debt when due; and

 

·                  the ability of our current tenants to enterinto new leases or satisfy their current rental payment obligations underexisting leases and the ability of future tenants to enter into new leases.

 

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

 

*Debt and Equity Markets.** ***Our results of operations are sensitive tothe volatility of the credit markets. The commercial real estate debt markets are currently experiencingvolatility as a result of certain factors, including the tightening ofunderwriting standards by lenders and credit rating agencies and thesignificant inventory of unsold collateralized mortgage backed securities inthe market.  Credit spreads for majorsources of capital have widened significantly as investors have demanded ahigher risk premium.  This is resultingin lenders increasing the cost for debt financing.  Should the overall 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 in our investment operationsgenerating lower overall economic returns and a reduced level of cash flow,which could potentially impact our ability to make distributions to ourstockholders at current levels.  Inaddition, the recent dislocations in the debt markets have reduced the amountof capital that is available to finance real estate, which, in turn: (1) leadsto a decline in real estate values generally; (2) slows real estatetransaction activity; (3) reduces the loan to value upon which lenders arewilling to extend debt and (4) results in difficulty in refinancing debtas it becomes due, all of which may reasonably be expected to have a materialadverse impact on the value of real estate investments and the revenues, incomeor cash flow from the acquisition and operations of real properties andmortgage loans.  In addition, the currentstate of the debt markets have negatively impacted the ability to raise equitycapital.

 

If the current debt market environment persists, wemay modify our investment strategies in order to seek to optimize our portfolioperformance.  Our strategies may include,among other options, limiting or eliminating the use of debt and focusing onthose investments that do not require the use of leverage to meet our portfoliogoals.  Such modifications to ourinvestment strategies could adversely affect our performance.

 

*Valuations.*  The recent market volatility will likely makethe valuation of our investment more difficult. There may be significant uncertainty in the valuation, or in thestability of the value, of our investment. The recent market volatility could result in a substantial decrease inthe value of our investment.  As aresult, we may not be able to recover the carrying amount of our investment orgoodwill, which may require us to recognize an impairment charge in earnings.

 

*Government Intervention. *The pervasive and fundamental disruptionsthat the global financial markets are currently undergoing have led toextensive and unprecedented governmental intervention.  Such intervention has in certain cases beenimplemented on an “emergency” basis, suddenly and substantially eliminatingmarket participants’ 

 

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ability to continue to implement certain strategies or manage the riskof their outstanding positions.  Inaddition, these interventions have typically been unclear in scope andapplication, resulting in confusion and uncertainty which in itself has beenmaterially detrimental to the efficient functioning of the markets as well aspreviously successful investment strategies. Among measures proposed by legislators, especially as to residentialmortgage loans, have been moratoriums on loan payments, limits on the abilityof lenders to enforce loan provisions, including the collection of interest atrates agreed in the loan documents, and involuntary modification of loanagreements.  If these or otherregulations adverse to lenders are implemented and applied to loans we havemade, they could adversely impact our operations.  It is impossible to predict what, if any,additional interim or permanent governmental restrictions may be imposed or theeffect of such restrictions on us and our results of operations.  There is likely to be increased regulation ofthe financial markets that could have a material impact on our operating resultsand financial condition.

 

### ***To hedge against exchange rateand interest rate fluctuations, we may use derivative financial instrumentsthat may be costly and ineffective and may reduce the overall returns on yourinvestment.***

### ** **

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.  Derivativeinstruments may include interest rate swap contracts, interest rate cap orfloor contracts, futures or forward contracts, options or repurchaseagreements.  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 credit risk, basis risk and legalenforceability risks.  In this context,credit risk is the failure of the counterparty to perform under the terms ofthe derivative contract.  If the fairvalue of a derivative contract is positive, the counterparty owes us, whichcreates credit risk for us.  We intend tomanage credit risk by dealing only with major financial institutions that havehigh credit ratings.  Basis risk occurswhen the index upon which the contract is based is more or less variable thanthe index upon which the hedged asset or liability is based, thereby making thehedge less effective.  We intend tomanage basis risk by matching, to a reasonable extent, the contract index tothe index upon which the hedged asset or liability is based.  Finally, legal enforceability risks encompassgeneral contractual risks, including the risk that the counterparty will breachthe terms of, or fail to perform its obligations under, the derivativecontract.  We intend to manage legalenforceability risks by ensuring, to the best of our ability, that we contractwith reputable counterparties and that each counterparty complies with theterms and conditions of the derivative contract.  If we are unable to manage these riskseffectively, our results of operations, financial condition and ability to makedistributions to you will be adversely affected.

 

### ***Complying with REIT requirementsmay limit our ability to hedge risk effectively.***

### ** **

The REIT provisions of theInternal Revenue Code may limit our ability to hedge the risks inherent to ouroperations.  From time to time, we mayenter into hedging transactions with respect to one or more of our assets orliabilities. Our hedging activities may include entering into interest rateswaps, caps, and floors, options to purchase these items, and futures andforward contracts. Except to the extent provided by Treasury regulations, anyincome we derive from a hedging transaction which is clearly identified as suchas specified 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 this test,but only to the extent that the transaction hedges indebtedness incurred or tobe incurred by us to acquire or carry real estate assets. Income from anyhedging transaction will, however, be nonqualifying for purposes of the 75%gross income test. The term “hedging transaction,” as used above, generallymeans any transaction we enter into in the normal course of our businessprimarily to manage risk of interest rate or price changes or currencyfluctuations with respect to borrowings made or to be made, or ordinaryobligations incurred or to be incurred, by us. To the extent that we do notproperly identify such transactions as hedges, hedge with other types offinancial instruments, or hedge other types of indebtedness, the income fromthose transactions is not likely to be treated as qualifying income forpurposes of the gross income tests. As a result of these rules, we may have tolimit the use of hedging techniques that might otherwise be advantageous, whichcould result in greater risks associated with interest rate or other changesthan we would otherwise incur.  Under theHousing and Economic Recovery Tax Act of 2008 these rules will be modifiedwith respect to our currency hedging, if any.

 

### ***The State of Texas has enactedlegislation that creates a “margin tax” and decreases state propertytaxes.  This tax reform could result inincreased taxes on our operations in Texas that, when combined with decreasedproperty taxes, could reduce the net cash available for distribution to you.***

### ** **

In May 2006, the Stateof Texas enacted legislation that replaces the former Texas franchise tax witha new “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 

 

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in calendar years beginningafter December 31, 2006.  The newlegislation expands the number of entities covered by the former Texas franchisetax, and specifically includes limited partnerships as subject to the newmargin tax.  The tax generally is 1% ofan entity’s taxable margin, which is the part of an entity’s total revenue lessapplicable deductions apportioned to Texas. In May 2006, the State of Texas also enacted legislation thatreduces the state property tax, but granted authority to local taxingjurisdictions to increase property taxes in the future to offset the originalreductions.  Although the Comptroller ofPublic Accounts of the State of Texas recently issued proposed administrative rules whichinterpret provisions of the margin tax and which are expected to be finalizedbefore January 1, 2008, there are a number of continuing uncertaintiesunder the margin tax statutes and administrative rules.

 

As a result of this Texas property tax legislation,reimbursable expenses from tenants at the property level may decrease, due todecreased property taxes.  We expect tohold significant assets in Texas.  As aconsequence, the new margin tax, when combined with the decreased property tax,could result in a net Texas state tax increase in future years and reduce theamount of cash we have available for distribution to you.

 

## ***General Risks Related toInvestments in Real Estate***

## *** ***

### ***Our opportunisticproperty-acquisition strategy involves a higher risk of loss than moreconservative investment strategies.***

### ** **

Our strategy for acquiringproperties may involve the acquisition of properties in markets that aredepressed or overbuilt, and/or have high growth potential in real estate leaserates and sale prices.  As a result ofour investment in these types of markets, we will face increased risks relatingto changes in local market conditions and increased competition for similarproperties in the same market, as well as increased risks that these marketswill not recover and the value of our properties in these markets will notincrease, or will decrease, over time. For these and other reasons, we cannot assure you that we will beprofitable or that we will realize growth in the value of our real estateproperties, and as a result, our ability to make distributions to ourstockholders could be affected.  Ourintended approach to acquiring and operating income-producing propertiesinvolves more risk than comparable real estate programs that have a targetedholding period for investments that is longer than ours, utilize leverage to alesser degree and/or employ more conservative investment strategies.

 

### ***Our revenue and net income mayvary significantly from one period to another due to investments inopportunity-oriented properties and portfolio acquisitions, which couldincrease the variability of our cash available for distributions.***

### ** **

Our opportunisticproperty-acquisition strategy will include investments in 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 revenue while in development orredevelopment.  During any periodwhen our projects in development or redevelopment or those withsignificant capital requirements increase without a corresponding increase instable revenue-producing properties, our revenues and net income will likelydecrease.  Many factors may have anegative impact on the level of revenues or net income produced by ourportfolio of properties and projects, including higher than expectedconstruction costs, failure to complete projects on a timely basis, failure ofthe properties to perform at expected levels upon completion of development orredevelopment, and increased borrowings necessary to fund higher than expectedconstruction or other costs related to the project.  Further, our net income and shareholders equitycould be negatively affected during periods with large portfolio acquisitions,which generally require large cash outlays and may require the incurrence ofadditional financing.  Any such reductionin our revenues and net income during such periods could cause a resultingdecrease in our cash available for distributions during the same periods.

 

### ***Our operating results will beaffected by economic and regulatory changes that have an adverse impact on thereal estate market in general, and we cannot assure you that we will beprofitable or that we will realize growth in the value of our real estateproperties.***

### ** **

Our operating results willbe 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; and

 

·                  periods of high interest rates and tight money supply.

 

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

 

### ***If we have limiteddiversification of the geographic locations of our properties, our operatingresults will be affected by economic changes that have an adverse impact on thereal estate market in those areas.***

### ** **

The properties acquiredby certain other Behringer Harvard-sponsored programs that have investmentobjectives similar to ours generally have been located in the southwest UnitedStates, and more specifically, in the Dallas, Texas metropolitan area.  This is particularly true of BehringerHarvard Short-Term Opportunity Fund I. Based upon the anticipated holding period of our properties, the currentreal estate market in the Dallas, Texas metropolitan area, and the experienceof our advisor and its affiliates with the real estate market in thisgeographic area, we anticipate that a number of our future propertyacquisitions may be located in this geographic area.  In the event that most of our properties arelocated in a single geographic area, our operating results and ability to makedistributions are likely to be impacted by economic changes affecting the realestate markets in that area.  Yourinvestment will be subject to greater risk to the extent that we lack ageographically diversified portfolio of properties.

 

### ***Properties that have significantvacancies could be difficult to sell, which could diminish the return on yourinvestment.***

### ** **

A property may incurvacancies either by the continued default of tenants under their leases or theexpiration of tenant leases.  Ifvacancies continue for a long period of time, we may suffer reduced revenuesresulting in decreased distributions to stockholders.  In addition, the value of the property couldbe diminished because the market value of a particular property will dependprincipally upon the value of the leases of such property.

 

### ***Many of our investments will bedependent on tenants for revenue, and lease terminations could reduce ourability to make distributions to stockholders.***

### ** **

The success of our realproperty investments often will be materially dependent on the financialstability of our tenants.  Lease paymentdefaults by tenants could cause us to reduce the amount of distributions tostockholders.  A default by a significanttenant on its lease payments to us would cause us to lose the revenueassociated with such lease and cause us to have to find an alternative sourceof revenue to meet mortgage payments and prevent a foreclosure if the propertyis subject to a mortgage.  In the eventof a tenant default, we may experience delays in enforcing our rights aslandlord and may incur substantial costs in protecting our investment andre-letting our property.  If significantleases are terminated, we cannot assure you that we will be able to lease theproperty for the rent previously received or sell the property withoutincurring a loss.  Additionally, loansthat we make generally will relate to real estate.  As a result, the borrower’s ability to repaythe loan may be dependent on the financial stability of the tenants leasing therelated real estate.

 

### ***We may be unable to secure fundsfor future tenant improvements, which could adversely impact our ability tomake cash distributions to our stockholders.***

### ** **

When tenants do not renewtheir leases or otherwise vacate their space, in order to attract replacementtenants, we will be required to expend substantial funds for tenantimprovements and tenant refurbishments to the vacated space.  If we have insufficient capital reserves, wewill have to obtain financing from other sources. We intend to establishcapital reserves on a property-by-property basis, as we deem necessary.  In addition to any reserves we establish, alender may require escrow of capital reserves in excess of our establishedreserves.  If these reserves or anyreserves otherwise established are designated for other uses or areinsufficient to meet our cash needs, we may have to obtain financing fromeither affiliated or unaffiliated sources to fund our cash requirements.  We cannot assure you that sufficientfinancing will be available or, if available, will be available on economicallyfeasible terms or on terms acceptable to us. Moreover, certain reserves required by lenders may be designated forspecific uses and may not be available for capital purposes such as futuretenant improvements.  Additional borrowingfor capital purposes will increase our interest expense, and therefore ourfinancial condition and our ability to make cash distributions to ourstockholders may be adversely affected.

 

### ***We may be unable to sell aproperty if or when we decide to do so, which could adversely impact ourability to make cash distributions to our stockholders.***

### ** **

We intend to hold thevarious real properties in which we invest until such time as our advisordetermines that a sale or other disposition appears to be advantageous toachieve our investment objectives or until it appears that such objectives willnot be met.  Otherwise, our advisor,subject to approval of our board of directors, may exercise its discretion asto whether and when to sell a property, and we will have no obligation to sellproperties at any particular time, except upon our liquidation.  If we do not begin the process of liquidatingour assets or listing our shares within six years of the termination of thisprimary offering, our charter requires that we hold a stockholders meeting tovote on a proposal for our orderly liquidation unless a majority of our boardof directors and a majority of our independent directors vote to defer such ameeting beyond the sixth anniversary of the termination of the Offering.  The real estate market is affected, asdiscussed above, by many factors, such as general economic conditions,availability of financing, interest rates and other factors,

 

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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.  Wecannot predict the length of time needed to find a willing purchaser and toclose the sale of an asset.  If we areunable to sell an 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 in co-ownership arrangements could take actionsthat decrease the value of an investment to us and lower your overall return.***

### ** **

We may enter into jointventures, tenant-in-common investments or other co-ownership arrangements withother Behringer Harvard programs or third parties having investment objectivessimilar to ours for the acquisition, development or improvement of propertiesas well as the acquisition of real estate-related investments.  We may also purchase and develop propertiesin joint ventures or in partnerships, co-tenancies or other co-ownershiparrangements with the sellers of the properties, affiliates of the sellers,developers or other persons.

 

Such investments may involverisks not otherwise present with other forms of real estate investment,including, for example:

 

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

 

·                  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 realproperty or excessively expensive premiums for insurance coverage may adverselyaffect your returns.***

### ** **

Our advisor will attempt toensure that all of our properties are adequately insured to cover casualtylosses.  The nature of the activities atcertain properties we may acquire will expose us and our operators to potentialliability for personal injuries and, in certain instances, such as withmarinas, property damage claims. For instance, marina business activities arecustomarily subject to various hazards, including gasoline or other fuelspills, fires, drownings and other water-related accidents, boat storage rackcollapses and other dangers relatively common in the marina industry.  In addition, there are types of losses,generally catastrophic in nature, such as losses due to wars, acts ofterrorism, earthquakes, floods, hurricanes, pollution or environmental mattersthat are uninsurable or not economically insurable, or may be insured subjectto limitations, such as large deductibles or co-payments.  Insurance risks associated with potentialterrorist acts could sharply increase the premiums we pay for coverage againstproperty and casualty claims.  Mortgagelenders generally insist that specific coverage against terrorism be purchasedby commercial property owners as a condition for providing mortgage, bridge ormezzanine loans.  It is uncertain whethersuch insurance policies will be available, or available at reasonable cost,which could inhibit our ability to finance or refinance our properties.  In such instances, we may be required toprovide other financial support, either through financial assurances orself-insurance, to cover potential losses. We cannot assure you that we will have adequate coverage for suchlosses.  In the event that any of ourproperties incurs a casualty loss that is not fully covered by insurance, thevalue of our assets will be reduced by the amount of any such uninsuredloss.  In addition, other than the capitalreserve or other reserves we may establish, we have no source of funding torepair or reconstruct any uninsured damaged property, and we cannot assure youthat any such sources of funding will be available to us for such purposes inthe future.  Also, to the extent we mustpay unexpectedly large amounts for insurance, we could suffer reduced earningsthat would result in decreased distributions to stockholders.

 

### ***Our operating results may benegatively affected by potential development and construction delays and resultin increased costs and risks, which could diminish the return on yourinvestment.***

### ** **

We may invest some or all ofthe proceeds available for investment in the acquisition, development and/orredevelopment of properties upon which we will develop and constructimprovements.  We could incur substantialcapital obligations in connection with these types of investments.  We will be subject to risks relating touncertainties associated with

 

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rezoning for development and environmental concerns of governmentalentities and/or community groups and our builder’s ability to controlconstruction costs or to build in conformity with plans, specifications andtimetables.  The builder’s failure toperform may necessitate legal action by us to rescind the purchase or theconstruction contract or to compel performance. Performance may also be affected or delayed by conditions beyond thebuilder’s control.  Delays in completionof construction could also give tenants the right to terminate preconstructionleases for space at a newly developed project. We may incur additional risks when we make periodic progress payments orother advances to such builders prior to completion of construction.  These and other such factors can result inincreased costs of a project or loss of our investment.  Substantial capital obligations could delayour ability to make distributions.  Inaddition, we will be subject to normal lease-up risks relating to newlyconstructed projects.  Furthermore, wemust rely upon projections of rental income and expenses and estimates of thefair market value of property upon completion of construction when agreeingupon a price to be paid for the property at the time of acquisition of theproperty.  If our projections areinaccurate, we may pay too much for a property, and the return on ourinvestment could suffer.

 

In addition, we may investin unimproved real property.  Returnsfrom development of unimproved properties are also subject to risks anduncertainties associated with rezoning the land for development andenvironmental concerns of governmental entities and/or community groups.  Although our intention is to limit anyinvestment in unimproved property to property we intend to develop, yourinvestment nevertheless is subject to the risks associated with investments inunimproved real property.

 

### ***If we contract with BehringerDevelopment Company LP or its affiliates for newly developed property, wecannot guarantee that any earnest money deposit we make to BehringerDevelopment Company LP or its affiliates 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 BehringerDevelopment or its affiliates may be existing income-producing properties,properties to be developed or properties under development.  We anticipate that we will be obligated topay a substantial earnest money deposit at the time of contracting to acquiresuch properties.  In the case ofproperties to be developed by Behringer Development or its affiliates, weanticipate that we will be required to close the purchase of the property uponcompletion of the development of the property by Behringer Development or itsaffiliates.  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 real property.  Typically, Behringer Development or itsaffiliates will only have a contract to acquire land, a development agreementto develop a building on the land and an agreement with one or more tenants tolease all or part of the property upon its completion.  We may enter into such a contract withBehringer Development or its affiliates even if at the time of contracting wehave not yet raised sufficient proceeds in the Offering to enable us to closethe purchase of such property.  However,we will not be required to close a purchase from Behringer Development or itsaffiliates, and will be entitled to a refund of our earnest money, in thefollowing circumstances:

 

·                  Behringer Development or its affiliates fails todevelop the property;

 

·                  all or a specified portion of the pre-leased tenantsfail to take possession under their leases for any reason; or

 

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

 

The obligation of Behringer Development or itsaffiliates to refund our earnest money will be unsecured, and no assurance canbe made that we would be able to obtain a refund of such earnest money depositfrom it under these circumstances since Behringer Development is an entitywithout substantial assets or operations.

 

### ***Competition with third parties inacquiring properties and other assets may reduce our profitability and thereturn on your investment.***

### ** **

We compete with many other entities engaged in realestate investment activities, including individuals, corporations, bank andinsurance company investment accounts, other REITs, real estate limitedpartnerships, and other entities engaged in real estate investment activities,many of which have greater resources than we will.  Larger real estate programs may enjoysignificant competitive advantages that result from, among other things, alower cost of capital and enhanced operating efficiencies.  In addition, the number of entities and theamount of funds competing for suitable properties may increase.  Any such increase would result in increaseddemand for these assets and therefore increased prices paid for them.  If we pay higher prices for properties andother investments, our profitability will be reduced and you may experience alower return on your investment.

 

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### ***A concentration of ourinvestments in any one property class may leave our profitability vulnerable toa downturn in such sector.***

### ** **

At any one time, a significant portion of our investmentscould be in one property class.  As aresult, we will be subject to risks inherent in investments in a single type ofproperty.  If our investments aresubstantially in one property class, then the potential effects on ourrevenues, and as a result, on cash available for distribution to ourstockholders, resulting from a downturn in the businesses conducted in thosetypes of properties could be more pronounced than if we had more fullydiversified our investments.

 

### ***Failure to succeed in new marketsor in new property classes may have adverse consequences on our performance.***

 

We may from time to time commence development activityor make acquisitions outside of our existing market areas or the propertyclasses of our primary focus if appropriate opportunities arise.  Our historical experience in our existingmarkets in developing, owning and operating certain classes of property doesnot ensure that we will be able to operate successfully in new markets, shouldwe choose to enter them, or that we will be successful in new propertyclasses.  We may be exposed to a varietyof risks if we choose to enter new markets, including an inability to evaluateaccurately local market conditions, to obtain land for development or toidentify appropriate acquisition opportunities, to hire and retain keypersonnel, and a lack of familiarity with local governmental and permittingprocedures.  In addition, we may abandonopportunities to enter new markets or acquire new classes of property that wehave begun to explore for any reason and may, as a result, fail to recoverexpenses already incurred.

 

### ***Acquiring or****attempting**to acquire multiple properties in a singletransaction may adversely affect our operations.*

### ** **

From time to time, we may attempt to acquire multipleproperties in a single transaction. Portfolio acquisitions are more complex and expensive than singleproperty acquisitions, and the risk that a multiple-property acquisition doesnot close may be greater than in a single-property acquisition.  Portfolio acquisitions may also result in usowning investments in geographically dispersed markets, placing additionaldemands on our ability to manage the properties in the portfolio.  In addition, a seller may require that a groupof properties be purchased as a package even though we may not want to purchaseone or more properties in the portfolio. In these situations, if we are unable to identify another person orentity to acquire the unwanted properties, we may be required to operate orattempt to dispose of these properties. To acquire multiple properties in a single transaction we may berequired to accumulate a large amount of cash. We would expect the returns that we earn on such cash to be less thanthe ultimate returns in real property and therefore, accumulating such cashcould reduce the funds available for distributions.  Any of the foregoing events may have anadverse effect on our operations.

 

### ***If we set aside insufficientcapital reserves, we may be required to defer necessary capital improvements.***

### ** **

If we do not have enough reserves for capital tosupply needed funds for capital improvements throughout the life of theinvestment in a property and there is insufficient cash available from ouroperations, we may be required to defer necessary improvements to the property,which may cause the property to suffer from a greater risk of obsolescence or adecline in value, or a greater risk of decreased cash flow as a result of fewerpotential tenants being attracted to the property.  If this happens, we may not be able tomaintain projected rental rates for affected properties, and our results ofoperations may be negatively impacted.

 

### ***Any student-housing propertiesthat we acquire will be subject to an annual leasing cycle, short lease-upperiod, seasonal cash flows, changing university admission and housingpolicies, and other risks inherent in the student-housing industry, any ofwhich could have a negative impact on your investment.***

### ** **

Student-housing propertiesgenerally have short-term leases of 12 months, ten months, nine months, orshorter.  As a result, we may experiencesignificantly reduced cash flows during the summer months from student-housingproperties while most students are on vacation. Furthermore, student-housing properties must be almost entirelyre-leased each year, exposing us to increased leasing risk.  Student-housing properties are also typicallyleased during a limited leasing season that usually begins in January andends in August of each year. We would, therefore, be highly dependent onthe effectiveness of our marketing and leasing efforts and personnel duringthis 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 relationshipswith colleges and universities for referrals of prospective student residentsor for mailing lists of prospective student residents and their parents. Manyof these colleges and universities own and operate their own competingon-campus facilities. Any failure to maintain good relationships with thesecolleges and universities could therefore have a material adverse effect on ourability to market our properties to students and their families.

 

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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 significantcompetition from university-owned student housing and from other residentialproperties that are in close proximity to any student-housing properties we mayacquire, which could have a negative 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.

### ** **

### ***We may invest in apartmentcommunities and short-term apartment leases which may expose us to the effectsof declining market rent, which could adversely impact our ability to make cashdistributions to our stockholders.***

### ** **

We expect that substantiallyall of our apartment leases will be for a term of one year or less.  Because these leases generally permit theresidents to leave at the end of the lease term without penalty, our rentalrevenues may be impacted by declines in market rents more quickly than if ourleases were for longer terms.

 

### ***To the extent we invest inapartment communities, we will face competition from other apartmentcommunities and the increased affordability of single-family homes, which maylimit our profitability and returns to our stockholders.***

### ** **

Any apartment communities wemay acquire will most likely compete with numerous housing alternatives inattracting residents, including other apartment communities and single-familyhomes, as well as owner-occupied single- and multifamily homes available torent.  Competitive housing in aparticular area and the increasing affordability of owner occupied single- andmultifamily homes available to rent or buy caused by declining mortgageinterest rates and government programs to promote home ownership couldadversely affect our ability to retain our residents, lease apartment units andincrease or maintain rental rates.

 

Moreover, the residentialapartment community industry is highly competitive.  This competition could reduce occupancylevels and revenues at our apartment communities, which would adversely affectour operations.  We expect to facecompetition from many sources, including from other apartment communities bothin the immediate vicinity and the broader geographic market where our apartmentcommunities will be located. Overbuilding of apartment communities may occur.  If so, this will increase the number ofapartment units available and may decrease occupancy and apartment rentalrates.  In addition, increases inoperating costs due to inflation may not be offset by increased apartmentrental rates.  We may be required toexpend substantial sums to attract new residents.

 

**In connection with the recentcredit market disruptions and economic slowdown, to the extent we investin apartment communities, we may face increased competition from single-familyhomes and condominiums for rent, which could limit our ability to retainresidents, lease apartment units or increase or maintain rents.**

 

Any apartment communities we may invest in maycompete with numerous housing alternatives in attracting residents, includingsingle-family homes and condominiums available for rent.  Such competitive housing alternatives maybecome more prevalent in a particular area because of the tightening ofmortgage lending underwriting criteria, homeowner foreclosures, the decline insingle-family home and condominium sales and the lack of available credit.  The number of single-family homes andcondominiums for rent in a particular area could limit our ability toretain residents, lease apartment units or increase or maintain rents.

 

### ***Our failure to integrate acquiredcommunities and new personnel could create inefficiencies and reduce the returnof 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 beable to integrate new management and operations personnel as our organizationgrows in size and complexity.  Failuresin either area will result in inefficiencies that could adversely affect ourexpected return on our investments and our overall profitability.

 

### ***BHO II Management’s failure tointegrate its subcontractors into BHO II Management’s operations in anefficient manner could reduce the return on your investment.***

### ** **

BHO II Management may relyon multiple subcontractors for on-site property management of ourproperties.  If BHO II Management isunable to integrate these subcontractors into its operations in an efficientmanner, BHO II Management may have to expend substantial time and money coordinatingwith these subcontractors, which could be a negative impact on the revenuesgenerated from such properties.

 

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### ***If we acquire lodging facilities,we will be dependent on the third-party managers of those facilities.***

### ** **

In order to qualify as aREIT, we will not be able to operate any hotel properties that we acquire orparticipate in the decisions affecting the daily operations of our hotels. Wewill lease any hotels we acquire to a TRS in which we may own up to a 100%interest.  Our TRS will enter intomanagement agreements with eligible independent contractors that are not oursubsidiaries or otherwise controlled by us to manage the hotels. Thus,independent hotel operators, under management agreements with our TRS, willcontrol the daily operations of our hotels.

 

We will depend on theseindependent management companies to adequately operate our hotels as providedin the management agreements. We will not have the authority to require anyhotel to be operated in a particular manner or to govern any particular aspectof the daily operations of any hotel (for instance, setting room rates). Thus,even if we believe our hotels are being operated inefficiently or in a mannerthat does not result in satisfactory occupancy rates, revenue per availableroom and average daily rates, we may not be able to force the managementcompany to change its method of operation of our hotels. We can only seekredress if a management company violates the terms of the applicable managementagreement with the TRS, and then only to the extent of the remedies providedfor under the terms of the management agreement.  In the event that we need to replace any ofour management companies, we may be required by the terms of the managementagreement to pay substantial termination fees and may experience significantdisruptions at the affected hotels.

 

### ***If we acquire lodging properties,we may have to make significant capital expenditures to maintain them.***

### ** **

Hotelshave an ongoing need for renovations and other capital improvements, includingreplacements of furniture, fixtures and equipment.  Generally, we will be responsible for thecosts of these capital improvements, which gives rise to the following risks:

 

·**                  **cost overruns and delays;

 

·**                 **renovations can be disruptive to operationsand can displace revenue at the hotels, including revenue lost while roomsunder renovation are out of service;

 

·**                 **the cost of funding renovations and thepossibility that financing for these renovations may not be available onattractive terms; and

 

·**     **the risk that the return on our investment inthese capital improvements will not be what we expect.

 

If we have insufficient cash flow from operations tofund needed capital expenditures, then we will need to borrow to fund futurecapital improvements.

 

### ***General economic conditions and discretionaryconsumer spending may affect certain of the properties we acquire and lower thereturn on your investment.***

### ** **

The operations of certainproperties in which we may invest, such as hotels and recreation and leisureproperties, will depend upon a number of factors relating to discretionaryconsumer spending.  Unfavorable local,regional or national economic developments or uncertainties regarding futureeconomic prospects as a result of terrorist attacks, military activity ornatural disasters could reduce consumer spending in the markets in which we ownproperties and adversely affect the operation of those properties.  Consumer spending on luxury goods, travel andother leisure activities such as boating, skiing and health and spa activitiesmay decline as a result of lower consumer confidence levels, even if prevailingeconomic conditions are favorable. In an economic downturn, consumerdiscretionary spending levels generally decline, at times resulting indisproportionately large reductions in expenditures on luxury goods, travel andother leisure activities.  Certain of theclasses of properties that we may acquire may be unable to maintain theirprofitability during periods of adverse economic conditions or low consumerconfidence, which could in turn affect the ability of operators to makescheduled rent payments to us.

 

### ***Seasonal revenue variations incertain asset classes will require the operators of such assets to manage cashflow properly over time to meet their non-seasonal scheduled rent payments tous.***

### ** **

Certain of the properties inwhich we may invest, including some hotels and resorts and recreation andleisure properties, are generally seasonal in nature. For example, the typicalski season begins in early November and runs through April, during whichtime ski resorts generate the vast majority of their annual revenues. Revenuesand profits at ski resorts and their related properties are substantially lowerand historically result in losses during the summer months due to the closureof ski operations. As a result of the seasonal nature of certain industriesthat may be conducted on properties we acquire, these businesses willexperience seasonal variations in revenues that may require our operators tosupplement revenue at their properties in order to be able to make scheduled rentpayments to us.  The failure of anoperator or a tenant to manage its cash flow properly may result in suchoperator or tenant having insufficient cash on hand to make its scheduled 

 

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payments to us during seasonally slow periods, which may adverselyaffect our cash available for distribution to stockholders.

 

### ***Adverse weather conditions mayaffect operations of certain of the properties we acquire or reduce ouroperators’ ability to make scheduled rent payments to us, which could reduceour cash flow from such investments.***

### ** **

Adverse weather conditionsmay influence revenues at certain types of properties we acquire, such as somehotels, resorts and recreation and leisure properties. These adverse weatherconditions include heavy snowfall (or lack thereof), hurricanes, tropicalstorms, high winds, heat waves, frosts, drought (or merely reduced rainfalllevels), excessive rain and floods. For example, adverse weather could reducethe number of people that visit properties we acquire. Certain properties maybe susceptible to damage from weather conditions such as hurricanes, whichdamage (including but not limited to property damage and loss of revenue) isnot generally insurable at commercially reasonable rates.  Poor weather conditions could also disruptoperations at properties we acquire and may adversely affect both the value ofour investment in a property and the ability of our tenants and operators tomake their scheduled rent payments to us.

 

### ***Marinas, ski resorts and othertypes of properties in which we may invest may not be readily adaptable toother uses, and if these properties become unprofitable, we may not be able torecoup the value of our investment.***

### ** **

Ski resorts and relatedproperties, marinas, and other types of recreation and leisure properties inwhich we may invest are specific-use properties that have limited alternativeuses. Therefore, if the operations of any of our properties in these sectorsbecome unprofitable due to industry competition, a general deterioration of theapplicable industry or otherwise, we may have great difficulty selling the propertyor we may have to sell the property for substantially less than the amount wepaid for it. Should any of these events occur, our income and cash availablefor distribution could be reduced.

 

### ***Governmental regulation ofmarinas with respect to dredging could negatively impact marinas we acquire andthe value of our investment.***

### ** **

Marinas that we may acquiremust be dredged from time to time to remove the silt and mud that collect inharbor-areas as a result of, among other factors, heavy boat traffic, tidalflow, water flow and storm runoff, in order to assure that boat traffic cansafely enter the harbor. Dredging and disposing of the dredged material can bevery costly and may require permits from various governmental authorities. Ifwe acquire marinas and we or our marina tenants, or operators engaged by ourmarina tenants, cannot timely obtain the permits necessary to dredge marinas ordispose of the dredged material, or if dredging is not practical or isexceedingly expensive, the operations of the marina would be materially andadversely affected, which would in turn have a negative impact on our financialcondition.

 

### ***We may not control the landbeneath marinas we acquire, and this land may be subject to governmentaltaking.***

### ** **

The U.S. Army Corps of Engineersand the Coast Guard control much of the land located beneath and surroundingmost marinas. The U.S. Army Corps of Engineers and the Coast Guard lease suchland to marina owners and operators under leases for wetlands that typicallyrange from five to 50 years, and leases for upland that typically are initiallyfor 25 years. As a result, many marinas cannot obtain title to land on or nearthe marinas that they are interested in developing or obtain permission todevelop on the land that they lease. Furthermore, control of such land by theU.S. Army Corps of Engineers and the Coast Guard increases the possibility thatsuch land, including the marina built on such land, may be condemned and takenby the local, state or federal government in an eminent domain proceeding.

 

### ***Governmental regulation withrespect to the operation of ski resorts could negatively impact ski resorts weacquire and reduce the return on your investment.***

### ** **

Ski resort mountain andlodging operations often require permits and approvals from certain federal,state and local authorities. Many ski resorts that we may consider acquiringhave been granted the right to use federal land as the site for ski lifts andtrails and related activities, under the terms of permits with the USDA Forest Service.The USDA Forest Service has the right to review and approve the location,design and construction of improvements in the permit area and many operationalmatters. Where development in or around wetlands is involved, permits must beobtained from the U.S. Army Corps of Engineers. Further, ski resort operationsare subject to environmental laws and regulations, and compliance with theselaws and regulations may require expenditures or modifications of developmentplans and operations in a manner that could have a detrimental effect on theski resort.  In addition, the rights ofski resorts and related properties that we may acquire or develop to usevarious water sources on or about their properties may also be subject tosignificant restrictions or the rights of other riparian users and the publicgenerally. Certain ski resorts and related properties we may acquire or developand the municipalities in which they are located may be dependent upon a singlesource of water, and in some cases the volume of water contained in such watersources could be historically low or inconsistent. This may lead to disputesand litigation over, and restrictions placed on, water use. There can be noassurance that new applications of laws, regulations, and policies, or changesin such laws, regulations, and policies, will not occur in a manner that couldhave a detrimental effect on a ski resort that we may acquire, or that materialpermits, licenses, or approvals will not be terminated, non-renewed 

 

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or renewed on terms or interpreted in ways that are materially lessfavorable to the resorts we purchase. No assurance can be given that anyparticular permit or approval will be obtained or upheld on judicial review.

 

### ***The costs of compliance withenvironmental laws and other governmental laws and regulations may adverselyaffect our income and the cash available 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 regulationsgenerally govern wastewater discharges, air emissions, the operation andremoval of underground and above-ground storage tanks, the use, storage,treatment, transportation and disposal of solid and hazardous materials, andthe remediation of contamination associated with disposals.  Some of these laws and regulations may imposejoint and several liability on tenants, owners or operators for the costs ofinvestigation or remediation of contaminated properties, regardless of fault orthe legality of the original disposal. In addition, the presence of these substances, or the failure toproperly remediate these substances, may adversely affect our ability to sellor rent such property or to use the property as collateral for futureborrowing.

 

Compliance with new or morestringent laws or regulations or stricter interpretation of existing laws mayrequire material expenditures by us.  Wecannot assure you that future laws, ordinances or regulations will not imposeany material environmental liability, or that the current environmentalcondition of our properties will not be affected by the operations of thetenants, by the existing condition of the land, by operations in the vicinityof the properties, such as the presence of underground storage tanks, or by theactivities of unrelated third parties. In addition, there are various local, state and federal fire, health,life-safety and similar regulations that we may be required to comply with, andthat may subject us to liability in the form of fines or damages fornoncompliance.  Any foreign investmentswe make will be subject to similar laws in the jurisdictions where they arelocated.

 

### ***Discovery of previouslyundetected environmentally hazardous conditions may adversely affect ouroperating results.***

### ** **

Under various federal, state and local environmentallaws, ordinances and regulations (including those of foreign jurisdictions), acurrent or previous owner or operator of real property may be liable for thecost of removal or remediation of hazardous or toxic substances on, under or insuch property.  The costs of removal orremediation could be substantial.  Suchlaws often impose liability whether or not the owner or operator knew of, orwas responsible for, the presence of such hazardous or toxic substances.  Environmental laws also may impose restrictionson the manner in which property may be used or businesses may be operated, andthese restrictions may require substantial expenditures.  Environmental laws provide for sanctions inthe event of noncompliance and may be enforced by governmental agencies or, incertain circumstances, by private parties. Certain environmental laws and common law principles could be used toimpose liability for release of and exposure to hazardous substances, includingasbestos-containing materials into the air, and third parties may seek recoveryfrom owners or operators of real properties for personal injury or propertydamage associated with exposure to released hazardous substances.

 

In addition, when excessive moisture accumulates inbuildings or on building materials, mold growth may occur, particularly if themoisture problem remains undiscovered or is not addressed over a period oftime.  Some molds may produce airborne toxins or irritants.  Concernabout indoor exposure to mold has been increasing, as exposure to mold maycause a variety of adverse health effects and symptoms, including allergic orother reactions. As a result, the presence of significant mold at any of ourprojects could require us to undertake a costly remediation program to containor remove the mold from the affected property or development project, whichwould reduce our operating results.

 

The cost of defending against claims of liability,of compliance with environmental regulatory requirements, of remediating anycontaminated property, or of paying personal injury claims could materiallyadversely affect our business, assets or results of operations and,consequently, amounts available for distribution to you.

 

### ***Our costs associated withcomplying with the Americans with Disabilities Act may affect cash availablefor distributions.***

### ** **

Our properties are generallyexpected to be subject to the Americans with Disabilities Act of 1990, asamended (Disabilities Act), or similar laws of foreign jurisdictions.  Under the Disabilities Act, all places ofpublic accommodation are required to comply with federal requirements relatedto access and use by disabled persons. The Disabilities Act has separate compliance requirements for “publicaccommodations” and “commercial facilities” that generally require thatbuildings and services be made accessible and available to people withdisabilities.  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 acquireproperties that comply with the Disabilities Act or similar laws of foreignjurisdictions or place the burden on the seller or other third party, such as atenant, to ensure compliance with such laws. However, we cannot assure you that we will be able to acquire propertiesor allocate responsibilities in this manner. If we cannot, our funds used for compliance with these laws may affectcash available for distributions and the amount of distributions to you.

 

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Any apartment communities weacquire must comply with Title III of the Disabilities Act, to the extent thatsuch properties are “public accommodations” and/or “commercial facilities” asdefined by the Disabilities Act. Compliance with the Disabilities Act could require removal of structuralbarriers to handicapped access in certain public areas of our apartmentcommunities where such removal is readily achievable.  The Disabilities Act does not, however,consider residential properties, such as apartment communities to be publicaccommodations or commercial facilities, except to the extent portions of suchfacilities, such as the leasing office, are open to the public.

 

### ***If we invest in apartmentcommunities, we must comply with the Fair Housing Amendment Act, which maydecrease our cash flow from operations.***

### ** **

We also must comply with theFair Housing Amendment Act of 1988 (FHAA), which requires that apartmentcommunities first occupied after March 13, 1991 be accessible tohandicapped residents and visitors. Compliance with the FHAA could require removal of structural barriers tohandicapped access in a community, including the interiors of apartment unitscovered under the FHAA.  Recently therehas been heightened scrutiny of multifamily housing communities for compliancewith the requirements of the FHAA and an increasing number of substantial enforcementactions and private lawsuits have been brought against apartment communities toensure compliance with these requirements. Noncompliance with the FHAA could result in the imposition of fines,awards of damages to private litigants, payment of attorneys’ fees and othercosts to plaintiffs, substantial litigation costs and substantial costs ofremediation.

 

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

### ** **

If we decide to sell any ofour properties, we intend to use commercially reasonable efforts to sell themfor cash or in exchange for other property. However, in some instances we may sell our properties by providingfinancing to purchasers.  If we providefinancing to purchasers, we will bear the risk of default by the purchaser andwill be subject to remedies provided by law, which could negatively impactdistributions to our stockholders.  Thereare no limitations or restrictions on our ability to take purchase moneyobligations.  We may, therefore, take apurchase money obligation secured by a mortgage as partial payment for thepurchase price of a property.  The termsof payment to us generally will be affected by custom in the area where the propertybeing sold is located and the then-prevailing economic conditions.  If we receive promissory notes or otherproperty in lieu of cash from property sales, the distribution of the proceedsof sales to our stockholders, or their reinvestment in other assets, will bedelayed until the promissory notes or other property are actually paid, sold,refinanced or otherwise disposed of.  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 defaults under a financing arrangement with us, itcould negatively impact our ability to make distributions to our stockholders.

 

## ***Risks Associated with DebtFinancing***

## *** ***

### ***We incur mortgage indebtedness andother borrowings, which increases our business risks.***

### ** **

We have and anticipate thatwe will continue to acquire real properties and other real estate-relatedinvestments by using either existing financing or borrowing new funds.  In addition, we may incur or increase ourmortgage debt by obtaining loans secured by some or all of our real propertiesto obtain funds to acquire additional properties and other investments and forpayment of distributions to stockholders. We also 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 other investment.Under our charter, the maximum amount of our indebtedness shall not exceed 300%of our “net assets” (as defined by the NASAA REIT Guidelines) as of the date ofany borrowing; however, we may exceed that limit if approved by a majority ofour independent directors.

 

In addition to our charterlimitation, our board of directors has adopted a policy to generally limit ouraggregate borrowings to approximately 75% of the aggregate value of our assetsunless substantial justification exists that borrowing a greater amount is inour best interests.  Our policy limitation, however, does not apply toindividual real estate assets and only will apply once we have ceased raisingcapital under this or any subsequent offering and invested substantially all ofour capital.  As a result, we expect to borrow more than 75% of thecontract purchase price of each real estate asset we acquire to the extent ourboard of directors determines that borrowing these amounts is prudent.

 

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 cashflow, then the amount available for distributions to stockholders may beaffected.  In addition, incurringmortgage debt increases the risk of loss because defaults on indebtednesssecured by a property may result in foreclosure actions initiated by lendersand our loss of the property securing the loan that is in default.  For tax purposes, a foreclosure of any of ourproperties would be treated as a sale of the 

 

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property for a purchase price equal to the outstanding balance of thedebt secured by the mortgage.  If theoutstanding balance of the debt secured by the mortgage exceeds our tax basisin the property, we would recognize taxable income on foreclosure, but wouldnot receive any cash proceeds from the foreclosure.  We may give full or partial guarantees tolenders of mortgage debt to the entities that own our properties.  When we give a guaranty on behalf of anentity that owns one of our properties, we will be responsible to the lenderfor satisfaction of the debt if it is not paid by such entity.  If any mortgages contain cross-collateralizationor cross-default provisions, there is a risk that more than one real propertymay be affected by a default.  If any ofour properties are foreclosed upon due to a default, our ability to makedistributions to our stockholders will be adversely affected.  In addition, because our goal is to be in aposition to liquidate our assets within three to six years after thetermination of the Offering, our approach to investing in properties utilizingleverage in order to accomplish our investment objectives over this period oftime may present more risks to investors than comparable real estate programsthat have a longer intended duration and that do not utilize borrowing to thesame degree.

### ** **

### ***If mortgage debt is unavailableat reasonable rates, we may not be able to refinance our properties, whichcould reduce the amount of cash distributions we can make.***

### ** **

When we place mortgage debton properties, we run the risk of being unable to refinance the properties whenthe loans come due, or of being unable to refinance on favorable terms.  If interest rates are higher when theproperties are refinanced, we may not be able to finance the properties atreasonable rates and 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 enterinto restrictive covenants relating to our operations, which could limit ourability to make distributions to our stockholders.***

### ** **

In connection with obtainingfinancing, a lender could impose restrictions on us that affect our ability toincur additional debt and our distribution and operating policies.  In general, we expect our loan agreements torestrict our ability to encumber or otherwise transfer our interest in therespective property without the prior consent of the lender.  Loan documents we enter may contain othercustomary negative covenants that may limit our ability to further mortgage theproperty, discontinue insurance coverage, replace Behringer Harvard OpportunityAdvisors II as our advisor or impose other limitations.  Any such restriction or limitation may havean adverse effect on our operations and our ability to make distributions toyou.

 

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

### ** **

We may finance our propertyacquisitions using interest-only mortgage indebtedness.  During the interest-only period, the amountof each scheduled payment will be less than that of a traditional amortizingmortgage loan.  The principal balance ofthe mortgage loan will not be reduced (except in the case of prepayments)because there are no scheduled monthly payments of principal during thisperiod.  After the interest-only period,we will be required either to make scheduled payments of amortized principaland interest or to make a lump-sum or “balloon” payment at maturity.  These required principal or balloon paymentswill increase the amount of our scheduled payments and may increase our risk ofdefault under the related mortgage loan. If the mortgage loan has an adjustable interest rate, the amount of ourscheduled payments also may increase at a time of rising interest rates.  Increased payments and substantial principalor balloon maturity payments will reduce the funds available for distributionto our stockholders because cash otherwise available for distribution will berequired to pay principal and interest associated with these mortgage loans.

 

### ***Increases in interest rates couldincrease the amount of our debt payments and adversely affect our ability tomake distributions to our stockholders.***

### ** **

We may incur indebtednessthat bears interest at a variable rate. In addition, from time to time we may pay mortgage loans or finance andrefinance our properties in a rising interest rate environment.  Accordingly, increases in interest ratescould increase our interest costs, which could have an adverse effect on our operatingcash flow and our ability to make distributions to you.  In addition, if rising interest rates causeus to need additional capital to repay indebtedness in accordance with itsterms or otherwise, we may need to liquidate one or more of our investments attimes that may not permit realization of the maximum return on suchinvestments.

 

### ***If we enter into financingarrangements involving balloon payment obligations, it may adversely affect ourability to make distributions.***

### ** **

Some of our financingarrangements may require us to make a lump-sum or “balloon” payment atmaturity.  Our ability to make a balloonpayment at maturity is uncertain and may depend upon our ability to obtainadditional financing or our ability to sell the property.  At the time the balloon payment is due, wemay or may not be able to refinance the balloon payment on terms as favorableas the original loan or sell the property at a price sufficient to make theballoon payment.  The effect of arefinancing or sale could affect the rate of return to stockholders and the projectedtime of disposition of our assets.  

 

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In addition, payments of principal and interest made to service ourdebts may leave us with insufficient cash to pay the distributions that we arerequired to pay to maintain 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 levels could hinder our ability to make distributions and coulddecrease the value of your investment.***

### ** **

Our board of directors hasadopted a policy to generally limit our aggregate borrowings to approximately75% of the aggregate value of our assets, but we may exceed this limitunder some circumstances.  Such debtmay be at a level that is higher than real estate investment trusts withsimilar investment objectives or criteria. High debt levels would cause us to incur higher interest charges, wouldresult in higher debt service payments, and could be accompanied by restrictivecovenants.  These factors could limit theamount of cash we have available to distribute and could result in a decline inthe value of your investment.

 

**Risks Relatedto Investments in Real Estate-Related Securities**

** **

### ***Investments in realestate-related securities will be subject to specific risks relating to theparticular issuer of the securities and may be subject to the general risks ofinvesting in subordinated real estate securities, which may result in losses tous.***

### ** **

We may invest in realestate-related securities of both publicly traded and private real estatecompanies.  Our investments in realestate-related securities will involve special risks relating to the particularissuer of the securities, including the financial condition and businessoutlook of the issuer.  Issuers of realestate-related securities generally invest in real estate or realestate-related assets and are subject to the inherent risks associated withreal estate-related investments discussed in this Annual Report on Form 10-K,including risks relating to rising 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-related securities are subject to risks of (1) limitedliquidity in the secondary trading market in the case of unlisted or thinlytraded securities, (2) substantial market price volatility resulting fromchanges in prevailing interest rates in the case of traded equity securities, (3) subordinationto the prior claims of banks and other senior lenders to the issuer, (4) theoperation of mandatory sinking fund or call/redemption provisions duringperiods of declining interest rates that could cause the issuer to reinvestredemption proceeds in lower yielding assets, (5) the possibility thatearnings of the issuer may be insufficient to meet its debt service anddistribution obligations and (6) the declining creditworthiness andpotential for insolvency of the issuer during periods of rising interest ratesand economic slowdown or downturn.  Theserisks may adversely affect the value of outstanding real estate-relatedsecurities and the ability of the issuers thereof to repay principal andinterest or make distribution payments.

 

### ***Investments in realestate-related preferred equity securities involve a greater risk of loss thantraditional debt financing.***

### ** **

We may invest in realestate-related preferred equity securities, which may involve a higher degreeof risk 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 default on our investment, we would beable to proceed only against the entity in which we have an interest, and notthe property owned by such entity and underlying our investment.  As a result, we may not recover some or allof our investment.

 

### ***We may make investments innon-U.S. dollar denominated securities, which will be subject to currency ratesexposure and the uncertainty of foreign laws and markets.***

### ** **

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

 

### ***We expect that a portion of anyreal estate-related securities investments we make will be illiquid, and we maynot be able to adjust our portfolio in response to changes in economic andother conditions.***

### ** **

Certain of the realestate-related securities that we may purchase in connection with privatelynegotiated transactions will not be registered under the 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 ourportfolio in response to changes in economic and other conditions may berelatively limited.  The mezzanine andbridge loans we may purchase will be particularly illiquid investments due totheir short life, their unsuitability for securitization and the greaterdifficulty of recoupment in the event of a borrower’s default.

 

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### ***Interest rate and related risksmay cause the value of our real estate-related securities investments to bereduced.***

### ** **

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 interest rates rise, the market value of thesesecurities 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 the securities sooner than expected,thereby lowering the effective yield on the investment.  On the other hand, when interest rates rise,issuers are more likely to maintain their existing preferred and debtsecurities.  As a result, repurchasesdecrease, thereby extending the average maturity of the securities.  We intend to manage interest rate risk bypurchasing preferred and debt securities with maturities and repurchaseprovisions that are designed to match our investment objectives.  If we are unable to manage these riskseffectively, our results of operations, financial condition and ability to paydistributions to you will be adversely affected.

 

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

### ** **

We may acquire realestate-related securities through tender offers, negotiated or otherwise, inwhich we solicit a target company’s stockholders to purchase theirsecurities.  The acquisition of thesesecurities could require us to spend significant amounts of money thatotherwise could be allocated to our operations. Additionally, in order to acquire the securities, the employees of ouradvisor likely will need to devote a substantial portion of their time topursuing the tender offer — time that otherwise could be allocated to managingour business.  These consequences couldadversely affect our operations and reduce the cash available for distributionto our stockholders.

 

### ***The CMBS in which we may investare subject to all of the risks of the underlying mortgage loans and the risksof the securitization process.***

### ** **

Commercial mortgage-backedsecurities (CMBS) are securities that evidence interests in, or are secured by,a single commercial mortgage loan or a pool of commercial mortgage loans.Accordingly, these securities are subject to all of the risks of the underlyingmortgage 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 also change dueto shifts in the market’s perception of issuers and regulatory or tax changesadversely affecting the mortgage securities market as a whole. In addition,CMBS are subject to the credit risk associated with the performance of theunderlying mortgage properties. In certain instances, third-party guarantees orother forms of credit support can reduce the credit risk.

 

CMBS are also subject toseveral risks created through the securitization process. Subordinate CMBS arepaid interest only to the extent that there are funds available to makepayments. To the extent the collateral pool includes delinquent loans, there isa risk that interest payment on subordinate CMBS will not be fully paid.Subordinate CMBS are also subject to greater credit risk than those CMBS thatare more highly rated.

 

### ***If we use leverage in connectionwith our investment in CMBS, the risk of loss associated with this type ofinvestment will 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 assurance that leveragedfinancing will be available to us on favorable terms or that, among otherfactors, the terms of such financing will parallel the maturities of theunderlying securities acquired. Therefore, such financing may mature prior tothe maturity of the CMBS acquired by us. If alternative financing is notavailable, we may have to liquidate assets at unfavorable prices to pay offsuch financing.  We may utilizerepurchase agreements as a component of our financing strategy. Repurchaseagreements economically resemble short-term, variable-rate financing andusually require the maintenance of specific loan-to-collateral value ratios. Ifthe market value of the CMBS subject to a repurchase agreement decline, we maybe required to provide additional collateral or make cash payments to maintainthe loan to collateral value ratio. If we are unable to provide such collateralor cash repayments, we may lose our economic interest in the underlying CMBS.

 

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## ***Risks Associated with Investmentsin Mortgage, Bridge and Mezzanine Loans***

## *** ***

### *** We have relatively less experience investingin mortgage, bridge, mezzanine or other loans as compared to investing directlyin real property, which could adversely affect our return on loan investments.***

### ** **

The experience of our advisor and its affiliateswith respect to investing in mortgage, bridge, mezzanine or other loans is notas extensive as it is with respect to investments directly in real properties.However, we may continue make such loan investments to the extent our advisordetermines that it is advantageous to us due to the state of the real estatemarket or in order to diversify our investment portfolio. Our less extensiveexperience with respect to mortgage, bridge, mezzanine or other loans couldadversely affect our return on loan investments.

 

### ***Our mortgage, bridge or mezzanineloans may be impacted by unfavorable real estate market conditions, which coulddecrease the value of those loans and the return on your investment.***

### ** **

If we make or invest inmortgage, bridge or mezzanine loans, we will be at risk of defaults on thoseloans caused by many conditions beyond our control, including local and othereconomic conditions affecting real estate values and interest rate levels.  We do not know whether the values of theproperty securing the loans will remain at the levels existing on the dates oforigination of the loans.  If the valuesof the underlying properties drop, our risk will increase because of the lowervalue of the security associated with such loans.

 

### ***Our mortgage, bridge or mezzanineloans will be subject to interest rate fluctuations, which could reduce ourreturns as compared to market interest rates and reduce the value of the loansin the event we sell them.***

### ** **

If we invest in fixed-rate,long-term mortgage, bridge or mezzanine loans and interest rates rise, theloans could yield a return lower than then-current market rates.  If interest rates decrease, we will beadversely affected to the extent that mortgage, bridge or mezzanine loans areprepaid, because we may not be able to make new loans at the previously higherinterest rate.  If we invest invariable-rate loans and interest rates decrease, our revenues will alsodecrease.  Finally, if we invest invariable-rate loans and interest rates increase, the value of the loans we ownat such time would decrease, which would lower the proceeds we would receive inthe event we sell such assets.  For thesereasons, if we invest in mortgage, bridge or mezzanine loans, our returns onthose loans and the value of your investment will be subject to fluctuations ininterest rates.

 

### ***Delays in liquidating defaultedmortgage, mezzanine or bridge loans could reduce our investment returns.***

### ** **

If there are defaults underour loans, we may not be able to repossess and sell quickly any propertiessecuring such loans.  The resulting timedelay could reduce the value of our investment in the defaulted loans.  An action to foreclose on a property securinga loan is regulated by state statutes and regulations and is subject to many ofthe delays and expenses of any lawsuit brought in connection with theforeclosure if the defendant raises defenses or counterclaims.  In the event of default by a mortgagor, theserestrictions, among other things, may impede our ability to foreclose on orsell the mortgaged property or to obtain proceeds sufficient to repay allamounts due to us on the loan.

 

### ***The mezzanine loans in which wemay invest would involve greater risks of loss than senior loans secured byincome-producing real properties.***

### ** **

We may invest in mezzanineloans that take the form of subordinated loans secured by second mortgages onthe underlying real property or loans secured by a pledge of the ownershipinterests of either the entity owning the real property or the entity that ownsthe interest in the entity owning the real property.  These types of investments involve a higherdegree of risk than long-term senior mortgage lending secured by incomeproducing real property because the investment may become unsecured as a resultof foreclosure by the senior lender.  Ifborrowers of these loans are real estate developers, our investments mayinvolve additional risks, including dependence for repayment on successfulcompletion and operation of the project, difficulties in estimatingconstruction or rehabilitation costs and loan terms that often require littleor no amortization.  In the event of abankruptcy of the entity providing the pledge of its ownership interests assecurity, we may not have full recourse to the assets of the entity, or theassets of the entity may not be sufficient to satisfy our mezzanine loan.  If a borrower defaults on our mezzanine loanor debt senior to our loan, or in the event of a borrower bankruptcy, ourmezzanine loan will be satisfied only after the senior debt.  As a result, we may not recover some or allof our investment.

 

### ***Returns on our mortgage, bridgeor mezzanine loans may 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 and/or regulation by foreignjurisdictions and subject to various laws and judicial and administrativedecisions.  We may determine not to makemortgage, bridge or mezzanine loans in any jurisdiction in which we believe wehave not complied in all material respects with applicable requirements.  If we decide not to make mortgage, bridge ormezzanine loans in several jurisdictions, it could reduce the amount of incomewe would otherwise receive.

 

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### ***Foreclosures create additionalownership risks that could adversely impact our returns on mortgageinvestments.***

### ** **

If we acquire property byforeclosure following defaults under our mortgage, bridge or mezzanine loans,we will have the economic and liability risks as the owner.

 

### ***The liquidation of our assets maybe delayed as a result of our investment in mortgage, bridge or mezzanineloans, which could delay distributions 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 determines that it is in ourbest interest to make or invest in mortgage, bridge or mezzanine loans, anyintended liquidation of us may be delayed beyond the time of the sale of all ofour properties until all mortgage, bridge or mezzanine loans expire or aresold, because we may enter into mortgage, bridge or mezzanine loans with termsthat expire after the date we intend to have sold all of our properties.

 

## ***Risks Associated with Section 1031Tenant-in-Common Transactions***

## *** ***

### ***We may have increased exposure toliabilities from litigation 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-kind exchangetreatment under Section 1031 of the Internal Revenue Code.  Section 1031 tenant-in-commontransactions (Section 1031 TIC Transactions) are structured as theacquisition of real estate owned in co-tenancy arrangements with partiesseeking to defer taxes under Section 1031 of the Internal Revenue Code(1031 Participants).  We may provideaccommodation in support of or otherwise be involved in such Section 1031TIC Transactions.  Specifically, at theclosing of certain properties acquired by a Behringer Harvard Exchange Entity,we may enter into a contractual arrangement with such entity providing:  (1) in the event that the BehringerHarvard Exchange Entity is unable to sell all of the co-tenancy interests inthat property to 1031 Participants, we will purchase, at 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 our participation in Section 1031TIC Transactions may have certain benefits to our business, including enablingus to invest capital more readily and over a more diversified portfolio andallowing us to acquire interests in properties that we would be unable toacquire using our own capital resources, there are significant tax andsecurities disclosure risks associated with the related offerings of co-tenancyinterests to 1031 Participants.  Changesin tax laws may negatively impact the tax benefits of like-kind exchanges orcause such transactions not to achieve their intended value.  In certain Section 1031 TIC Transactionsit is anticipated that we would receive fees in connection with our provisionof accommodation in support of the transaction and, as such, even though we donot sponsor these Section 1031 TIC Transactions, we may be named in orotherwise required to defend against any lawsuits brought by 1031 Participantsbecause of our affiliation with sponsors of such transactions.  Furthermore, in the event that the InternalRevenue Service conducts an audit of the purchasers of co-tenancy interests andsuccessfully challenges the qualification of the transaction as a like-kind exchange,purchasers of co-tenancy interests may file a lawsuit against the entityoffering the co-tenancy interests, its sponsors, and/or us.  We may be involved in one or more suchofferings and could therefore be named in or otherwise required to defend againstlawsuits brought by 1031 Participants. Any amounts we are required to expend defending any such claims willreduce the amount of funds available for investment by us in properties orother investments and may reduce the amount of funds available for distributionto our stockholders.  In addition,disclosure of any such litigation may adversely affect our ability to raiseadditional capital in the future through the sale of stock.

 

### ***We may have increased businessand litigation risks as a result of any direct sales by us of tenant-in-common interestsin Section 1031 Tenant-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 tax laws may negatively impact thetax benefits of like-kind exchanges or cause such transactions not to achievetheir intended value.  Furthermore, theInternal Revenue Service may determine that the sale of tenant-in-commoninterests is a “prohibited transaction” under the Internal Revenue Code, whichwould cause all of the gain we realize from any such sale to be payable as atax to the Internal Revenue Service, with none of such gain available fordistribution to our 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.  Wemay be named in or otherwise required to defend against any lawsuits brought bystockholders or 1031 Participants in connection with Section 1031 TICTransactions in which we directly sell tenant-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.  Any alleged failure by us to comply withthese requirements could expose us to risks of litigation.  Any amounts we are 

 

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required to expend defending claims brought against us will reduce theamount of funds available for us to invest in properties or other investmentsand may reduce the amount of funds available for distribution to ourstockholders.  In addition, disclosure ofany such litigation may adversely affect our ability to raise additionalcapital in the future through the sale of stock.

 

### ***A portion of the properties weacquire may be in the form of tenant-in-common or other co-tenancyarrangements.  We will be subject torisks associated with such co-tenancy arrangements that otherwise may not bepresent in non-co-tenancy real estate investments.***

### ** **

We may enter into tenant-in-common or other co-tenancyarrangements with respect to a portion of the properties we acquire.  Whether acquired as a planned co-tenancy oras the result of an accommodation or other arrangement disclosed above,ownership of co-tenancy interests involves risks generally not otherwisepresent with an investment in real estate, including the following:

 

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

 

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

 

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

 

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

 

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

 

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

 

### ***Actions by a co-tenant might havethe result of subjecting the property to liabilities in excess of thosecontemplated and may have the effect 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 the opportunity to purchase such co-tenancyinterests in the future, we cannot guarantee that we will have sufficient fundsavailable at the time to purchase such co-tenancy interests. In addition, wemay desire to sell our co-tenancy interests in a given property at a time whenthe other co-tenants in such property do not desire to sell theirinterests.  Therefore, we may not be ableto sell our interest in a property at the time we would like to sell.  Finally, it is anticipated that it will bemuch more difficult to find a willing buyer for our co-tenancy interests in aproperty than it would be to find a buyer for a property we owned outright.

 

### ***Our participation in Section 1031TIC Transactions may limit our ability to borrow funds in the future, whichcould adversely affect the 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 be viewed by our lenders in such amanner as to limit our ability to borrow funds based on regulatory restrictionson lenders limiting the amount of loans they can make to any one borrower.

 

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### ***Our operating results will benegatively affected if our investments, including investments intenant-in-common interests promoted by affiliates of our advisor, do not meetprojected distribution levels.***

### ** **

Behringer Harvard Holdingsand its affiliates have promoted a number of tenant-in-common real estateprojects.  Some of these projects havenot met the distribution levels anticipated in the projections produced byBehringer Harvard Holdings and its affiliates. In addition, certain other projects have not achieved the leasing andoperational thresholds projected by Behringer Harvard Holdings and itsaffiliates.  If projections related toour investments, including any tenant-in-common interests in which we invest,are inaccurate, we may pay too much for an investment and our return on ourinvestment could suffer.

 

Specifically, severaltenant-in-common investment programs have not benefited from expected leasingimprovements.  Behringer Harvard Holdingshas provided support for some of these programs in the form of leases forvacant 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.  With respect to this program, BehringerHarvard Holdings has completed a settlement with the investors to support theirreturns and is pursuing a claim against the seller and others on behalf of theinvestors and itself.

 

## ***Federal Income Tax Risks***

## *** ***

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

### ** **

In order for us to qualify as a REIT, we must satisfycertain requirements set forth in the Code and Treasury Regulations and variousfactual matters and circumstances that are not entirely within ourcontrol.  We intend to structure ouractivities in a manner designed to satisfy all of these requirements.  However, if certain of our operations were tobe recharacterized by the Internal Revenue Service, such recharacterizationcould jeopardize our ability to satisfy all of the requirements forqualification as a REIT and may affect our ability to qualify, or continue toqualify, as a REIT.  In addition, newlegislation, new regulations, administrative interpretations or court decisionscould significantly change the tax laws with respect to qualifying as a REIT orthe federal income tax consequences of qualifying.

 

Our qualification as a REIT depends upon our abilityto meet, through investments, actual operating results, distributions andsatisfaction of specific stockholder rules, the various tests imposed by theCode.  We cannot assure you that we willsatisfy the REIT requirements in the future.   If we fail to qualify as a REIT for any taxable year, we will be subjectto federal income tax on our taxable income for that year at corporate rates.  In addition, we would generally bedisqualified from treatment as a REIT for the four taxable years following theyear of losing our REIT status.  Losingour REIT status would reduce our net earnings available for investment ordistribution to stockholders because of the additional tax liability.  In addition, distributions to stockholderswould no longer qualify for the distributions-paid deduction, and we would nolonger be required to make distributions. If this occurs, we might be required to borrow funds or liquidate someinvestments in order to pay the applicable tax. Our failure to qualify as a REIT would adversely affect the return onyour investment.

 

Qualification as a REIT is subject to the satisfactionof tax requirements and various factual matters and circumstances that are notentirely within our control.  Newlegislation, regulations, administrative interpretations or court decisionscould change the tax laws with respect to qualification as a REIT or thefederal income tax consequences of being a REIT.  Our failure to qualify as a REIT would adverselyaffect your return on your investment.

 

### ***Our investment strategy may causeus to incur penalty taxes, lose our REIT status, or own and sell propertiesthrough taxable REIT subsidiaries, each of which would diminish the return toour stockholders.***

### ** **

In light of ouropportunistic investment strategy, it is possible that one or more sales of ourproperties may be considered “prohibited transactions” under the InternalRevenue Code.  Any subdivision ofproperty, such as the sale of condominiums, would almost certainly beconsidered such a prohibited transaction. If we are deemed to have engaged in a “prohibited transaction” (i.e., wesell a property held by us primarily for sale in the ordinary course of ourtrade or business) all income that we derive from such sale would be subject toa 100% penalty tax.  The Internal RevenueCode sets forth a safe harbor for REITs that wish to sell property withoutrisking the imposition of the 100% penalty tax. A principal requirement of the safe harbor is that the REIT must holdthe applicable property for not less than two years prior to its sale.  Given our opportunistic investment strategy,the sale of one or more of our properties may not fall within the prohibitedtransaction safe harbor.

 

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 TRS or acquired the property and transferred it to a TRS for anon-tax business purpose prior to the sale (i.e., for a reason other than theavoidance of taxes).  However, there maybe circumstances that prevent us from using a TRS in a transaction that doesnot qualify for the safe harbor. Additionally, even if it is possible to effect a property dispositionthrough a TRS, we may decide to forgo the use of a TRS in a transaction thatdoes not meet the safe harbor based on our own internal analysis, the opinionof counsel or the opinion of other tax advisors 

 

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that the disposition willnot be subject to the 100% penalty tax. In cases where a property disposition is not effected through a TRS, theInternal Revenue Service could successfully assert that the dispositionconstitutes a prohibited transaction, in which event all of the net income fromthe sale of such property will be payable as a tax and none of the proceedsfrom such sale will be distributable by us to our stockholders or available forinvestment by us.

 

If we acquire a propertythat we anticipate will not fall within the safe harbor from the 100% penaltytax upon disposition, then we may acquire such property through a TRS in orderto avoid the possibility that the sale of such property will be a prohibitedtransaction and subject to the 100% penalty tax.  If we already own such a property directly orindirectly through an entity other than a TRS, we may contribute the propertyto a TRS if there is another, non-tax related business purpose for thecontribution of such property to the TRS. Following the transfer of the property to a TRS, the TRS will operatethe property and may sell such property and distribute the net proceeds fromsuch sale to us, and we may distribute the net proceeds distributed to us bythe TRS to our stockholders.  Though asale of the property by a TRS likely would eliminate the danger of theapplication of the 100% penalty tax, the TRS itself would be subject to a taxat the federal level, and potentially at the state and local levels, on thegain realized by it from the sale of the property as well as on the incomeearned while the property is operated by the TRS.  This tax obligation would diminish the amountof the proceeds from the sale of such property that would be distributable toour stockholders.  As a result, theamount available for distribution to our stockholders would be substantiallyless than if the REIT had not operated and sold such property through the TRSand such transaction was not successfully characterized as a prohibitedtransaction.  The maximum federalcorporate income tax rate currently is 35%. Federal, state and local corporate income tax rates may be increased inthe future, 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 of thenon-mortgage securities we hold in all of our TRSs may not exceed 20% (25% forour 2009 taxable year and beyond) of the value of all of our assets at the endof any calendar quarter.  If the InternalRevenue Service were to determine that the value of our interests in all of ourTRSs exceeded this limit at the end of any calendar quarter, then we would failto 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% ofour gross income with respect to any year may be from sources other than realestate.  Distributions paid to us from aTRS are considered to be non-real estate income.  Therefore, we may fail to qualify as a REITif distributions from all of our TRSs, when aggregated with all other non-realestate income with respect to any one year, are more than 25% of our grossincome with respect to such year.  Wewill use all reasonable efforts to structure our activities in a mannerintended to satisfy the requirements for our continued qualification as aREIT.  Our failure to qualify as a REITwould adversely affect the return on your investment.

 

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

### ** **

Income received in the natureof rental subsidies or rent guarantees, in some cases, may not qualify asrental 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, inconnection with our Section 1031 TIC Transactions, we or one of ouraffiliates may enter into a number of contractual 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 forentering into these agreements, we will be paid fees that could becharacterized by the Internal Revenue Service as non-qualifying income forpurposes of satisfying the “income tests” required for 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 REIT status.  We will use commercially reasonable effortsto structure our activities in a manner intended to satisfy the requirementsfor our continued qualification as a REIT. Our failure to qualify as a REIT would adversely affect the return onyour investment.

 

### ***Recharacterization of the Section 1031TIC Transactions may result in taxation of income from a prohibited transaction,which would diminish 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 a 100% penalty tax.  If this occurs, our ability to make cashdistributions to our stockholders will be adversely affected.

 

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***You may have current tax liability on distributions you elect toreinvest 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 betreated for tax purposes as having received an additional distribution to theextent the shares are purchased at a discount to fair market value.  As a result, unless you are a tax-exemptentity, you may have to use funds from other sources to pay your tax liabilityon the value of the shares of common stock received.

 

### ***If our operating partnershipfails to maintain its status as a partnership, its income may be subject totaxation, which would reduce the cash available to us for distribution to ourstockholders.***

### ** **

We intend to maintain thestatus of Behringer Harvard Opportunity OP II, our operating partnership, as apartnership for federal income tax purposes. However, if the Internal Revenue Service were to successfully challengethe status of the operating partnership as an entity taxable as a partnership,Behringer Harvard Opportunity OP II would be taxable as a corporation.  In such event, this would reduce the amountof distributions that the operating partnership could make to us.  This could also result in our losing REITstatus, and becoming subject to a corporate level tax on our income.  This would substantially reduce the cashavailable to us to make distributions and the return on your investment.  In addition, if any of the partnerships orlimited liability 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.  Such a recharacterization of an underlyingproperty owner could also threaten our ability to maintain REIT status.

### ** **

### ***In certain circumstances, we maybe subject to federal and state taxes on income as a REIT, which would reduceour cash available for distribution 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, ifwe have net income from a “prohibited transaction,” such income will be subjectto a 100% penalty tax.  We may not beable to make sufficient distributions to avoid excise taxes applicable toREITs.  We may also decide to retain incomewe earn from the sale or other disposition of our assets and pay income taxdirectly on such income.  In that event,our stockholders would be treated as if they earned that income and paid thetax 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 state taxes paid by us willreduce the cash available to us for distribution to our stockholders.

 

### ***Non-U.S. income or other taxes,and a requirement to withhold any non-U.S. taxes, may apply, and, if so, theamount of net cash from operations payable to you will be reduced.***

### ** **

We intend to acquire realproperty located outside the U.S. and may invest in stock or other securitiesof entities owning real property located outside the U.S.  As a result, we may be subject to foreign(i.e., non-U.S.) income taxes, stamp taxes, real property conveyance taxes,withholding taxes, and other foreign taxes or similar impositions in connectionwith our ownership of foreign real property 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 imposes income taxes onprofits from our investment in foreign real property or foreign securities, youwill not be eligible to claim a tax credit on your U.S. federal income taxreturns to offset the income taxes paid to the foreign country, and theimposition of any foreign taxes in connection with our ownership and operationof foreign real property or our investment in securities of foreign entitieswill reduce the amounts distributable to you. Similarly, the imposition of withholding taxes by a foreign country willreduce the amounts distributable to you. We expect the organizational costs associated with non-U.S. investments,including costs to structure the investments so as to minimize the impact offoreign taxes, will be higher than those associated with U.S. investments.  Moreover, we may be required to file incometax or other information returns in foreign jurisdictions as a result of ourinvestments made outside of the U.S.  Anyorganizational costs and reporting requirements will increase ouradministrative expenses and reduce the amount of cash available fordistribution to you.  You are urged toconsult with your own tax advisors with respect to the impact of applicablenon-U.S. taxes and tax withholding requirements on an investment in our commonstock.

 

***Our foreign investments will be subject to changes in foreign tax orother laws, as well as to changes in U.S. tax laws, and such changes couldnegatively impact our returns from any particular investment.***

*** ***

We expect to makeinvestments in real estate located outside of the United States.  Such investments will typically be structuredto minimize non-U.S. taxes, and generally include the use of holdingcompanies.  Our ownership, operation anddisposition strategy with respect to non-U.S. investments will take intoaccount foreign tax considerations.  Forexample, it is typically advantageous from a tax perspective in non-U.S.jurisdictions to sell interests in a holding company that owns real 

 

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estate rather than the realestate itself.  Buyers of such entities,however, will often discount their purchase price by any inherent or expectedtax in such entity.  Additionally, thepool of buyers for interests in such holding companies is typically morelimited than buyers of direct interests in real estate, and we may be forced todispose of real estate directly, thus potentially incurring higher foreigntaxes and negatively effecting the return on the investment.

 

We will also capitalize ourholding companies with debt and equity to reduce foreign income and withholdingtaxes as appropriate and with consultation with local counsel in eachjurisdiction.  Such capitalizationstructures are complex and potentially subject to challenge by foreign anddomestic taxing authorities.

 

We may use certain holdingstructures for our non-U.S. investments to accommodate the needs of one classof investors which reduce the after-tax returns to other classes ofinvestors.  For example, if we interposean entity treated as a corporation for United States tax purposes in our chainof ownership with respect to any particular investment, U.S. tax-exemptinvestors will generally benefit as such investment will no longer generateunrelated business taxable income. However, if a corporate entity is interposed in a non-U.S. investmentholding structure, this would prevent individual investors from claiming aforeign tax credit for any non-U.S. income taxes incurred by the corporateentity or its subsidiaries.

 

Foreign investments aresubject to changes in foreign tax or other laws.  Any such law changes may require us to modifyor abandon a particular holding structure. Such changes may also lead to higher tax rates on our foreigninvestments than we anticipated, regardless of structuring modifications.  Additionally, U.S. tax laws with respect toforeign investments are subject to change, and such changes could negativelyimpact our returns from any particular investment.

 

### ***Legislative orregulatory action could adversely affect the returns 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 the tax laws are likely to continue to occur, andwe cannot assure you that any such changes will not adversely affect thetaxation of a stockholder.  Any suchchanges could have an adverse effect on an investment in our shares or on themarket value or the resale potential of our assets.  You are urged to consult with your own taxadvisor with respect to the impact of recent legislation on your investment inour shares and the status of legislative, regulatory or administrativedevelopments and proposals and their potential effect on an investment in ourshares.  You also should note that ourcounsel’s tax opinion is based upon existing law and Treasury Regulations,applicable as of the date of its opinion, all of which are subject to change,either prospectively or retroactively.

 

Congress passed majorfederal tax legislation in 2003, with modifications to that legislation in2005.  One of the changes affected bythat legislation generally reduced the tax rate on dividends paid bycorporations to individuals to a maximum of 15% prior to 2011.  REIT distributions generally do not qualifyfor this reduced rate.  The tax changesdid not, however, reduce the corporate tax rates.  Therefore, the maximum corporate tax rate of35% has not been affected.  However, as aREIT, we generally would not be subject to federal or state corporate incometaxes on that portion of our ordinary income or capital gain that we distributecurrently to our stockholders, and we thus expect to avoid the “double taxation”that other corporations are typically subject to.

 

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

 

### ***Equity participation in mortgage,bridge, mezzanine or other loans may result in taxable income and gains fromthese properties that could adversely impact our REIT status.***

### ** **

If we participate under aloan in any appreciation of the properties securing the mortgage loan or itscash flow and 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 couldaffect our ability to qualify as a REIT.

 

## ***Risks Related to Investments byTax-Exempt Entities and Benefit Plans Subject to ERISA***

## *** ***

### ***If the fiduciary of an employeepension benefit plan subject to ERISA (such as profit sharing, Section 401(K) orpension plan) or any other retirement plan or account fails to meet thefiduciary and other standards under ERISA or the Internal Revenue Code as aresult of an investment in our stock, you could be subject to criminal and civilpenalties.***

### ** **

There are specialconsiderations that apply to employee benefit plans subject to ERISA (such asprofit sharing, section 401(k) or pension plans) and other retirement plans oraccounts subject to Section 4975 of the Internal Revenue Code 

 

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(such as an IRA) that areinvesting in our shares.  If you areinvesting the assets of such a plan or account in our common stock, you shouldsatisfy yourself that:

 

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

 

·                  your investment is made in accordance with thedocuments and instruments governing your plan or IRA, including your plan’s oraccount’s investment policy;

 

·                  your investment satisfies the prudence anddiversification 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 the liquidity of theplan or IRA;

 

·                  your investment will not produce “unrelated businesstaxable income” for the plan or IRA;

 

·                  you will be able to value the assets of the planannually in accordance with ERISA requirements and applicable provisions of theplan or IRA; and

 

·                  your investment will not constitute a prohibitedtransaction under Section 406 of ERISA or Section 4975 of theInternal 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.  In addition, if an investment in our sharesconstitutes a prohibited transaction under ERISA or the Internal Revenue Code,the fiduciary who authorized or directed the investment may be subject to theimposition of excise taxes with respect to the amount invested.

 

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

 

None.

 

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**Item 2.                    Properties.**

 

**General**

 

As of December 31, 2008, we consolidated onewholly-owned property.  The followingtable presents certain additional information about our consolidated propertyas of December 31, 2008:

 
| **Property Name** | ** ** | **Location** | ** ** | **Date Acquired** | ** ** | **Approximate  Rentable  Square Footage** | ** ** | **Description**          | ** ** | **Encumbrances** | ** ** | **Ownership  Interest** | ** ** |
|------------------------|------------|--------------|------------|------------------------|------------|------------------------------------------------|------------|--------------------------|------------|------------------|------------|-------------------------|------------|
| 1875 Lawrence          |       | Denver, CO   |       | October 2008      |       | 185,000                                        |       | 15-story office building |       | $18.5 million    |       | 100%                    |       |

 

The following informationgenerally applies to our consolidated property:

 

·                  we believe our property is adequately covered byinsurance and suitable for its intended purposes;

 

·                  our property is located in a market where we aresubject to competition in attracting new tenants and retaining current tenants;and

 

·                  depreciation is provided on a straight-line basis overthe estimated useful life of the building.

 

**Future Lease Payments Table**

 

The following table presents the future minimum baserental payments due to us over the next ten years at our consolidated propertyas of December 31, 2008 (amountsin thousands):

 
| 2009       |   | $      | 3,645  |   |
|------------|--------|--------|--------|--------|
| 2010       |   | 3,090  |   |
| 2011       |   | 1,649  |   |
| 2012       |   | 1,003  |   |
| 2013       |   | 695    |   |
| 2014       |   | 224    |   |
| 2015       |   | — |   |
| 2016       |   | — |   |
| 2017       |   | — |   |
| 2018       |   | — |   |
| Thereafter |   | — |   |

 

**Portfolio Lease Expirations**

 

The following table presents lease expirations atour consolidated property as of December 31, 2008 ($ in thousands):

 
| **Year of  Expiration** | ** ** | **Number of  Leases  Expiring** | ** ** | **Annualized  Base Rent(1)** | ** ** | **Percent of  Portfolio  Annualized Base  Rent Expiring** | ** ** | **Leased  Rentable  Sq. Ft.** | ** ** | **Percent of  Portfolio   Rentable Sq. Ft.   Expiring** | ** ** |
|-------------------------|------------|--------------------------------------|------------|-----------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------------------------------------------------------|------------|
|                    |       |                                 |       |                              |       |                                                                     |       |                               |       |                                                                             |       |
| 2009                    |       | 7                                    |       | $                                 | 602        |                                                                     | 16%        |                               | 30,025     |                                                                             | 17%        |   |
| 2010                    |       | 6                                    |       | 854                               |       | 22%                                                                      |       | 42,437                             |       | 24%                                                                              |       |
| 2011                    |       | 10                                   |       | 1,514                             |       | 39%                                                                      |       | 75,812                             |       | 42%                                                                              |       |
| 2012                    |       | 1                                    |       | 67                                |       | 2%                                                                       |       | 2,614                              |       | 1%                                                                               |       |
| 2013                    |       | 2                                    |       | 573                               |       | 15%                                                                      |       | 22,574                             |       | 13%                                                                              |       |
| 2014                    |       | 2                                    |       | 247                               |       | 6%                                                                       |       | 5,377                              |       | 3%                                                                               |       |
|                    |       |                                 |       |                              |       |                                                                     |       |                               |       |                                                                             |       |
| Total                   |       | 28                                   |       | $                                 | 3,857      |                                                                     | 100%       |                               | 178,839    |                                                                             | 100%       |   |

 

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(1) Annualized Base Rent representscontractual base rental income on a US GAAP straight line adjustment basis fromthe time of our acquisition.

 

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**Item 3.                    Legal Proceedings.**

 

We are not party to, and none of our properties aresubject to, any material pending legal proceedings.

 

**Item 4.                    Submission of Matters to a Vote of SecurityHolders.**

 

No matters were submitted to a vote of securityholders during the fourth quarter of 2008.

 

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**PART II**

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

 

**Market Information**

 

There is no established public trading market forour 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.  Pursuantto the Offering, we are selling shares of our common stock to the public at aprice of $10.00 per share and at a price of $9.50 per share pursuant to ourdistribution reinvestment plan.  Unlessand until our shares are listed on a national securities exchange, it is notexpected that a public market for the shares will develop.

 

To assist the FinancialIndustry Regulatory Authority (“FINRA”) members and their associated personsthat participate in the Offering, pursuant to FINRA Rule 5110, we disclose ineach annual report distributed to investors a per share estimated value of theshares, the method by which it was developed and the date of the data used todevelop the estimated value.  Inaddition, we prepare annual statements of estimated share values to assistfiduciaries of retirement plans subject to the annual reporting requirements ofERISA in the preparation of their reports relating to an investment in ourshares.  For these purposes, the value ofa share of our common stock is estimated to be $10.00 per share.  The basis for this valuation is the fact thatthe current public offering price for our shares of common stock in our primaryoffering is $10.00 per share (without regard to purchase price discounts forcertain categories of purchasers). Although this estimated value represents the most recent price at whichinvestors are willing to purchase shares in our primary offering, thisestimated value is not likely to reflect the proceeds you would receive uponour liquidation or upon the sale of your shares because (i) these estimates arenot designed to reflect the price at which properties and other assets can besold; (ii) no public market for our shares exists or is likely to develop;(iii) the per share valuation method is not designed to arrive at a valuationthat is related to any individual or aggregated value estimates or appraisalsof the value of our assets.

 

For up to three full fiscal years after the Offeringor any subsequent offering of our shares (other than offerings relatedto a distribution reinvestment plan, employee benefit plan or the redemption ofinterests in our operating partnership), we may use the offering price of shares in our most recent offeringas the estimated value of a share of our common stock (unless we have soldassets and made special distributions to stockholders of net proceeds from suchsales, in which case the estimated value of a share of our common stock willequal the offering price less the amount of those special distributionsconstituting a return of capital).  Notwithstandingthe foregoing, in February 2009 FINRA released Regulatory Notice 09-09. Thisnotice confirms that the National Association of Securities Dealers (“NASD”)Rule 2340(c)(2) prohibits broker-dealers that are required to report anestimated value per share for non-traded REITs from using a per share estimatedvalue developed from data that is more than 18 months old. This would mean thatbroker-dealers that participate in a public offering of our shares could notuse the last price paid to acquire a share in an offering as the estimatedvalue per share of our common stock beginning 18 months after termination ofthe most recent offering.  We arecurrently evaluating how we will assist broker-dealers with this requirement.

 

**Holders**

 

As of March 11, 2009, we had 8,297,353 sharesof common stock outstanding held by a total of 3,705 stockholders.

 

**Distributions**

 

Until we generate sufficientcash flow from operations or FFO to fully fund the payment of distributions,some or all of our distributions will be paid from other sources.  We may generate cash to pay distributionsfrom financing activities, components of which may include borrowings(including borrowings secured by our assets) in anticipation of futureoperating cash flow and proceeds of the 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 orredevelopment projects or in properties that havesignificant capital requirements, these properties may not immediately generatecash flow from operations or FFO.  Thus, our ability to make distributionsmay be negatively impacted, especially during our early periods of operation.

 

We expect to declaredistributions on a quarterly basis and to pay distributions to our stockholderson a monthly basis. We intend to calculate these monthly distributions based ondaily record dates so our investors will become eligible for distributionsimmediately upon purchasing shares.  Distributions will be paid tostockholders as of the record dates selected by the directors.

 

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.

 

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Distributions will beauthorized at the discretion of our board of directors, based on its analysisof our earnings, cash flow, anticipated cash flow, capital expenditurerequirements, general financial condition or other factors that our board ofdirectors deems relevant.  The board’s discretion will be influenced, insubstantial part, by its obligation to cause us to comply with the REITrequirements.  Because we may receive income from interest or rents atvarious times during our fiscal year, distributions may not reflect our incomeearned in that particular distribution period but may be paid in anticipationof cash flow that we expect to receive during a later period or of receivingfunds in an attempt to make distributions relatively uniform.

 

Many of the factors that canaffect the availability and timing of cash distributions to stockholders arebeyond our control, and a change in any one factor could adversely affect ourability 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 to achieveexpected cash flows necessary to continue to pay initially establisheddistributions or maintain distributions at any particular level, or thatdistributions will increase over time.”

 

We are not prohibited from distributing our ownsecurities in lieu of making cash distributions to stockholders.  We mayissue securities as stock dividends in the future.

 

The distributions declared during the year ended December 31,2008 were $0.9 million, and exceeded FFO for the year ended December 31, 2008by approximately $0.7 million. Accordingly, for the year ended December 31, 2008, distributionswere funded from sources other than cash from operations.  Cash amounts distributed to stockholders inexcess of FFO were funded from proceeds from the offering.

 

Distributions by quarter for the year ended December 31,2008 were as follows (in thousands, except per share amounts):

 
| ** **  | ** ** | **Distributions** | ** ** |
|-------------|------------|-------------------|------------|
| **2008**    | ** ** | **Declared**      | ** ** | **Paid** | ** ** | **Per Share(1)** | ** ** |
| 4th Quarter |       | $                 | 494        |   | $ | 439 |   | $ | 0.076 |   |
| 3rd Quarter |       | 297               |       | 212 |   | 0.076 |   |
| 2nd Quarter |       | 74                |       | 33 |   | 0.050 |   |
| 1st Quarter |       | —            |       | — |   | — |   |
|        |       |              |       |   |   |   |   |
|        |       | $                 | 865        |   | $ | 684 |   | $ | 0.202 |   |

 

----

(l) Distributions declared per share assumesthe share was issued and outstanding each day during the period and is based ona declared daily distribution for the period of $0.0008219 per share per day.Each day during the second, third, and fourth quarter was a record date fordistributions.

 

Over thelong-term, we expect that a greater percentage of our distributions will bepaid from cash flow from investments and operations (except with respect todistributions related to sales of our assets).  However, operatingperformance cannot be accurately predicted due to numerous factors, includingour ability to raise and invest capital at favorable yields, the financialperformance of our investments in the current real estate environment, thetypes and mix of investments in our portfolio and the accounting treatment ofour investments in accordance with our accounting policies.  In addition,effective on June 2009, our board of directors increased our distribution ratefor an annual effective rate of 3.0% to 5.0%. As a result, future distributionsdeclared and paid may continue to exceed FFO. FFO is a non-GAAP financial measure that is widely recognized as ameasure of REIT operating performance. See the “Funds from Operations” section below for a reconciliation ofFFO to our net income.

 

For further discussion regarding our ability tosustain the current level of our distributions, see “Risk Factors” and“Management’s Discussion and Analysis of Financial Condition and Results ofOperations — Liquidity and Capital Resources — Distributions.”

 

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**Recent Sales of Unregistered Securities**

 

None.

 

**Use of Proceeds from Registered Securities**

 

On January 4, 2008,our Registration Statement on Form S-11 (File No. 333-140887),covering a public offering of up to 125,000,000 shares of common stock, wasdeclared effective under the Securities Act of 1933. The Offering commenced on January 21,2008 and is ongoing.  We expect to sellthe shares offered in our public offering over a two-year period.  Under rules promulgated by the SEC, insome circumstances we may continue the offering beyond this date.  Our board of directors has the discretion toextend the offering period for the shares offered under the DRIP up to thesixth anniversary of the termination of the primary offering.  We may reallocate the shares of common stockbeing offered between the primary offering and the DRIP.

 

We are offering a maximumof 100,000,000 shares in our primary offering at an aggregate offering price ofup to $1 billion, or $10.00 per share with discounts available to certaincategories of purchasers.  The 25,000,000shares offered under the DRIP are initially being offered at an aggregateoffering price of $237.5 million, or $9.50 per share.  Behringer Securities LP, an affiliate of ouradvisor, is the dealer manager of our offering. As of December 31, 2008, we had sold 7,302,740 shares of our commonstock, net of the 22,471 shares issued to Behringer Harvard Holdings on a bestefforts basis pursuant to the Offering for gross offering proceeds ofapproximately $72.8 million.

 

From the commencement ofthe Offering through December 31, 2008, we incurred the following expensesin connection with the issuance and distribution of the registered securitiespursuant to the Offering (amounts in thousands):

 
| **Type of Expense**    | ** ** | **Amount** | ** ** |
|----------------------------------|------------|------------|------------|
| Other expenses to affiliates (1) |       | $          | 13,027     |   |
| Other expenses to non-affiliates |       | —     |       |
|                             |       |       |       |
| Total expenses                   |       | $          | 13,027     |   |

 

----

(1)“Other expenses toaffiliates” includes commissions and dealer manager fees paid to BehringerSecurities, which reallowed all or a portion of the commissions and fees tosoliciting dealers.

 

From the commencement of the Offering through December 31,2008, the net offering proceeds to us from the Offering, including the DRIP,after deducting the total expenses incurred described above, were $59.8million.  From the commencement of theOffering through December 31, 2008, we had used $17.1 million of such netproceeds to purchase interests in real estate, net of notes payable.  Of the amount used for the purchase of theseinvestments, $0.9 million was paid to Behringer Opportunity Advisors II, asacquisition and advisory fees and acquisition expense reimbursement.

 

**Securities Authorized for Issuance under Equity Compensation Plans**

 

The following table provides information regardingour equity compensation plans as of December 31, 2008:

 
| **Plan Category**                                      | ** ** | **Number of securities to be  issued upon exercise of  outstanding options,  warrants and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities remaining  available for future issuance  under equity compensation  plans** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Equity compensation plans approved by  security holders     |       | —                                                                                                                                               |       | —                                                                                                      |       | 10,000,000                                                                                                                                  | *          |
| Equity compensation plans not approved by  security holders |       | —                                                                                                                                               |       | —                                                                                                      |       | —                                                                                                                                      |       |
| Total                                                       |       | —                                                                                                                                               |       | —                                                                                                      |       | 10,000,000                                                                                                                                  | *          |

 

----

* All shares authorized for issuance pursuant toawards not yet granted under the Incentive Plan.

 

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**Share Redemption Program**

 

Our board of directors has adopted a shareredemption program that permits our stockholders to sell their shares to usafter they have held them for at least one year, subject to significantconditions and limitations.  The purchaseprice for the redeemed shares is set forth in the prospectus for the offeringof our common stock.  Subject to certainlimitations, we will waive the one-year holding requirement for redemptionssought upon a stockholder’s death or qualifying disability or redemptionssought upon a stockholder’s confinement to a long-term care facility.  Our board of directors reserves the right inits sole discretion at any time, and from time to time, to (1) waive theone-year holding period in the event of other exigent circumstances affecting astockholder such as bankruptcy or a mandatory distribution requirement underthe stockholder’s IRA, (2) reject any request for redemption, (3) changethe purchase price for redemptions, or (4) otherwise amend the terms for theshare redemption program.  Under theterms of the program, we will not redeem in excess of 5% of theweighted-average number of shares outstanding during the twelve-month periodimmediately prior to the date of redemption. In addition, our board of directors will determine at least quarterlywhether we have sufficient cash to repurchase shares, and such purchases willgenerally be limited to proceeds from the DRIP plus 1% of operating cash flowfor the previous fiscal year (to the extent positive).  As of December 31, 2008, 2,031 shareshad been redeemed or presented for redemption.

 

During the fourth quarter ended 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  |       | —                                                    |       | $                                                | —     |                                                                                                                               | —     |                                                                                                                         |       |   |
| November |       | 2,031                                                     |       | $                                                | 8.99       |                                                                                                                               | 2,031      |                                                                                                                         | (1)        |   |
| December |       | —                                                    |       | $                                                | —     |                                                                                                                               | —     |                                                                                                                         |       |   |
|     |       |                                                      |       |                                             |       |                                                                                                                               |       |                                                                                                                         |       |
|     |       | 2,031                                                     |       | $                                                | 8.99       |                                                                                                                               | 2,031      |                                                                                                                         | (1)        |   |

 

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(1) Adescription of the maximum number of shares that may be purchased under ourredemption program is included in the narrative preceding this table.

 

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**Item 6.                    Selected Financial Data.**

 

We were formed on January 9, 2007, andcommenced operations on April 1, 2008 when we accepted the minimum amountof subscriptions pursuant to the Offering. At December 31, 2007, we owned no properties.  As of December 31, 2008, we wholly ownedone property.  The following data shouldbe read in conjunction with our consolidated financial statements and the notesthereto and “Management’s Discussion and Analysis of Financial Condition andResults of Operations” appearing elsewhere in this Annual Report on Form 10-K.  The selected data below has been derived fromour audited consolidated financial statements (in thousands, except per shareamounts).

 
| ** **                                      | ** ** | **As of December 31,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                      | ** ** | **2008**                              | ** ** | **2007** | ** ** |
|                                            |       |                                  |       |   |   |
| Total assets                                    |       | $                                     | 86,343     |   | $ | 203 |   |
|                                            |       |                                  |       |   |   |
| Long-term debt obligations                      |       | $                                     | 18,500     |   | $ | — |   |
| Other liabilities                               |       | 9,021                                 |       | 54 |   |
| Stockholders’ equity                       |       | 58,822                                |       | 149 |   |
|                                            |       |                                  |       |   |   |
| Total liabilities and stockholders’ equity |       | $                                     | 86,343     |   | $ | 203 |   |

 
| ** **                       | ** ** | ** **            | ** ** | **From Inception**         | ** ** |
|----------------------------------|------------|-----------------------|------------|---------------------------------|------------|
| ** **                       | ** ** | **Year Ended**   | ** ** | **(January 9, 2007)** | ** ** |
| ** **                       | ** ** | **December 31,** | ** ** | **through**                     | ** ** |
| ** **                       | ** ** | **2008**              | ** ** | **December 31, 2007** | ** ** |
|                             |       |                  |       |                            |       |
| Revenues                         |       | $                     | 913        |                            | $          | — |   |
|                             |       |                  |       |                            |       |
| Net loss                         |       | $                     | (249       | )                               | $          | (52 | ) |
|                             |       |                  |       |                            |       |
| Basic and diluted loss per share |       | $                     | (0.09      | )                               | $          | (2.30 | ) |
|                             |       |                  |       |                            |       |
| Distributions declared per share |       | $                     | 0.30       |                            | $          | — |   |

 

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

 

The following discussion and analysis should be readin conjunction with the accompanying consolidated financial statements and thenotes thereto.

 

**Critical Accounting Policies and Estimates**

 

Management’s discussion and analysis of financialcondition and results of operations are based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America.  The preparation of these financial statementsrequires our management to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  On a regular basis, we evaluate theseestimates, including investment impairment. These estimates are based on management’s historical industry experienceand on various other assumptions that are believed to be reasonable under thecircumstances.  Actual results may differfrom these estimates.

 

Below is a discussion of the accounting policiesthat we consider to be critical in that they may require complex judgment intheir application or require estimates about matters that are inherentlyuncertain.

 

***Principles of Consolidation andBasis of Presentation***

 

Our consolidated financial statements include ouraccounts and the accounts of other subsidiaries over which we havecontrol.  All inter-company transactions,balances, and profits have been eliminated in consolidation.  Interests in entities acquired will beevaluated for consolidation based on Financial Accounting Standards Board (“FASB”)Interpretation (“FIN”) 46R, “Consolidation of Variable Interest Entities,”which requires the consolidation of variable interest entities (“VIE”) in whichwe are deemed to be the primary beneficiary. If the interest in the entity is determined not to be a VIE under FIN46R, then the entity will be evaluated for consolidation under the AmericanInstitute of Certified Public Accountants’ Statement of Position 78-9, “Accountingfor Investments in Real Estate Ventures,” and by Emerging Issues Task Force04-5, “Determining Whether a General Partner, or the General Partners as aGroup, Controls a Limited Partnership or Similar Entity When the LimitedPartners Have Certain Rights.”

 

There are judgments and estimates involved indetermining if an entity in which we have made an investment is a VIE and ifso, if we are the primary beneficiary. The entity is evaluated to determine if it is a VIE by, among otherthings, calculating the percentage of equity being risked compared to the totalequity of the entity.  FIN 46R providessome guidelines as to what the minimum equity at risk should be, but thepercentage can vary depending upon the industry and/or the type of operationsof the entity and it is up to management to determine that minimum percentageas it relates to our business and the facts surrounding each of ouracquisitions.  In addition, even if theentity’s equity at risk is a very low percentage, we are required by FIN 46R toevaluate the equity at risk compared to the entity’s expected future losses todetermine if there could still in fact be sufficient equity at the entity.  Determining expected future losses involvesassumptions of various possibilities of the results of future operations of theentity, assigning a probability to each possibility, and using a discount rateto determine the net present value of those future losses.  A change in the judgments, assumptions, andestimates outlined above could result in consolidating an entity that shouldnot be consolidated or accounting for an investment on the equity method thatshould in fact be consolidated, the effects of which could be material to ourfinancial statements.

 

***Real Estate***

 

Upon the acquisition of real estate properties, weallocate the purchase price of those properties to the tangible assetsacquired, consisting of land, inclusive of associated rights, and buildings,any assumed debt, identified intangible assets and asset retirement obligationsbased on their relative fair values in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 142, “Goodwill and Other IntangibleAssets.”  Identified intangible assetsconsist of the fair value of above-market and below-market leases, in-placeleases, in-place tenant improvements and tenant relationships.

 

Initial valuations are subject to change until ourinformation is finalized, which is no later than twelve months from theacquisition date.

 

We determine the fair value of assumed debt bycalculating the net present value of the scheduled note payments using interestrates for debt with similar terms and remaining maturities that we believe wecould obtain.  Any difference between thefair value and stated value of the assumed debt is recorded as a discount orpremium and amortized over the remaining life of the loan.

 

The fair value of the tangible assets acquired,consisting of land and buildings, is determined by valuing the property as ifit were vacant, and the “as-if-vacant” value is then allocated to land andbuildings.  Land values are derived fromappraisals, and building values are calculated as replacement cost lessdepreciation or management’s estimates of the relative 

 

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fairvalue of these assets using discounted cash flow analyses or similarmethods.  The value of the commercialoffice building is depreciated over the estimated useful life of 25 years usingthe straight-line method.

 

We 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-place leases and (2) management’s estimate of currentmarket lease rates for the corresponding in-place leases, measured over aperiod equal to (a) the remaining non-cancelable lease term forabove-market leases, or (b) the remaining non-cancelable lease term plusany fixed rate renewal option for below-market leases.  We record the fair value of above-market andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over theabove determined lease term.

 

The total value of identified real estate intangibleassets acquired is further allocated to in-place lease values and tenantrelationships based on our evaluation of the specific characteristics of eachtenant’s lease and our overall 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 include 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 expectedlease-up period and carrying costs that would have otherwise been incurred hadthe leases not been in place, including tenant improvements andcommissions.  The estimates of the fairvalue of tenant relationships also include costs to execute similar leases,including leasing commissions, legal costs and tenant improvements as well asan estimate of the likelihood of renewal as determined by management on atenant-by-tenant basis.

 

We amortize the value of in-place leases to expenseover the term of the respective leases. The value of tenant relationship intangibles is amortized to expenseover the initial term and any anticipated renewal periods, but in no event doesthe amortization period for intangible assets exceed the remaining depreciablelife of the building.  Should a tenantterminate its lease, the unamortized portion of the in-place lease value andtenant relationship intangibles are charged to expense.  As of December 31, 2008, the estimatedremaining useful life for acquired lease intangibles is approximately twoyears.

 

***Investment Impairments***

 

For real estate we wholly own, we monitor events andchanges in circumstances indicating that the carrying amounts of the realestate assets may not be recoverable. When such events or changes in circumstances are present, we assesspotential impairment by comparing estimated future undiscounted operating cashflows expected to be generated over the life of the asset and from its eventualdisposition to the carrying value of the asset. In the event that the carrying amount exceeds the estimated futureundiscounted operating cash flows, we recognize an impairment loss to adjustthe carrying amount of the asset to estimated fair value.  We consider projected future undiscountedcash flows, trends, strategic decisions regarding future development plans, andother factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cashflows are reasonable, different assumptions regarding such factors as marketrents, economies, and occupancies could significantly affect these estimates.

 

In evaluating our investment for impairment, managementuses appraisals and makes estimates and assumptions, including, but not limitedto, the projected date of disposition of the property, the estimated futurecash flows of the property during our ownership, and the projected sale priceof the property.  A change in theseestimates and assumptions could result in understating or overstating the bookvalue of our investment, which could be material to our financialstatements.  Due to the judgment andassumptions applied in the estimation process with respect to impairments, itis possible actual results could differ substantially from those estimated.

 

We believe the carrying value of our operating realestate asset is currently recoverable. However, if market conditions worsen beyond our current expectations, orif changes in our development strategy significantly affect any key assumptionsused in our fair value calculations, we may need to take charges in futureperiods for impairments related to existing assets.  Any such non-cash charges would have anadverse effect on our consolidated financial position and results ofoperations.

 

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**Overview**

 

We were formed primarily to acquire and operatecommercial real estate and real estate-related assets on an opportunisticbasis.  In particular, we focus generallyon acquiring commercial properties with significant possibilities forshort-term capital appreciation, such as those requiring development,redevelopment or repositioning, those located in markets and submarkets withhigh growth potential, and those available from sellers who are distressed orface time-sensitive deadlines.  ****In addition, given currenteconomic circumstances, our opportunistic investment strategy may also includeinvestments in loans secured by or related to real estate at more attractiverates of current return than have been available for some time.  Such loan investments may  also have capital gain characteristics,whether as a result of a discount purchase or related equityparticipations. ****Wemay acquire a wide variety of commercial properties, including office,industrial, retail, hospitality, recreation and leisure, single-tenant, multifamily,and other real properties.  Theseproperties may be existing, income-producing properties, newly constructedproperties or properties under development or construction, and may includemultifamily 

 

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properties purchased for conversion into condominiumsand single-tenant properties that may be converted for multifamily use.  Further, 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 mayoriginate or invest in collateralized mortgage-backed securities, mortgage,bridge or mezzanine loans, and Section 1031 tenant-in-common interests(including those issued by affiliates of our advisor), or in entities that makeinvestments similar to the foregoing.  Weexpect to make our investments in or in respect of real estate assets locatedin the United States and other countries based on our new and existing marketconditions.  As of December 31,2008, we had acquired one property, 1875 Lawrence.

 

On February 26, 2007, we filed a RegistrationStatement on Form S-11 with the SEC to offer up to 125,000,000 shares ofcommon stock for sale to the public, of which 25,000,000 shares are beingoffered pursuant to the DRIP.  We reservethe right to reallocate the shares we are offering between our primary offeringand the DRIP.  The SEC declared ourRegistration Statement effective on January 4, 2008, and we commenced ourongoing initial public offering on January 21, 2008.  We commenced operations on April 1, 2008upon satisfaction of the conditions of our escrow agreement and acceptance ofinitial subscriptions of common stock.

 

**Results of Operations**

 

As of December 31, 2008, we had invested in oneproperty, 1875 Lawrence, located in Denver, Colorado.  As of December 31, 2007, we had no realestate or real estate-related assets. Accordingly, our results of operations for the respective periodspresented reflect increases in most categories due to the growth of ourportfolio.  Management expects increasesin most categories in the future as we purchase additional real estate and realestate-related assets and as we begin to realize the full year impact of our2008 acquisition.

 

***Fiscalyear ended December 31, 2008 as compared to the period from January 9,2007 (date of inception) through December 31, 2007***

 

*Revenues.*  Revenues for the year ended December 31,2008 were $913,000 and were generated by our consolidated property, 1875Lawrence, which was acquired on October 28, 2008.  No revenue was generated for the period from January 9,2007 (date of inception) through December 31, 2007.  We expect increases in revenue in the futureas we purchase additional real estate properties.

 

*Property Operating Expenses.*  Property operating expenses for the yearended December 31, 2008 were $302,000 and were comprised of operatingexpenses of 1875 Lawrence.  We incurredno property operating expenses for the period from January 9, 2007 (dateof inception) through December 31, 2007. We expect increases in property operating expenses in the future as wepurchase additional real estate properties.

 

*Real Estate Taxes. *Real estate taxes for the year ended December 31,2008 were $77,000 and were comprised of real estate taxes related to 1875Lawrence. We incurred no real estate taxes for the period from January 9,2007 (date of inception) through December 31, 2007.  We expect increases in real estate taxes inthe future as we purchase additional real estate properties.

 

*Property/Asset Management Fees. *Property and assetmanagement fees for the year ended December 31, 2008 were $95,000 and werecomprised of fees related to 1875 Lawrence. There were no property and asset management fees for the period from January 9,2007 (date of inception) through December 31, 2007.  We expect increases in property and assetmanagement fees in the future as we purchase additional real estate properties.

 

*General and Administrative Expenses.* General and administrative expenses for theyear ended December 31, 2008 were $652,000, as compared to $54,000for the period from January 9, 2007 (date of inception) through December 31,2007, and were comprised of auditing fees, legal fees, board of directors’fees, and other administrative expenses.  We expect increases in general and administrative expenses in the futureas we purchase additional real estate properties.

 

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*Depreciation and Amortization Expense. *Depreciationand amortization expense for the year ended December 31, 2008 was$399,000 and was comprised of depreciation and amortization related to 1875Lawrence.  There was no depreciation andamortization expense for the period from January 9, 2007 (date ofinception) through December 31, 2007. We expect increases in depreciation and amortization expense in thefuture as we purchase additional real estate properties.

 

*Interest Income*.Interest income of $363,000 for the year ended December 31, 2008represents interest income on funds on deposit, net of bank fees.  Upon admission of new stockholders,subscription proceeds are used for payment of dealer manager fees and sellingcommissions and may be utilized as consideration for investments and thepayment or reimbursement of offering expenses and operating expenses.  Until required for such purposes, netoffering proceeds are held in short-term, liquid investments and earn interestincome.  Interest income for the periodfrom January 9, 2007 (date of 

 

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inception)through December 31, 2007 was $2,000. We expect interest income to increase as we continue to accept newinvestors.

 

**Cash Flow Analysis**

 

***Fiscalyear ended December 31, 2008 as compared to the period from January 9,2007 (date of inception) through December 31, 2007***

 

Cash flows used in operating activities for the yearended December 31, 2008 were $95,000 and were comprised primarily of thenet loss of $249,000, decrease in payables to related parties of $236,000 andprepaid expenses and other assets of $122,000, partially offset by increase inaccrued liabilities of $386,000, which consists primarily of accrued propertytaxes on 1875 Lawrence, and depreciation and amortization of $219,000.  For the period from January 9, 2007(date of inception) through December 31, 2007, cash flows provided byoperating activities were $2,000 and consisted of the net loss offset bychanges in accrued liabilities.

 

Cash flows used in investing activities for the yearended December 31, 2008 were $35.1 million and represent the purchase of1875 Lawrence.  There was no cash flowfrom investing activities for the period from January 9, 2007 (date ofinception) through December 31, 2007.

 

Cash flows provided by financing activities for theyear ended December 31, 2008 were $82.3 million and were comprisedprimarily of the issuance of common stock, net of offering costs, of $64.5million and loan proceeds of $18.5 million related to the note payable on 1875Lawrence.  Cash provided by financingactivities for the period from January 9, 2007 (date of inception) throughDecember 31, 2007 was $201,000 and consisted of proceeds from the issuanceof common and convertible stock.

 

**Liquidity and Capital Resources**

 

Our principal demands for funds will be for theacquisition of real estate and real estate-related assets, for the payment ofoperating expenses and distributions, and for the payment of interest on anyoutstanding indebtedness we may incur. Generally, we expect to meet cash needs for items other thanacquisitions from our cash flow from operations, and we expect to meet cashneeds for acquisitions from the net proceeds of the Offering and from financings.

 

We expect to fund our short-term liquidityrequirements by using the net proceeds realized from the Offering and cash flowfrom the operations of investments we acquire.  Operating cash flows areexpected to increase as additional real estate assets are added to theportfolio.  For both our short-term and long-term liquidity requirements,other potential future sources of capital may include proceeds from securedor unsecured financings from banks or other lenders, proceeds from thesale of our investments, if and when any are sold, and undistributed funds fromoperations.  If necessary, we may use financings or other sources ofcapital in the event of unforeseen significant capital expenditures.

 

Our advisor may, but is not required to, establishcapital reserves from gross offering proceeds, out of cash flow generated byoperating properties and other investments or out of non-liquidating net saleproceeds from the sale of our properties and other investments.  Capital reserves are typically utilized fornon-operating expenses such as tenant improvements, leasing commissions andmajor capital expenditures. Alternatively, a lender may require its own formula for escrow ofcapital reserves.

 

We intend to borrow money to acquire properties andmake other investments.  There is nolimitation on the amount we may invest in any single property or other asset oron the amount we can borrow for the purchase of any individual property orother investment.  Under our charter, themaximum amount of our indebtedness shall not exceed 300% of our “net assets”(as defined by the NASAA REIT Guidelines) as of the date of any borrowing;however, we may exceed that limit if approved by a majority of our independentdirectors.  In addition to our charterlimitation, our board of directors has adopted a policy to generally limit ouraggregate borrowings to approximately 75% of the aggregate value of our assetsunless substantial justification exists that borrowing a greater amount is inour best interests.  Our policy limitation, however, 

 

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doesnot apply to individual real estate assets and only will apply once we haveceased raising capital under the Offering or any subsequent offering andinvested substantially all of our capital.  As a result, we expect toborrow more than 75% of the contract purchase price of each real estate assetwe acquire during the early periods of our operations to the extent our board ofdirectors determines that borrowing at these levels is prudent.

 

Recently, the U.S. credit markets and the sub-primeresidential mortgage market have experienced severe dislocations and liquiditydisruptions. Sub-prime mortgage loans have experienced increasing rates ofdelinquency, foreclosure and loss. These and other related events continue tohave a significant impact on the capital markets associated not only withsub-prime mortgage-backed securities, asset-backed securities andcollateralized debt obligations, but also with the U.S. housing, credit andfinancial markets as a whole.

 

The commercial real estate debt markets arecurrently experiencing 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 majorsources of capital have widened significantly as investors have demanded ahigher risk premium.  This is resultingin lenders increasing the cost for debt financing.  Consequently, there is greater uncertaintyregarding our ability to access the credit markets in order to attractfinancing on reasonable terms. Our ability to borrow funds to finance futureacquisitions could be adversely affected by our inability to secure permanentfinancing on reasonable terms, if at all.

 

Should the overall cost of borrowings increase,either by increases in the index rates or by increases in lender spreads, wewill need to factor such increases into the economics of our acquisitions,developments and property contributions. This may result in our investment operations generating lower overalleconomic returns and a reduced level of cash flow, which could potentiallyimpact our ability to make distributions to our stockholders at currentlevels.  In addition, the recentdislocations in the debt markets have reduced the amount of capital that isavailable to finance real estate, which, in turn: (1) leads to a declinein 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 itbecomes due, all of which may reasonably be expected to have a material adverseimpact on the value of real estate investments and the revenues, income or cashflow from the acquisition and operations of real properties and mortgageloans.  In addition, the current state ofthe debt markets have negatively impacted the ability to raise equity capital.

 

If the current debt market environment persists, wemay modify our investment strategies in order to seek to optimize our portfolioperformance.  Our strategies may include,among other options, limiting or eliminating the use of debt and focusing onthose investments that do not require the use of leverage to meet our portfoliogoals.

 

*Debt Financings*

 

We may, from time to time, make mortgage, bridge, ormezzanine loans and other loans for acquisitions and investments as well asproperty development.  We may obtainfinancing at the time an asset is acquired or an investment is made or at suchlater time as determined to be necessary, depending on multiple factors.

 

At December 31, 2008, our note payable balancewas $18.5 million and consisted of the note payable related to 1875Lawrence.  We have unconditionallyguaranteed payment of the loan for an amount not to exceed the lesser of (i) $11.75million and (ii) 50% of the total amount advanced under the loan agreementif the aggregate amount advanced is less than $23.5 million.  At December 31, 2008, the interest rateon this note was 6.25% and the loan matures on December 31, 2012.  Our loan agreement stipulates that we complywith certain reporting and financial covenants. These covenants include, among other things, maintaining minimum debtservice coverage ratios.  As of December 31,2008, we believe we were in compliance with the debt covenants under our loanagreement.  We did not have any notespayable as of December 31, 2007.

 

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**Funds from Operations**

 

Funds from operations (“FFO”) is a non-GAAPfinancial measure that is widely recognized as a measure of REIT operatingperformance. FFO is defined by the National Association of Real Estateinvestment Trusts as net income (loss), computed in accordance with GAAP,excluding extraordinary items, as defined by GAAP, and gains (or losses) fromsales of property, plus depreciation and amortization on real estate assets,and after adjustments for unconsolidated partnerships, joint ventures, andsubsidiaries. We believe that FFO is helpful to investors and our management asa measure of operating performance of our operating assets because it excludesdepreciation and amortization, gains and losses from property dispositions, andextraordinary items, and as a result, when compared year to year, reflects theimpact on operations from trends in occupancy rates, rental rates, operatingcosts, development activities, general and administrative expenses, andinterest costs, which is not immediately apparent from net income. Historicalcost accounting for real estate assets in accordance with GAAP implicitlyassumes that the value of real estate diminishes predictably over time. Sincereal estate values have historically risen or fallen with market conditions,many industry investors and analysts have considered the presentation ofoperating results for real estate companies that use historical cost accountingalone to be insufficient. As a result, our management believes that the use ofFFO, together with the required GAAP presentations, provides a supplementalunderstanding of our performance and a more informed and appropriate basis onwhich to make decisions involving operating, financing and investingactivities. Factors that impact FFO include start-up costs, fixed costs, delayin buying assets, lower yields on cash held in accounts pending investment,income from portfolio properties and other portfolio assets, interest rates onacquisition financing and operating expenses. FFO should not be considered asan alternative to net income (loss) or as an indication of our liquidity, noris it indicative of funds available to fund our cash needs, including ourability to make distributions.

 

Our calculation of FFO for the years endedDecember 31, 2008 and 2007 is presented below (amounts in thousands):

 
| ** **                         | ** ** | **2008**   | ** ** | **2007**   | ** ** |
|------------------------------------|------------|------------|------------|------------|------------|
| ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss, as reported              |       | $          | (249       | )          | $          | (52 | ) |
| Preferred stock dividends          |       | —     |       | —     |       |
| Net loss allocable to common stock |       | (249       | )          | (52        | )          |
|                               |       |       |       |       |       |
| Adjustments for:                   |       |       |       |       |       |
| Real estate depreciation (1)       |       | 174        |       | —     |       |
| Real estate amortization (1)       |       | 225        |       | —     |       |
| Funds from operations (FFO)        |       | $          | 150        |       | $          | (52 | ) |
|                               |       |       |       |       |       |
| GAAP weighted average shares:      |       |       |       |       |       |
| Basic and diluted                  |       | 2,859      |       | 22         |       |
|                               |       |       |       |       |       |   |   |
| FFO per share                      |       | $          | 0.05       |       | $          | (2.36 | ) |

 

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(1) This represents the depreciation andamortization expense of the property we consolidate.

 

Provided below is additional informationrelated to selected non-cash items included in net loss above, which may behelpful in assessing our operating results.

 

·                Straight-linerental revenue of $20,000 was recognized for the year ended December 31, 2008.

 

·                Amortizationof intangible lease assets and liabilities was recognized as a net increase torental revenues of $180,000 for the year ended December 31, 2008.

 

In addition,cash flows generated from FFO may be used to fund all or a portion of certaincapitalizable items that are excluded from FFO, such as capital expendituresand payments of principal on debt, each of which may impact the amount of cashavailable for distribution to our stockholders.

 

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**Net Operating Income**

 

Net operating income (“NOI”)is a non-GAAP financial measure that is defined as net income (loss), computedin accordance with GAAP, generated from properties before interest expense,asset management fees, interest income, general and administrative expenses,depreciation, amortization, and the sale of assets.  We believe that NOI provides an accurate measureof the operating performance of our operating assets because NOI reflects theoperating performance of our properties and excludes certain items that are notassociated with management of the properties. To facilitate understanding of this financial measure, a reconciliationof net operating income to net income (loss) has been provided in accordancewith GAAP.  Our calculation of NOI forthe year ended December 31, 2008 and for the period from January 9,2007 (date of inception) through December 31, 2007 is presented below(amounts in thousands):

 
| ** **                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------|------------|----------|------------|----------|------------|
|                               |       |     |       |     |       |
| Revenues                           |       | $        | 913        |     | $          | — |   |
|                               |       |     |       |     |       |
| Operating expenses:                |       |     |       |     |       |
| Property operating expenses        |       | 302      |       | —   |       |
| Real estate taxes                  |       | 77       |       | —   |       |
| Property management fees           |       | 34       |       | —   |       |
| Total operating expenses           |       | 413      |       | —   |       |
|                               |       |     |       |     |       |
| Net operating income               |       | $        | 500        |     | $          | — |   |
|                               |       |     |       |     |       |
| Reconciliation to Net Loss         |       |     |       |     |       |
| Net operating income               |       | $        | 500        |     | $          | — |   |
|                               |       |     |       |     |       |
| Less:                              |       |     |       |     |       |
| Depreciation and amortization      |       | (399     | )          | —   |       |
| General and administrative expense |       | (652     | )          | (54      | )          |
| Asset management fees              |       | (61      | )          | —   |       |
| Add:                               |       |     |       |     |       |
| Interest income                    |       | 363      |       | 2        |       |
|                               |       |     |       |     |       |
| Net loss                           |       | $        | (249       | )        | $          | (52 | ) |

 

**Distributions**

 

Distributionsare authorized at the discretion of our board of directors based on itsanalysis of our performance over the previous period, expectations of performancefor future periods and other factors, including but not limited to earnings,cash flow, anticipated cash flow, capital expenditure requirements and generalfinancial condition. The board’s decisions are influenced, in substantial part,by the requirements necessary to maintain our REIT status. In light of thepervasive and fundamental disruptions in the global financial and real estatemarkets, we cannot provide assurance that we will be able to achieve expectedcash flows necessary to continue to pay distributions as they may beestablished or maintain distributions at any particular level, or thatdistributions will increase over time. If the current economic conditionscontinue, our board may determine to reduce our current distribution rate in orderto conserve cash. If funds from operations are not sufficient to fully fund thepayment of distributions, the level of our distributions may not be sustainableand some or all of our distributions will be paid from other sources. We maygenerate cash to pay distributions from financing activities, components ofwhich may include borrowings (including borrowings secured by our assets) inanticipation of future operating cash flow. In addition, from time to time, ouradvisor and its affiliates may agree to waive or defer all, or a portion, ofthe acquisition, asset management or other fees or other incentives due tothem, enter into lease agreements for unleased space, pay generaladministrative expenses, or otherwise supplement investor returns in order toincrease the amount of cash available to make distributions to ourstockholders.

 

The distributions declaredduring the year ended December 31, 2008 were $0.9 million, and exceeded FFO forthe year ended December 31, 2008 by approximately $0.7 million.  Accordingly, for the year ended December 31,2008, distributions were funded from sources other than cash from operations. Cash amounts distributed to stockholders in excess of FFO were fundedfrom proceeds from the Offering.

 

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Distributions by quarter forthe year ended December 31, 2008 were as follows (amounts in thousands):

 
| ** **  | ** ** | **Distributions** |       |
|-------------|------------|-------------------|------------|
| **2008**    | ** ** | **Declared**      | ** ** | **Paid** | ** ** | **Per Share(1)** | ** ** |
| 4th Quarter |       | $                 | 494        |   | $ | 439 |   | $ | 0.076 |   |
| 3rd Quarter |       | 297               |       | 212 |   | 0.076 |   |
| 2nd Quarter |       | 74                |       | 33 |   | 0.050 |   |
| 1st Quarter |       | —            |       | — |   | — |   |
|        |       |              |       |   |   |   |   |
|        |       | $                 | 865        |   | $ | 684 |   | $ | 0.202 |   |

 

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(1) Distributions declaredper share assumes the share was issued and outstanding each day during theperiod and is based on a declared daily distribution for the period of$0.0008219 per share per day.  Each dayduring the second, third, and fourth quarter was a record date fordistributions.

 

                Over thelong-term, we expect that a greater percentage of our distributions will bepaid from cash flow from operations (except with respect to distributionsrelated to sales of our assets). However, operating performance cannot beaccurately predicted due to numerous factors, including our ability to raiseand invest capital at favorable yields, the financial performance of ourinvestments in the current real estate environment, the types and mix ofinvestments in our portfolio and the accounting treatment of our investments inaccordance with our accounting policies. In addition, effective onJune 2009, our board of directors increased our distribution rate for an annualeffective rate of 3.0% to 5.0%. As a result, future distributions declared andpaid may continue to exceed FFO.  FFO isa non-GAAP financial measure that is widely recognized as a measure of REIT operatingperformance.  See the “Funds fromOperations” section for a reconciliation of FFO to our net income.

 

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**Contractual Obligations**

 

The following table summarizes our contractualobligations as of December 31, 2008 (amounts in thousands):

 
| **Note Payable** | ** ** | **Total** | ** ** | **2009** | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **Thereafter** | ** ** |
|-----------------------|------------|-----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Principal             |       | $         | 18,500     |     | $          | —   |       | $        | —     |     | $          | 740      |       | $              | 17,760     |   | $ | — |   | $ | — |   |
| Interest              |       | 4,691     |       | 1,172    |       | 1,172    |       | 1,151    |       | 1,196    |       | —   |       | —         |       |
|                  |       |      |       |     |       |     |       |     |       |     |       |     |       |           |       |
| Total                 |       | $         | 23,191     |     | $          | 1,172    |       | $        | 1,172      |     | $          | 1,891    |       | $              | 18,956     |   | $ | — |   | $ | — |   |

 

**Off-Balance Sheet Arrangements**

 

We have no off-balance sheet arrangements that arereasonably likely to have a current or future material effect on our financialcondition, changes in financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources.

 

**New Accounting Pronouncements**

 

In February 2008, the FASB staff issued StaffPosition No. 157-2 “Effective Date of FASB Statement No. 157” (“FSPSFAS 157-2”). FSP SFAS 157-2 delays the effective date of SFAS No. 157 tofiscal years beginning after November 15, 2008, for non-financial assetsand non-financial liabilities, except for items that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  We adopted FSP SFAS No. 157-2effective January 1, 2009, and this adoption is expected to enhance ourfuture disclosures regarding how we develop fair value estimates related tonon-financial assets and liabilities in our financial statements.

 

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.  ThisStatement is broader in scope than that of Statement 141, which applied only tobusiness combinations in which control was obtained by transferringconsideration. SFAS 141R applies the same method of accounting (the acquisitionmethod) to all transactions and other events in which one entity obtainscontrol over one or more other businesses.  This Statement also 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 business combinations occurring on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  Early adoption is not allowed. Theacquisition of real estate property has been determined to meet the definitionof a business combination as defined in SFAS No. 141(R).  Therefore, beginning January 1, 2009, wewill no longer capitalize acquisition related costs for future acquisitions ofreal estate properties, but will expense such costs as incurred.

 

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 valueoption established by SFAS No. 159 permits all entities to choose tomeasure eligible items at fair value at specified election dates.  Abusiness entity will report unrealized gains and losses on items for which thefair value option has been elected in earnings (or another performance indicatorif the business entity does not report earnings) at each subsequent reportingdate.  We adopted this standard effective January 1, 2008 but havenot elected the fair value measurement option for any financial assets orliabilities at the present time; however, we may elect to measure futureeligible financial assets or liabilities at fair value.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements - An amendmentof ARB No. 51.”  This Statement amends Accounting Research Bulletin No. 51to establish accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary.  It clarifiesthat a noncontrolling interest in a subsidiary, which is sometimes referred toas minority interest, is an ownership interest in the consolidated entity thatshould be reported as equity in the consolidated financial statements. Among other requirements, this Statement requires consolidated net income to bereported at amounts that include the amounts attributable to both the parentand the noncontrolling interest.  It also requires disclosure, on the faceof the consolidated income statement, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest.  ThisStatement is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008.  Earlieradoption is prohibited.  This Statement shall be applied prospectively asof the beginning of the fiscal year in which this Statement is initiallyapplied, except for the presentation and disclosure requirements.  Thepresentation and disclosure requirements shall be applied retrospectively forall periods presented.

 

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**Inflation**

 

The real estate market has not been affectedsignificantly by inflation in the past several years due to the relatively lowinflation rate.  However, we intend toinclude provisions in the majority of our tenant leases that would protect usfrom the impact of inflation.  Theseprovisions include reimbursement billings for common area maintenance charges,real estate tax and insurance reimbursements on a per square foot basis, or insome cases, annual reimbursement of operating expenses above a certain persquare foot allowance.

 

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

 

*Interest Rate Risk*

 

We may be exposed to interest rate changes primarilyas a result of long-term debt used to acquire properties and make loans andother permitted investments.  Ourmanagement’s objectives, with regard to interest rate risks, are to limit theimpact of interest rate changes on earnings and cash flows and to lower overallborrowing costs.  To achieve theseobjectives, we will borrow primarily at fixed rates or variable rates with thelowest margins available and in some cases, with the ability to convertvariable 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.  We may enter intoderivative financial instruments such as options, forwards, interest rateswaps, caps, or floors to mitigate our interest rate risk on a relatedfinancial instrument or to effectively lock the interest rate portion of ourvariable rate debt.  At December 31,2008, we had one note payable outstanding which was subject to a variableinterest rate based on LIBOR plus a margin of 2.5%.  However, the note payable has a minimuminterest rate of 6.25%, which if the LIBOR rate increased 100 basis points,would not result in an increase to a rate above the minimum.

 

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

 

The information required by this Item 8 is includedin our Consolidated Financial Statements beginning on page F-1 of thisAnnual Report on Form 10-K.

 

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

 

None.

 

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

 

*Evaluation of Disclosure Controlsand Procedures*

 

As required by Rule 13a-15(b) and Rule 15d-15(b) underthe Exchange Act, our management, including our Chief Executive Officer andChief Financial Officer, evaluated, as of December 31, 2008, theeffectiveness of our disclosure controls and procedures as defined in ExchangeAct Rule 13a-15(e) and Rule 15d-15(e). Based on that evaluation,our Chief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures 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 our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures.

 

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

 

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

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting (as defined in Exchange Act Rules 13a-15(f) and15d-15(f)).  Our management, including our Chief Executive Officer andChief Financial Officer, evaluated, as of December 31, 2008, theeffectiveness of our internal control over financial reporting using theframework in *Internal Control — IntegratedFramework*issued by the Committee of Sponsoring Organizations of theTreadway Commission.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our internal controls, as ofDecember 31, 2008, were effective in providing reasonable assuranceregarding reliability of financial reporting.

 

This annual report does notinclude an attestation report of the Company’s registered public accountingfirm regarding internal control over financial reporting. Management’s reportwas not subject to attestation by our registered 

 

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public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit the Company to provide onlymanagement’s report in this annual report.

 

*Changes inInternal Control over Financial Reporting*

 

Therehas been no change in internal control over financial reporting that occurredduring the quarter ended December 31, 2008 that has materially affected,or is reasonably likely to materially affect, our internal control overfinancial reporting.

 

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

 

None.

 

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**PART III**

 

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

 

The information required by this Item will bepresented in our definitive proxy statement for the annual meeting ofstockholders to be held on June 24, 2009, which is expected to be filedwith the Securities and Exchange Commission on or about April 30, 2009,and is incorporated herein by reference.

 

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

 

The information required by this Item will bepresented in our definitive proxy statement for the annual meeting ofstockholders to be held on June 24, 2009, which is expected to be filedwith the Securities and Exchange Commission on or about April 30, 2009,and is incorporated herein by reference.

 

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

 

The information required by this Item will bepresented in our definitive proxy statement for the annual meeting ofstockholders to be held on June 24, 2009, which is expected to be filedwith the Securities and Exchange Commission on or about April 30, 2009,and is incorporated herein by reference.

 

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

 

The information required by this Item will bepresented in our definitive proxy statement for the annual meeting ofstockholders to be held on June 24, 2009, which is expected to be filedwith the Securities and Exchange Commission on or about April 30, 2009,and is incorporated herein by reference.

 

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

 

The information required by this Item will bepresented in our definitive proxy statement for the annual meeting ofstockholders to be held on June 24, 2009, which is expected to be filedwith the Securities and Exchange Commission on or about April 30, 2009,and is incorporated herein by reference.

 

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**PART IV**

 

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

 

(a)                                  *List of Documents Filed.*

 

                                                1.                                       *Financial Statements*

 

The list of the financialstatements filed as part of this Annual Report on Form 10-K is set forthon page F-1 herein.

 

2.                                       *Financial Statement Schedule*

 

Report of Independent RegisteredPublic Accounting Firm

 

Schedule III—Real Estate andAccumulated Depreciation

 

3.                                       *Exhibits*

 

The list of exhibits filedas part of this Annual Report on Form 10-K is submitted in the Exhibit Indexfollowing the financial statements in response to Item 601 of Regulation S-K.

 

(b)           *Exhibits.*

 

The exhibits filed in response to Item 601 ofRegulation S-K are listed in the Exhibit Index attached hereto.

 

(c)           *Financial StatementSchedules.*

 

All financial statement schedules, except forSchedule III (see (a) 2. above), have been omitted because the requiredinformation of such schedules is not present, is not present in amountssufficient to require a schedule, or is included in the financial statements.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| ** **                                              | **Behringer Harvard Opportunity REIT II, Inc.** |
|---------------------------------------------------------|------------------------------------------------------|
|                                                    |                                                 |
|                                                    |                                                 |
| Dated:     March 31, 2009 | By:                                                  | /s/ Robert S. Aisner |
|                                                    |                                                 | Robert S. Aisner |
|                                                    |                                                 | Chief Executive Officer |
|                                                    |                                                 | (Principal Executive Officer) |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 

 
| March 31, 2009 |   | /s/ Robert M. Behringer              |
|---------------------|--------|--------------------------------------|
|                |   | Robert M. Behringer                  |
|                |   | Chairman of the Board of Directors   |
|                |   |                                 |
| March 31, 2009 |   | /s/ Robert S. Aisner                 |
|                |   | Robert S. Aisner                     |
|                |   | Chief Executive Officer and Director |
|                |   | (Principal Executive Officer)        |
|                |   |                                 |
| March 31, 2009 |   | /s/ Gary S. Bresky                   |
|                |   | Gary S. Bresky                       |
|                |   | Chief Financial Officer              |
|                |   | (Principal Financial Officer)        |
|                |   |                                 |
| March 31, 2009 |   | /s/ Bryan A. Sinclair                |
|                |   | Bryan A. Sinclair                    |
|                |   | Chief Accounting Officer             |
|                |   | (Principal Accounting Officer)       |
|                |   |                                 |
| March 31, 2009 |   | /s/ Andreas K. Bremer                |
|                |   | Andreas K. Bremer                    |
|                |   | Director                             |
|                |   |                                 |
| March 31, 2009 |   | /s/ Cynthia Pharr Lee                |
|                |   | Cynthia Pharr Lee                    |
|                |   | Director                             |
|                |   |                                 |
| March 31, 2009 |   | /s/ Jeffrey P. Mayer                 |
|                |   | Jeffrey P. Mayer                     |
|                |   | Director                             |

 

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** **

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS**

 

 
| ** **                                                                                                                                                                               | **Page**   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Financial Statements**                                                                                                                                                            | ** ** |
|                                                                                                                                                                                     |       |
| Report  of Independent Registered Public Accounting Firm                                                                                                                                 | F-2        |
|                                                                                                                                                                                     |       |
| Consolidated Balance Sheets as of December 31,  2008 and 2007                                                                                                                       | F-3        |
|                                                                                                                                                                                     |       |
| Consolidated Statements of Operations for the Year  Ended December 31, 2008  and for the Period from January 9, 2007 (date of inception) through December 31, 2007        | F-4        |
|                                                                                                                                                                                     |       |
| Consolidated Statements of Stockholders’ Equity the  Year Ended December 31, 2008 and for the Period from January 9, 2007  (date of inception) through December 31, 2007. | F-5        |
|                                                                                                                                                                                     |       |
| Consolidated Statements of Cash Flows for the Year Ended  December 31, 2008, and  for the Period from January 9, 2007 (date of inception) to  December 31, 2007           | F-6        |
|                                                                                                                                                                                     |       |
| Notes to Consolidated Financial Statements                                                                                                                                               | F-7        |
|                                                                                                                                                                                     |       |
| **Financial Statement Schedule**                                                                                                                                                         |       |
|                                                                                                                                                                                     |       |
| Report of Independent Registered Public Accounting  Firm                                                                                                                                 | F-18       |
|                                                                                                                                                                                     |       |
| Schedule III — Real Estate and Accumulated  Depreciation                                                                                                                            | F-19       |

 

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### **REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

### ** **

Tothe Board of Directors and Stockholders of

BehringerHarvard Opportunity REIT II, Inc.,

Addison,Texas

 

Wehave audited the accompanying consolidated balance sheets of Behringer HarvardOpportunity REIT II, Inc. and subsidiaries (the “Company”) as of December 31,2008 and 2007 and the related consolidated statements of operations,stockholders’ equity and cash flows for the year ended December 31, 2008and for the period from January 9, 2007 (date of inception) through December 31,2007.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

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

 

In our opinion,such consolidated financial statements present fairly, in all materialrespects, the financial position of Behringer Harvard Opportunity REIT II, Inc.and subsidiaries at December 31, 2008 and 2007 and the results of theiroperations and their cash flows for the year ended December 31, 2008 andfor the period from January 9,2007 (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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**BehringerHarvard Opportunity REIT II, Inc.**

**Consolidated Balance Sheets**

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

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

 
| ** **                                                                                                                                                                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Assets**                                                                                                                                                                                       |       |     |       |     |       |
| **Real estate**                                                                                                                                                                                  |       |     |       |     |       |
| Land                                                                                                                                                                                             |       | $        | 9,000      |     | $          | — |   |
| Buildings, net                                                                                                                                                                                   |       | 25,964   |       | —   |       |
| **Total real estate**                                                                                                                                                                            |       | 34,964   |       | —   |       |
|                                                                                                                                                                                             |       |     |       |     |       |
| Cash and cash equivalents                                                                                                                                                                        |       | 47,375   |       | 203      |       |
| Accounts receivable, net                                                                                                                                                                         |       | 44       |       | —   |       |
| Receivable from related party                                                                                                                                                                    |       | 501      |       | —   |       |
| Prepaid expenses and other assets                                                                                                                                                                |       | 129      |       | —   |       |
| Deferred financing fees, net                                                                                                                                                                     |       | 533      |       | —   |       |
| Lease intangibles, net                                                                                                                                                                           |       | 2,797    |       | —   |       |
| **Total assets**                                                                                                                                                                                 |       | $        | 86,343     |     | $          | 203 |   |
|                                                                                                                                                                                             |       |     |       |     |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                    |       |     |       |     |       |
| Note payable                                                                                                                                                                                     |       | $        | 18,500     |     | $          | — |   |
| Payables to related parties                                                                                                                                                                      |       | 5,519    |       | 1        |       |
| Acquired below-market leases, net                                                                                                                                                                |       | 2,262    |       | —   |       |
| Distributions payable                                                                                                                                                                            |       | 181      |       | —   |       |
| Accrued liabilities                                                                                                                                                                              |       | 1,059    |       | 53       |       |
| **Total liabilities**                                                                                                                                                                            |       | 27,521   |       | 54       |       |
|                                                                                                                                                                                             |       |     |       |     |       |
| **Commitments and contingencies**                                                                                                                                                                |       |     |       |     |       |
|                                                                                                                                                                                             |       |     |       |     |       |
| **Stockholders’ Equity**                                                                                                                                                                    |       |     |       |     |       |
| Preferred stock, $.0001 par value per  share; 50,000,000 shares authorized, none outstanding                                                                                                     |       | —   |       | —   |       |
| Convertible stock, $.0001 par value per  share; 1,000 shares authorized, 1,000 shares issued and outstanding                                                                                     |       | —   |       | —   |       |
| Common stock, $.0001 par value per share; 350,000,000  shares authorized, 7,323,180 and 22,471 shares issued and outstanding at  December 31, 2008 and December 31, 2007, respectively |       | 1        |       | —   |       |
| Additional paid-in capital                                                                                                                                                                       |       | 59,987   |       | 201      |       |
| Cumulative distributions and net loss                                                                                                                                                            |       | (1,166   | )          | (52      | )          |
| **Total stockholders’ equity**                                                                                                                                                              |       | 58,822   |       | 149      |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                              |       | $        | 86,343     |     | $          | 203 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

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**Behringer Harvard Opportunity REIT II, Inc.**

**Consolidated Statements of Operations**

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

 
| ** **                                                 | ** ** | **For the Year  Ended  December 31, 2008** | ** ** | **For the Period From  January 9, 2007  (Date of Inception)  Through  December 31, 2007** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                       |       |                                                           |       |                                                                                                                                   |       |
| **Revenue**                                                |       | $                                                              | 913        |                                                                                                                                   | $          | — |   |
|                                                       |       |                                                           |       |                                                                                                                                   |       |
| **Expenses**                                               |       |                                                           |       |                                                                                                                                   |       |
| Property operating expenses                                |       | 302                                                            |       | —                                                                                                                                 |       |
| Real estate taxes                                          |       | 77                                                             |       | —                                                                                                                                 |       |
| Property management fees                                   |       | 34                                                             |       | —                                                                                                                                 |       |
| Asset management fees                                      |       | 61                                                             |       | —                                                                                                                                 |       |
| General and administrative                                 |       | 652                                                            |       | 54                                                                                                                                     |       |
| Depreciation and amortization                              |       | 399                                                            |       | —                                                                                                                                 |       |
| **Total expenses**                                         |       | 1,525                                                          |       | 54                                                                                                                                     |       |
|                                                       |       |                                                           |       |                                                                                                                                   |       |
| Interest income, net                                       |       | 363                                                            |       | 2                                                                                                                                      |       |
|                                                       |       |                                                           |       |                                                                                                                                   |       |
| **Net loss**                                               |       | $                                                              | (249       | )                                                                                                                                      | $          | (52 | ) |
|                                                       |       |                                                           |       |                                                                                                                                   |       |
| **Basic and diluted weighted average shares  outstanding** |       | 2,859                                                          |       | 22                                                                                                                                     |       |
|                                                       |       |                                                           |       |                                                                                                                                   |       |
| **Basic and diluted loss per share**                       |       | $                                                              | (0.09      | )                                                                                                                                      | $          | (2.30 | ) |

 

*See Notes to Consolidated FinancialStatements.*

 

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**Behringer Harvard Opportunity REIT II, Inc.**

**Consolidated Statements of Stockholders’ Equity**

**(in thousands)**

 
| ** **                                               | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional**             | ** ** | **Cumulative** | ** ** | **Total**            | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|----------------------------|------------|----------------|------------|----------------------|------------|
| ** **                                               | ** ** | **Number  of Shares** | ** ** | **Par  Value**        | ** ** | **Number  of Shares** | ** ** | **Par  Value** | ** ** | **Paid-in  Capital** | ** ** | **Distributions  and Net Loss** | ** ** | **Stockholders’  Equity** | ** ** |
| **Balance  at January 9, 2007**(date of  inception) |       | —                     |       | $                     | —     |                       | —     |           | $          | —               |       | $ | — |   | $ | — |   | $ | — |   |
| Issuance of  convertible stock, net                      |       | 1                          |       |                  |       |                       |       |           |       | 1                    |       |   |   | 1 |   |
| Issuance of  common stock, net                           |       |                       |       |                  |       | 22                         |       | —         |       | 200                  |       |   |   | 200 |   |
| Net loss                                                 |       |                       |       |                  |       |                       |       |           |       |                 |       | (52 | ) | (52 | ) |
| **Balance  at December 31, 2007**                   |       | 1                          |       | —                |       | 22                         |       | —         |       | 201                  |       | (52 | ) | 149 |   |
|                                                     |       |                       |       |                  |       |                       |       |           |       |                 |       |   |   |   |   |
| Issuance of  common stock, net                           |       |                       |       |                  |       | 7,301                      |       | 1              |       | 59,786               |       |   |   | 59,787 |   |
| Distributions  declared on common stock                  |       |                       |       |                  |       |                       |       |           |       |                 |       | (865 | ) | (865 | ) |
| Net loss                                                 |       |                       |       |                  |       |                       |       |           |       |                 |       | (249 | ) | (249 | ) |
| **Balance  at December 31, 2008**                   |       | 1                          |       | $                     | —     |                       | 7,323      |           | $          | 1                    |       | $ | 59,987 |   | $ | (1,166 | ) | $ | 58,822 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

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**Behringer Harvard Opportunity REIT II, Inc.**

**Consolidated Statements of Cash Flows**

**(in thousands)**

 
| ** **                                                                                       | ** ** | **For the Year  Ended  December 31, 2008** | ** ** | **For the Period From  January 9, 2007  (Date of Inception)  Through  December 31, 2007** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Cash flows from operating activities**                                                         |       |                                                           |       |                                                                                                                                   |       |
| Net loss                                                                                         |       | $                                                              | (249       | )                                                                                                                                      | $          | (52 | ) |
| Adjustments to reconcile net loss to net  cash flows provided by (used in) operating activities: |       |                                                           |       |                                                                                                                                   |       |
| Depreciation and amortization                                                                    |       | 219                                                            |       | —                                                                                                                                 |       |
| Change in accounts receivable                                                                    |       | (44                                                            | )          | —                                                                                                                                 |       |
| Change in prepaid expenses and other assets                                                      |       | (122                                                           | )          | —                                                                                                                                 |       |
| Addition of lease intangibles                                                                    |       | (49                                                            | )          | —                                                                                                                                 |       |
| Change in accrued liabilities                                                                    |       | 386                                                            |       | 54                                                                                                                                     |       |
| Change in payables to related parties                                                            |       | (236                                                           | )          | —                                                                                                                                 |       |
| **Cash provided by (used in) operating  activities**                                             |       | (95                                                            | )          | 2                                                                                                                                      |       |
|                                                                                             |       |                                                           |       |                                                                                                                                   |       |
| **Cash flows from investing activities**                                                         |       |                                                           |       |                                                                                                                                   |       |
| Purchases of real estate                                                                         |       | (35,056                                                        | )          | —                                                                                                                                 |       |
| **Cash used in investing activities**                                                            |       | (35,056                                                        | )          | —                                                                                                                                 |       |
|                                                                                             |       |                                                           |       |                                                                                                                                   |       |
| **Cash flows from financing activities**                                                         |       |                                                           |       |                                                                                                                                   |       |
| Financing costs                                                                                  |       | (533                                                           | )          | —                                                                                                                                 |       |
| Proceeds from notes payable                                                                      |       | 18,500                                                         |       | —                                                                                                                                 |       |
| Issuance of common/convertible stock                                                             |       | 72,315                                                         |       | 201                                                                                                                                    |       |
| Redemptions of common stock                                                                      |       | (18                                                            | )          | —                                                                                                                                 |       |
| Offering costs                                                                                   |       | (7,774                                                         | )          | —                                                                                                                                 |       |
| Distributions                                                                                    |       | (167                                                           | )          | —                                                                                                                                 |       |
| **Cash provided by financing activities**                                                        |       | 82,323                                                         |       | 201                                                                                                                                    |       |
|                                                                                             |       |                                                           |       |                                                                                                                                   |       |
| Net change in cash and cash equivalents                                                          |       | 47,172                                                         |       | 203                                                                                                                                    |       |
| Cash and cash equivalents at beginning of  period                                                |       | 203                                                            |       | —                                                                                                                                 |       |
| Cash and cash equivalents at end of period                                                       |       | $                                                              | 47,375     |                                                                                                                                   | $          | 203 |   |

 

*See Notes to Consolidated Financial Statements.*

 

F-6

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Tableof Contents

** **

**BehringerHarvard Opportunity REIT II, Inc.Notes to Consolidated Financial Statements**

** **

**1.****            ****Business and Organization**

 

***Business***

 

Behringer Harvard Opportunity REIT II, Inc.(which may be referred to as the “Company,” “we,” “us,” or “our”) was organizedas a Maryland corporation on January 9, 2007 and intends to qualify as areal estate investment trust (“REIT”), for federal income tax purposes,effective for our taxable year ended December 31, 2008.  We invest in and operate commercial realestate and real estate-related assets. In particular, we focus generally on acquiring commercial propertieswith significant possibilities for short-term capital appreciation, such asthose requiring development, redevelopment or repositioning, those located inmarkets and submarkets with high growth potential, and those available fromsellers who are distressed or face time-sensitive deadlines.  We may acquire a wide variety of commercialproperties, including office, industrial, retail, hospitality, recreation andleisure, single-tenant, multifamily, and other real properties.  These properties may be existing, income-producingproperties, newly constructed properties, or properties under development orconstruction, and may include multifamily properties purchased for conversioninto condominiums and single-tenant properties that may be converted formultifamily use.  Further, we may investin real estate-related securities, including securities issued by other realestate companies, either for investment or in change of control transactionscompleted on a negotiated basis or otherwise. We also may originate or invest in collateralized mortgage-backedsecurities, mortgage, bridge or mezzanine loans and Section 1031tenant-in-common interests (including those issued by affiliates of ouradvisor), or in entities that make investments similar to the foregoing.  We expect to make our investments in or inrespect of real estate assets located in the United States and other countriesbased on our view of existing market conditions.

 

Substantially all of ourbusiness is conducted through Behringer Harvard Opportunity OP II LP, a limitedpartnership organized in Delaware on January 12, 2007 (“Behringer HarvardOpportunity OP II”).  As of December 31,2008, our wholly-owned subsidiary, BHO II, Inc., a Delaware corporation,was the sole general partner of Behringer Harvard Opportunity OP II and owned a0.1% partnership interest in Behringer Harvard Opportunity OP II.  As of December 31, 2008, ourwholly-owned subsidiary, BHO Business Trust II, a Maryland business trust, wasthe sole limited partner of Behringer Harvard Opportunity OP II.

 

We are externally managed and advised by BehringerHarvard Opportunity Advisors II LP (“Behringer Opportunity Advisors II”), aTexas limited partnership formed in January 2007.  Behringer Opportunity Advisors II is ouraffiliate responsible for managing our affairs on a day-to-day basis and foridentifying and making acquisitions and investments on our behalf.

 

***Organization***

 

On February 26, 2007, we filed a RegistrationStatement on Form S-11 with the Securities and Exchange Commission tooffer up to 125,000,000 shares of common stock for sale to the public (the “Offering”),of which 25,000,000 shares are being offered pursuant to our distributionreinvestment plan (the “DRIP”).  Wereserve the right to reallocate the shares we are offering between our primaryoffering and the DRIP.  The Securitiesand Exchange Commission declared our Registration Statement effective on January 4,2008, and we commenced our ongoing initial public offering on January 21,2008.   In connection with our initialcapitalization, on January 19, 2007, we issued 22,471 shares of our commonstock and 1,000 shares of our convertible stock to Behringer Harvard Holdings,LLC (“Behringer Harvard Holdings”), an affiliate of our advisor.

 

We commenced operations on April 1, 2008 uponsatisfaction of the conditions of our escrow agreement in all states exceptPennsylvania and our acceptance of initial subscriptions of common stock.  On September 19, 2008, we satisfied theescrow conditions for Pennsylvania.  Uponadmission of new stockholders, subscription proceeds are used for payment ofdealer manager fees and selling commissions and may be utilized asconsideration for investments and the payment or reimbursement of offeringexpenses and operating expenses.  Untilrequired for such purposes, net offering proceeds are held in short-term,liquid investments.  Through December 31,2008, we had sold 7,302,740 shares in the Offering and the DRIP for grossproceeds of $72.8 million.  As of December 31,2008, we had redeemed 2,031 shares of our common stock and had 7,232,180 sharesof our common stock outstanding, which includes the 22,471 shares issued toBehringer Harvard Holdings.Asof December 31, 2008, we had 1,000 shares of convertible stock issued andoutstanding to Behringer Harvard Holdings.

 

Our common stock is not currently listed on a nationalsecurities exchange.  Depending upon thenprevailing market conditions, it is our intention to consider beginning theprocess of liquidating our assets and distributing the net proceeds to our stockholderswithin three to six years after the termination of the Offering.  If we do not begin an orderly liquidationwithin that period, we may seek to have our shares listed on a nationalsecurities exchange.

 

F-7

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Tableof Contents

 

**BehringerHarvard Opportunity REIT II, Inc.Notes to Consolidated Financial Statements**

 

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

 

***Use of Estimates in thePreparation of Financial Statements***

 

The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesof America (“GAAP”) requires management to make estimates and assumptions thataffect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period.  These estimates include such items aspurchase price allocation for real estate acquisitions, impairment oflong-lived assets, depreciation and amortization, and allowance for doubtfulaccounts.  Actual results could differfrom those estimates.

 

***Principles of Consolidation andBasis of Presentation***

 

Our consolidated financial statements include ouraccounts and the accounts of other subsidiaries over which we havecontrol.  All inter-company transactions,balances, and profits have been eliminated in consolidation.  Interests in entities acquired will beevaluated based on Financial Accounting Standards Board (“FASB”) Interpretation(“FIN”) 46R “Consolidation of Variable Interest Entities,” which requires theconsolidation of variable interest entities (“VIE”) in which we are deemed tobe the primary beneficiary.  If theinterest in the entity is determined not to be a variable interest entity underFIN 46R, then the entities will be evaluated for consolidation under theAmerican Institute of Certified Public Accountants’ Statement of Position 78-9,“Accounting for Investments in Real Estate Ventures,” and by Emerging IssuesTask Force 04-5, “Determining Whether a General Partner, or the GeneralPartners as a Group, Controls a Limited Partnership or Similar Entity When theLimited Partners Have Certain Rights.” In the Notes to Consolidated Financial Statements, all dollar and shareamounts in tabulation are in thousands of dollars and shares, respectively,unless otherwise noted.

 

There are judgments and estimates involved indetermining if an entity in which we have made an investment is a VIE and ifso, if we are the primary beneficiary. The entity is evaluated to determine if it is a VIE by, among otherthings, calculating the percentage of equity being risked compared to the totalequity of the entity.  FIN 46R providessome guidelines as to what the minimum equity at risk should be, but thepercentage can vary depending upon the industry and/or the type of operationsof the entity and it is up to management to determine that minimum percentageas it relates to our business and the facts surrounding each of ouracquisitions.  In addition, even if theentity’s equity at risk is a very low percentage, we are required by FIN 46R toevaluate the equity at risk compared to the entity’s expected future losses todetermine if there could still in fact be sufficient equity at the entity.  Determining expected future losses involvesassumptions of various possibilities of the results of future operations of theentity, assigning a probability to each possibility, and using a discount rateto determine the net present value of those future losses.  A change in the judgments, assumptions, andestimates outlined above could result in consolidating an entity that shouldnot be consolidated or accounting for an investment on the equity method thatshould in fact be consolidated, the effects of which could be material to ourfinancial statements.

 

***Real Estate***

 

Upon the acquisition of real estate properties, weallocate the purchase price of those properties to the tangible assetsacquired, consisting of land, inclusive of associated rights, and buildings,any assumed debt, identified intangible assets and asset retirement obligationsbased on their relative fair values in accordance with Statement of Financial AccountingStandards (“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 and tenant relationships.

 

Initial valuations are subject to change until ourinformation is finalized, which is no later than twelve months from theacquisition date.

 

We determine the fair value of assumed debt bycalculating the net present value of the scheduled note payments using interestrates for debt with similar terms and remaining maturities that we believe wecould obtain.  Any difference between thefair value and stated value of the assumed debt is recorded as a discount orpremium and amortized over the remaining life of the loan.

 

The fair value of the tangible assets acquired,consisting of land and buildings, is determined by valuing the property as ifit were vacant, and the “as-if-vacant” value is then allocated to land andbuildings.  Land values are derived fromappraisals, 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.  The value of the commercial office buildingis depreciated over the estimated useful life of 25 years using thestraight-line method.

 

F-8

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Tableof Contents

 

**BehringerHarvard Opportunity REIT II, Inc.Notes to Consolidated Financial Statements**

 

We 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-place leases and (2) management’s estimate of currentmarket lease rates for the corresponding in-place leases, measured over aperiod equal to (a) the remaining non-cancelable lease term forabove-market leases, or (b) the remaining non-cancelable lease term plusany fixed rate renewal option for below-market leases.  We record the fair value of above-market andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over theabove determined lease term.

 

The total value of identified real estate intangibleassets acquired is further allocated to in-place lease values and tenantrelationships based on our evaluation of the specific characteristics of eachtenant’s lease and our overall 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 include 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 expectedlease-up period and carrying costs that would have otherwise been incurred hadthe leases not been in place, including tenant improvements andcommissions.  The estimates of the fairvalue of tenant relationships also include costs to execute similar leases,including leasing commissions, legal costs and tenant improvements as well asan estimate of the likelihood of renewal as determined by management on atenant-by-tenant basis.

 

We amortize the value of in-place leases to expenseover the term of the respective leases. The value of tenant relationship intangibles is amortized to expenseover the initial term and any anticipated renewal periods, but in no event doesthe amortization period for intangible assets exceed the remaining depreciablelife of the building.  Should a tenantterminate its lease, the unamortized portion of the in-place lease value andtenant relationship intangibles is charged to expense.  As of December 31, 2008, the estimatedremaining useful life for acquired lease intangibles was approximately twoyears.

 

Anticipated amortization expense associated with theacquired lease intangibles for each of the following five years ended December 31is as follows:

 
| **Year** | ** ** | **Lease  Intangibles** | ** ** |
|----------|------------|------------------------|------------|
| 2009     |       | $                      | 228        |   |
| 2010     |       | 228                    |       |
| 2011     |       | 38                     |       |
| 2012     |       | —                 |       |
| 2013     |       | —                 |       |
|          |            |                        |            |  |

 

Accumulated depreciation and amortization related toour consolidated investments in real estate assets and intangibles were asfollows:

 
| ** **                          | ** ** | **Buildings and** | ** ** | **Land and** | ** ** | **Lease**       | ** ** | **Acquired  Below-Market** | ** ** |
|-------------------------------------|------------|------------------------|------------|-------------------|------------|-----------------|------------|----------------------------|------------|
| **2008**                            | ** ** | **Improvements**       | ** ** | **Improvements**  | ** ** | **Intangibles** | ** ** | **Leases**                 | ** ** |
| Cost                                |       | $                      | 26,138     |              | $          | 9,000           |       | $                          | 3,021      |   | $ | (2,441 | ) |
| Less: depreciation and amortization |       | (174                   | )          | —            |       | (224            | )          | 179                        |       |
|                                |       |                   |       |              |       |            |       |                       |       |
| Net                                 |       | $                      | 25,964     |              | $          | 9,000           |       | $                          | 2,797      |   | $ | (2,262 | ) |

 

***Impairment of Long-Lived Assets***

 

For real estate we wholly own, we monitor events andchanges in circumstances indicating that the carrying amounts of the realestate assets may not be recoverable. When such events or changes in circumstances are present, we assesspotential impairment by comparing estimated future undiscounted operating cashflows expected to be generated over the life of the asset and from its eventualdisposition to the carrying value of the asset. In the event that the carrying amount exceeds the estimated futureundiscounted operating cash flows, we recognize an impairment loss to adjustthe carrying amount of the asset to estimated fair value.  We consider projected future undiscountedcash flows, trends, strategic decisions regarding future development plans, andother factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cashflows are reasonable, different assumptions regarding such factors as marketrents, economies, and occupancies could significantly affect these estimates.

 

F-9

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Tableof Contents

 

**Behringer HarvardOpportunity REIT II, Inc.Notes to Consolidated Financial Statements**

 

In evaluating our investment for impairment,management uses appraisals and makes estimates and assumptions, including, butnot limited to, the projected date of disposition of the property, theestimated future cash flows of the property during our ownership, and theprojected sales price of the property.  Achange in these estimates and assumptions could result in understating oroverstating the book value of our investment, which could be material to ourfinancial statements.  Due to thejudgment and assumptions applied in the estimation process with respect toimpairments, it is possible actual results could differ substantially from thoseestimated.

 

We believe the carrying value of our operating realestate asset is currently recoverable. However, if market conditions worsen beyond our current expectations, orif changes in our development strategy significantly affect any key assumptionsused in our fair value calculations, we may need to take charges in futureperiods for impairments related to existing assets.  Any such non-cash charges would have anadverse effect on our consolidated financial position and results ofoperations.

 

***Cash and Cash Equivalents***

 

We consider investments in highly-liquid moneymarket funds or investments with original maturities of three months or less tobe cash equivalents.  The carrying amountof cash and cash equivalents reported on the balance sheet approximates fairvalue.

 

***Prepaid Expenses and Other Assets***

 

Prepaid expenses and otherassets include prepaid directors’ and officers’ insurance, as well as prepaidinsurance of our consolidated property.

 

***Deferred Financing Fees***

 

Deferred financing fees are recorded at cost and areamortized to interest expense of our note payable using a straight-line methodthat approximates the effective interest method over the life of the relateddebt.  We did not have any accumulatedamortization of deferred financing fees for the years ended December 31,2008 or 2007.

 

***Revenue Recognition***

 

We recognize rentalincome generated from leases on real estate assets on a straight-line basisover the terms of the respective leases, including the effect of rent holidays,if any.  Straight-line rental revenue of$20,000 was recognized in revenue for the year ended December 31,2008.  There was no straight-line rentalrevenue for the year ended December 31, 2007.

 

***Organization and OfferingExpenses***

 

We reimburse our advisor or its affiliates for anyorganization and offering expenses incurred on our behalf in connection withthe primary offering (other than selling commissions and the dealer managerfee) provided that at no point will we reimburse expenses that would cause ourtotal organization and offering expenses (other than selling commissions andthe dealer manager fee) related to our primary offering to exceed 1.5% of grossoffering proceeds from the primary offering. Organization and offering expenses are defined generally as any and allcosts and expenses incurred by us in connection with our formation, preparingfor the offering, the qualification and registration of the offering, and themarketing and distribution of our shares. Organization and offering expenses include, but are not limited to,accounting and legal fees, costs to amend the registration statement andsupplement the prospectus, printing, mailing and distribution costs, filingfees, amounts to reimburse our advisor or its affiliates for the salaries ofemployees, and other costs in connection with preparing supplemental salesliterature, telecommunication costs, fees of the transfer agent, registrars,trustees, escrow holders, depositories and experts, and fees and costs foremployees of our advisor or its affiliates to attend industry conferences.  At each balance sheet date, we estimate thetotal gross public offering proceeds expected to be received under the publicoffering and recognize the amount of organization and offering reimbursement asdetermined under SFAS No. 5, “Accounting for Contingencies.”  We record the amount of reimbursement at thelower of (a) 1.5% of the estimated gross public offering proceeds, or (b) theactual organization and offering costs incurred by our advisor or itsaffiliates.

 

All offering costs are recorded as an offset toadditional paid-in capital, and all organization costs are recorded as anexpense at the time we become liable for the payment of these amounts.

 

***Income Taxes***

 

We intend to make an election to be taxed as a REITunder Sections 856 through 860 of the Internal Revenue Code commencing with ourtaxable year ended December 31, 2008. If we qualify for taxation as a REIT, we generally will not be subjectto federal corporate income tax to the extent we distribute our REIT taxableincome to our stockholders, so long as we distribute at least 90 percent of ourREIT taxable income (which is computed without regard to the dividends paid

 

F-10

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Table of Contents

 

**BehringerHarvard Opportunity REIT II, Inc.Notes to Consolidated Financial Statements**

 

deduction or net capital gain and which doesnot necessarily equal net income as calculated in accordance with GAAP).  REITs are subject to a number of otherorganizational and operations requirements. Even if we qualify for taxation as a REIT, we may be subject to certainstate and local taxes on our income and property, and federal income and excisetaxes on our undistributed income.

 

***Stock-Based Compensation***

 

We have adopted a stock-based incentive award planfor our directors and consultants and for employees, directors and consultantsof our affiliates.  We account for thisplan in accordance with SFAS No. 123R, “Share-Based Payment.” In the modified prospectivemethod, compensation cost is recognized for all share-based payments grantedafter the effective date and for all unvested awards granted prior to theeffective date. SFAS No. 123R also requires the tax benefits associatedwith these share-based payments to be classified as financing activities in theConsolidated Statements of Cash Flows, rather than as operating cash flows. Wedid not issue any stock-based awards under the plan for the year ended December 31,2008 or 2007.

 

***Concentration of Credit Risk***

 

At December 31, 2008 and 2007, we had cash andcash equivalents deposited in certain financial institutions in excess offederally insured levels.  We havediversified our cash and cash equivalents among several banking institutions inan attempt to minimize exposure to any one of these entities.  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 insuredbank.  Beginning October 3, 2008 through December 31, 2009, theFDIC 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.

 

***Earnings per Share***

 

Earnings (loss) per share is calculated based on theweighted average number of common shares outstanding during each period.  The weighted average shares outstanding usedto calculate both basic and diluted loss per share were the same for the yearended December 31, 2008 and for the period from January 9, 2007 (dateof inception) through December 31, 2007 as there were no stock-basedawards outstanding.

 

***Reportable Segments***

 

FASB No. 131, “Disclosures about Segments of anEnterprise and Related Information,” establishes standards for reportingfinancial and descriptive information about an enterprise’s reportablesegments.  We have determined that wehave one reportable segment, with activities related to the ownership,development and management of real estate assets.  Our chief operating decision maker evaluatesoperating performance on an individual property level.  Therefore, our properties are aggregated intoone reportable segment.

 

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

 

In February 2008, the FASB staff issued StaffPosition No. 157-2 “Effective Date of FASB Statement No. 157” (“FSPSFAS 157-2”). FSP SFAS 157-2 delays the effective date of SFAS No. 157 tofiscal years beginning after November 15, 2008, for non-financial assetsand non-financial liabilities, except for items that are recognized ordisclosed at fair value in the financial statements on a recurring basis (atleast annually).  We adopted FSP SFAS No. 157-2effective January 1, 2009, and this adoption is expected to enhance ourfuture disclosures regarding how we develop fair value estimates related tonon-financial assets and liabilities in our financial statements.

 

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.  ThisStatement is broader in scope than that of Statement 141, which applied only tobusiness combinations in which control was obtained by transferringconsideration. SFAS 141R applies the same method of accounting (the acquisitionmethod) to all transactions and other events in which one entity obtainscontrol over one or more other businesses.  This Statement also 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 business combinations occurring on orafter the beginning of the first annual reporting period beginning on or after December 15,2008.  Early adoption is not allowed. Theacquisition of real estate property has been determined to meet the definitionof a business combination as defined in SFAS No. 141(R).  Therefore, beginning January 1, 2009, wewill no longer capitalize acquisition related costs for future acquisitions ofreal estate properties, but will expense such costs as incurred.

 

F-11

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Tableof Contents

** **

**Behringer Harvard Opportunity REIT II, Inc.**

**Notes to Consolidated Financial Statements**

 

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 valueoption established by SFAS No. 159 permits all entities to choose tomeasure eligible items at fair value at specified 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.  We adopted this standard effective January 1, 2008 but havenot elected the fair value measurement option for any financial assets orliabilities at the present time; however, we may elect to measure futureeligible financial assets or liabilities at fair value.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements - An amendmentof ARB No. 51.”  This Statement amends Accounting Research Bulletin No. 51to establish accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary.  It clarifiesthat a noncontrolling interest in a subsidiary, which is sometimes referred toas minority interest, is an ownership interest in the consolidated entity thatshould be reported as equity in the consolidated financial statements. Among other requirements, this Statement requires consolidated net income to bereported at amounts that include the amounts attributable to both the parentand the noncontrolling interest.  It also requires disclosure, on the faceof the consolidated income statement, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest.  ThisStatement is effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008.  Earlieradoption is prohibited.  This Statement shall be applied prospectively asof the beginning of the fiscal year in which this Statement is initiallyapplied, except for the presentation and disclosure requirements.  Thepresentation and disclosure requirements shall be applied retrospectively forall periods presented.

 

**4.****                                   ****Real Estate Investments andAcquisitions**

 

As of December 31,2008, we wholly owned one property.  Thefollowing table presents certain information about our consolidated property asof December 31, 2008:

 
| **Property Name** | ** ** | **Location** | ** ** | **Approximate  Rentable  Square Footage  (unaudited)** | ** ** | **Description**          | ** ** | **Ownership  Interest** | ** ** |
|------------------------|------------|--------------|------------|-------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| 1875  Lawrence         |       | Denver, CO   |       | 185,000                                                     |       | 15-story office building |       | 100%                    |       |

 

***Real Estate Asset Acquisition***

 

On October 28, 2008, we acquired a multi-tenantoffice building known as 1875 Lawrence, located in Denver, Colorado (“1875Lawrence”).  1875 Lawrence is a 15-storyoffice building containing approximately 185,000 rentable square feet, locatedon approximately half an acre of land. The total contract purchase price for 1875 Lawrence, exclusive ofclosing costs, was $34.5 million.

 

**5.****                                   ****Note Payable**

 

The following table sets forth our note payable on1875 Lawrence as of December 31, 2008. We did not have any notes payable as of December 31, 2007.

 
| ** **      | ** ** | ** **  | ** ** | **Interest** | ** **               | **Maturity** | ** ** |
|-----------------|------------|-------------|------------|--------------|--------------------------|--------------|------------|
| **Description** | ** ** | **Balance** | ** ** | **Rate**     | ** **               | **Date**     | ** ** |
| 1875  Lawrence  |       | $           | 18,500     |         | 30-day LIBOR + 2.5 % (1) |         | 12/31/12   |   |
|                 |            |             |            |              |                          |              |            |  |

 

----

(1) 30-dayLIBOR was 1.0826% at December 31, 2008. The loan has a minimum interest rate of 6.25%.

 

On December 31, 2008, we entered into a loanagreement with a financial institution to borrow up to $23.5 million.  The initial advance under the loan agreementwas $18.5 million and was used to fund acquisition and acquisition-relatedcosts of 1875 Lawrence, which we acquired on October 28, 2008.  The remaining advances under the loanagreement will be used for capital expenditures, tenant improvements, andleasing commission costs for 1875 Lawrence.  We have unconditionally guaranteed payment ofthe loan for an amount not to exceed the lesser of (i) $11.75 million and (ii) 50%of the total amount advanced under the loan agreement if the aggregate amountadvanced is less than $23.5 million.

 

The loan matures on December 31, 2012 and wehave the option to extend it for one twelve-month period provided that certainconditions have been met.

 

Commencing with the first calendar month followingthe date of the loan and continuing through the first 24 months, monthlypayments of accrued unpaid interest are required.  Commencing on the twenty-fifth calendar monthfrom

 

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** **

**Behringer Harvard Opportunity REIT II, Inc.**

**Notes to Consolidated Financial Statements**

 

the date of the loan and continuing until thematurity date, monthly payments of principal and interest are due and payablewith principal calculated using an amortization term of 25 years, with theunpaid principal balance and all accrued unpaid interest being due and payableon the maturity date.

 

The loan is secured by a first mortgage lien on theassets of 1875 Lawrence including the land, fixtures, improvements, contracts,leases, rents, and reserves.

 

We are subject to customary affirmative, negative,and financial covenants, representations, warranties and borrowing conditions,all as set forth in the loan agreement. As of December 31, 2008, we believe we were in compliance with thecovenants under our loan agreement.

 

The following table summarizes our contractualobligations for principal payments as of December 31, 2008:

** **

| **Year** | ** ** | **Amount Due** | ** ** |
|----------|------------|---------------------|------------|
| 2011     |       | $                   | 740        |   |
| 2012     |       | 17,760              |       |
|     |       |                |       |   |
|     |       | $                   | 18,500     |   |

 

**6.****                                   ****Leasing Activity**

 

Future minimum base rentalpayments due to us under non-cancelable leases in effect as of December 31,2008 for 1875 Lawrence are as follows:

** **

| **Year**   | ** ** | **Minimum  Rental  Payments** | ** ** |
|------------|------------|-------------------------------|------------|
| 2009       |       | $                             | 3,644      |   |
| 2010       |       | 3,090                         |       |
| 2011       |       | 1,649                         |       |
| 2012       |       | 1,003                         |       |
| 2013       |       | 695                           |       |
| Thereafter |       | 224                           |       |
|       |       |                          |       |
| Total      |       | $                             | 10,305     |   |

 

As of December 31,2008, one of our tenants accounted for 10% or more of our aggregate annualrental revenues from our consolidated property, 1875 Lawrence.  Policy Studies, Inc. accounted forrental revenue of approximately $130,000, or approximately 14%, of ouraggregate rental revenues for the year ended December 31, 2008.

 

**7.****                                   ****Stockholders’ Equity**

 

***Capitalization***

 

As of December 31,2008, our authorized capital was 350,000,000 shares of common stock, 50,000,000shares of preferred stock and 1,000 shares of convertible stock.  All shares of such stock have a par value of$.0001 per share.  As of December 31,2008, we had 7,323,180 shares of our common stock issued and outstanding, 1,000shares of convertible stock issued and outstanding, and no shares of preferredstock issued and outstanding.

 

The shares of convertiblestock will be converted into shares of common stock automatically if (1) wehave made total distributions on then outstanding shares of our common stockequal to the issue price of those shares plus a 10% cumulative, non-compounded,annual return on the issue price of those outstanding shares, or (2) welist our common stock for trading on a national securities exchange if the sumof the prior distributions on then outstanding shares of the common stock plusthe aggregate market value of the common stock (based on the 30-day averageclosing price) meets the same 10% performance threshold.  In general, the convertible stock willconvert into shares of common stock with a value equal to the lesser of (A) 20%of the excess of our enterprise value plus the aggregate value of distributionspaid to date on then outstanding shares of our common stock over the aggregateissue price of those outstanding shares plus a 10% cumulative, non-compounded,annual return on the issue price of those outstanding shares or (B) 15% ofthe excess of our enterprise value plus the aggregate value of distributionspaid to date on then outstanding shares of the common stock over the aggregateissue price of those outstanding shares plus a 6% cumulative, non-compounded,annual return on the issue price of those outstanding shares.  Atthe date of issuance of the shares of convertible stock, management determinedthe fair value under GAAP was less than the nominal value paid for the shares;therefore, the difference is not material.

 

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** **

**Behringer Harvard Opportunity REIT II, Inc.**

**Notes to Consolidated Financial Statements**

 

Thetiming of the conversion of any or all of the convertible stock may be deferredby our board of directors if it determines that full conversion may jeopardizeour qualification as a REIT.  Any suchdeferral will in no event otherwise alter the terms of the convertible stock,and such stock shall be converted at the earliest date after our board ofdirectors determines that such conversion will not jeopardize our qualificationas a REIT.  Our board of directors isauthorized to amend our charter, without the approval of the stockholders, toincrease the aggregate number of authorized shares of capital stock or thenumber of shares of any class or series that we have authority to issue.

 

***Share Redemption Program***

 

Our board of directors has adopted a shareredemption program that permits our stockholders to sell their shares to usafter they have held them for at least one year, subject to significantconditions and limitations.  The purchaseprice for the redeemed shares is set forth in the prospectus for theOffering.  Subject to certainlimitations, we will waive the one-year holding requirement for redemptionssought upon a stockholder’s death or qualifying disability or redemptionssought upon a stockholder’s confinement to a long-term care facility.  Our board of directors reserves the right inits sole discretion at any time, and from time to time, to (1) waive theone-year holding period in the event of other exigent circumstances affecting astockholder such as bankruptcy or a mandatory distribution requirement underthe stockholder’s IRA, (2) reject any request for redemption, (3) changethe purchase price for redemptions, or (4) otherwise amend the terms forthe share redemption program.  Under theterms of the program, we will not redeem in excess of 5% of theweighted-average number of shares outstanding during the twelve-month periodimmediately prior to the date of redemption. In addition, our board of directors will determine at least quarterlywhether we have sufficient cash to repurchase shares, and such purchases willgenerally be limited to proceeds from the DRIP plus 1% of operating cash flowfor the previous fiscal year (to the extent positive).  We redeemed 2,031 shares of common stock forapproximately $18,000 during the year ended December 31, 2008.

 

***Distribution Reinvestment Plan***

 

We have adopted our DRIP through which commonstockholders may elect to have distributions otherwise distributable to theminvested in additional shares of our common stock.  We are offering up to 25,000,000 shares forsale pursuant to the DRIP at an initial purchase price of $9.50 per share.  We may reallocate the shares of common stockbeing offered between the primary offering and the DRIP.  We may terminate the DRIP in our discretionat any time upon ten days’ notice to plan participants.

 

***Distributions***

 

We initiated the payment ofmonthly distributions in April 2008 in the amount of a 3% annualized rateof return, based on an investment in our common stock of $10.00 per share andcalculated on a daily record basis of $0.0008219 per share.  A portion of each distribution is expected toconstitute a return of capital for tax purposes.  Pursuant to the DRIP, stockholders may electto reinvest any cash distribution in additional shares of common stock.  We record all distributions when declared,except that the stock issued through the DRIP is recorded when the shares areactually issued.  Distributions declaredand payable as of December 31, 2008 were $181,000, which included $45,000of cash distributions payable.

 

The following are the distributions declared byquarter for the year ended December 31, 2008:

 

| **2008**    | ** ** | **Total** | ** ** | **Cash** | ** ** | **DRIP** | ** ** |
|-------------|------------|-----------|------------|----------|------------|----------|------------|
| 4th Quarter |       | $         | 494        |     | $          | 120      |       | $ | 374 |   |
| 3rd Quarter |       | 297       |       | 75       |       | 222      |       |
| 2nd Quarter |       | 74        |       | 17       |       | 57       |       |
| 1st Quarter |       | —    |       | —   |       | —   |       |
|        |       |      |       |     |       |     |       |   |   |   |
|        |       | $         | 865        |     | $          | 212      |       | $ | 653 |   |

 

**8.****                                   ****Related Party Transactions**

 

Our advisor and certain of its affiliates will receivefees and compensation in connection with the Offering, and in connection withthe acquisition, management, and sale of our assets.

 

Behringer Securities LP (“Behringer Securities”),the dealer-manager and an affiliate of our advisor, receives commissions of upto 7% of gross offering proceeds. Behringer Securities reallows 100% of selling commissions earned toparticipating broker-dealers.  Inaddition, we pay Behringer Securities a dealer manager fee of up to 2.5% ofgross offering proceeds.  Pursuant toseparately negotiated agreements, Behringer Securities may reallow a portion ofits dealer manager fee in an aggregate amount up to 2% of gross offeringproceeds to broker-dealers participating in the Offering; provided, however,that Behringer Securities may reallow, in the aggregate, no more than 1.5% ofgross offering proceeds for marketing fees and expenses, conference fees andnon-itemized, non-invoiced due diligence efforts and no more than 0.5% of 

 

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** **

**Behringer Harvard Opportunity REIT II, Inc.**

**Notes to Consolidated Financial Statements**

 

gross offering proceeds for out-of-pocket andbona fide, separately invoiced due diligence expenses incurred as fees, costsor other expenses from third parties. Further, in special cases pursuant to separately negotiated agreementsand subject to applicable limitations imposed by the Financial IndustryRegulatory Authority, Behringer Securities may use a portion of its dealermanager fee to reimburse certain broker-dealers participating in the Offeringfor technology costs and expenses associated with the Offering and costs andexpenses associated with the facilitation of the marketing and ownership of ourshares by such broker-dealers’ customers. No selling commissions or dealer manager fee is paid for sales under theDRIP.  For the year ended December 31,2008, Behringer Securities earned selling commissions and dealer manager feesof $4.9 million and $1.8 million, respectively, which were recorded as areduction to additional paid-in capital.

 

We reimburse Behringer Opportunity Advisors II orits affiliates for any organization and offering expenses incurred on ourbehalf in connection with our primary offering (other than selling commissionsand the dealer manager fee) provided that at no point will we reimburseexpenses that would cause our total organization and offering expenses relatedto the primary offering (other than selling commissions and the dealer managerfee) to exceed 1.5% of gross offering proceeds from the primary offering.  Since our inception through December 31, 2008,approximately $6.4 million of organization and offering expenses had beenincurred by Behringer Opportunity Advisors II or its affiliates on ourbehalf.  Of this amount, $1.1 million hadbeen reimbursed by us and $5.3 million of reimbursements payable is included inpayables to affiliates on our balance sheet. Of the $5.3 million of organization and offering expenses reimbursableby us through December 31, 2008, approximately $111,000 had been expensedas organizational costs with the remainder recorded as a reduction ofadditional paid-in capital.  BehringerOpportunity Advisors II or its affiliates determines the amount of organizationand offering expenses owed based on specific invoice identification as well asan allocation of costs to us and other Behringer Harvard programs, based onrespective equity offering results of those entities in offering.

 

Our advisor or its affiliates also receiveacquisition and advisory fees of 2.5% of the amount paid and/or budgeted inrespect of the purchase, development, construction, or improvement of eachasset we acquire, including any debt attributable to these assets.

 

Our advisor or its affiliates also receive anacquisition expense reimbursement in the amount of 0.25% of 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. Our advisor or its affiliates will also receive an acquisition expensereimbursement in the amount of 0.25% of the funds advanced in respect of a loanor other investment.  We also pay third parties, or reimburse the advisoror its affiliates, for any investment-related expenses due to third parties inthe case of a completed investment, including, but not limited to, legal feesand expenses, travel and communication expenses, costs of appraisals,accounting fees and expenses, third-party brokerage or finder’s fees, titleinsurance, premium expenses, and other closing costs.  Our advisor or itsaffiliates are responsible for paying all of the expenses it incurs associatedwith persons employed by the advisor to the extent dedicated to makinginvestments for us, such as wages and benefits of the investmentpersonnel.  Our advisor or its affiliates are also responsible for payingall of the investment-related expenses that we or our advisor or its affiliatesincur that are due to third parties with respect to investments we do notmake.  For the year ended December 31,2008, our advisor earned $0.8 million in acquisition and advisory fees and $0.1million in acquisition expense reimbursements. For property acquisitions, we capitalize these fees as part of our realestate.

 

We pay our advisor or its affiliates a debtfinancing fee of 1% of the amount available under any loan or line of creditmade available to us.  It is anticipatedthat our advisor will pay some or all of these fees to third parties with whomit subcontracts to coordinate financing for us. For the year ended December 31,2008, we incurred debt financing fees of $235,000.  We did not incur any debt financing fees forthe year ended December 31, 2007.

 

We pay our advisor or its affiliates a developmentfee in an amount that is usual and customary for comparable services renderedto similar projects in the geographic market of the project if such affiliateprovides the development services and if a majority of our independentdirectors determines that such development fee is fair and reasonable and onterms and conditions not less favorable than those available from unaffiliatedthird parties.

 

We pay our property manager and affiliate of ouradvisor, Behringer Harvard Opportunity II Management Services, LLC (“BHO IIManagement”), or its affiliates, fees for the management and leasing of ourproperties.  Property management fees are4.5% of the gross revenues of the properties managed by BHO II Management orits affiliates.  In the event that wecontract directly with a third-party property manager in respect of a property,BHO II Management or its affiliates receives an oversight fee equal to 0.5% ofthe gross revenues of the property managed. In no event will BHO II Management or its affiliates receive both aproperty management fee and an oversight fee with respect to any particularproperty.  In the event we own a propertythrough a joint venture that does not pay BHO II Management directly for itsservices, we will pay BHO II Management a management fee or oversight fee, asapplicable, based only on an economic interest in the property.  In addition to the property management fee oroversight fee, if BHO II Management or its affiliates provide leasing services

 

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** **

**Behringer Harvard Opportunity REIT II, Inc.**

**Notes to Consolidated Financial Statements**

 

with respect to a property, we will pay BHOII Management or its affiliates leasing fees in an amount equal to the leasingfees charged by unaffiliated persons rendering comparable services in the samegeographic location of the applicable property. Also, if BHO II Management or its affiliates supervise construction workat our properties, we will pay BHO II Management or its affiliates aconstruction supervision fee equal to an amount not greater than 5% of all hardconstruction costs incurred in connection with the construction work.  We reimburse the costs and expenses incurredby BHO II Management or its affiliates on its behalf, including the wages andsalaries and other employee-related expenses of all on-site employees of BHO IIManagement or its affiliates, its subcontractors who are engaged in theoperation, management, maintenance, or access control of the Company’sproperties, including taxes, insurance and benefits relating to such employees,and legal, travel, and other out-of-pocket expenses that are directly relatedto the management of specific properties. Furthermore, other third-party charges, including fees and expenses ofthird-party accountants, are reimbursed. We did not incur any property management fees or oversight fees paid toBHO II Management for the year ended December 31, 2008 and for the periodfrom January 9, 2007 (date of inception) to December 31, 2007.

 

We pay our advisor or its affiliates a monthly assetmanagement fee of one-twelfth of 1.0% of the sum of the higher of the cost orvalue of each asset.  For the year ended December 31,2008, we expensed $61,000 of asset management fees.  We did not incur any asset management feesfor the year ended December 31, 2007.

 

Our advisor or its affiliates also will be paid adisposition fee if the advisor or its affiliates provide a substantial amountof services, as determined by our independent directors, in connection with thesale of one or more assets.  In suchevent, our advisor or its affiliates will receive a disposition fee equal to (1) inthe case of the sale of real property, the lesser of: (A) one-half of theaggregate brokerage commission paid (including the disposition fee) or, if noneis paid, the amount that customarily would be paid, or (B) 3% of the salesprice of each property sold, and (2) in the case of the sale of any assetother than real property, 3% of the sales price of such asset.

 

We reimburse our advisor orits affiliates for all expenses paid or incurred by the advisor in connectionwith the services provided to us, subject to the limitation that we will notreimburse our advisor for any amount by which its operating expenses (includingthe asset management fee) at the end of the four preceding fiscal quartersexceeds the greater of:  (A) 2% ofour average invested assets, or (B) 25% of our net income determinedwithout reduction for any additions to reserves for depreciation, bad debts orother similar non-cash reserves and excluding any gain from the sale of ourassets for that period.  Notwithstandingthe above, we may reimburse the advisor for expenses in excess of thislimitation if a majority of our independent directors determines that suchexcess expenses are justified based on unusual and non-recurring factors. Forthe year ended December 31, 2008, we incurred and expensed such costs foradministrative services totaling $101,000     We incurred and expensed less than $100,000for such costs for the period from January 9, 2007 (date of inception)through December 31, 2007.

 

We are dependent on Behringer Securities, BehringerOpportunity Advisors II, and BHO II Management for certain services that areessential to us, including the sale of shares of our common stock, assetacquisition and disposition decisions, property management and leasingservices, and other general administrative responsibilities.  In the event that these companies were unableto provide us with their respective services, we would be required to obtainsuch services from other sources.

 

**9.****                                   ****Fair Value Disclosure of FinancialInstruments**

 

We determined the following disclosure of estimatedfair values using available market information and appropriate valuationmethodologies.  However, considerablejudgment is necessary to interpret market data and develop the related estimatesof fair value.  Accordingly, theestimates presented herein are not necessarily indicative of the amounts thatcould be realized upon disposition of the financial instruments.  The use of different market assumptionsand/or estimation methodologies may have a material effect on the estimatedfair value amounts.

 

As of December 31, 2008 and 2007, managementestimated that the carrying value of cash and cash equivalents, accountsreceivable, accounts payable, accrued expenses, other liabilities, payables/receivablesfrom related parties, and distributions payable were at amounts that reasonablyapproximated their fair value based on their highly-liquid nature and/orshort-term maturities.

 

As of December 31, 2008, our note payabletotaled $18.5 million and consisted of one variable interest loan which weentered into on December 31, 2008. The loan has a variable interest rate with a minimum rate of 6.25%.  We believe that the carrying value of thisloan approximates its fair value at December 31, 2008.

 

The fair value estimatespresented herein are based on information available to our management as of December 31, 2008and 2007.  Although our management is notaware of any factors that would significantly affect the estimated fair valueamounts, such amounts have not been comprehensively revalued for purposes ofthese consolidated 

 

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** **

**Behringer Harvard Opportunity REIT II, Inc.**

**Notes to Consolidated Financial Statements**

 

financial statements since that date, andcurrent estimates of fair value may differ significantly from the amountspresented herein.

 

**10.****                            ****Supplemental Cash FlowInformation**

 

Supplemental cash flowinformation is summarized below for the year ended December 31, 2008 andfor the period from January 9, 2007 (date of inception) through December 31,2007.

 
| ** **                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| **Non-cash financing activities:**                     | * *   | * * | * *   | * * | * *   |
| Common stock issued in distribution reinvestment  plan |       | $        | 517        |     | $          | — |   |
| Accrued dividends payable                              |       | $        | 181        |     | $          | — |   |
| Offering costs payable to related parties              |       | $        | 5,254      |     | $          | — |   |

 

**11.****                            ****Quarterly Results (Unaudited)**

 

Presented below is a summary of the unauditedquarterly financial information for the year ended December 31, 2008and for the period from January 9 2007 (date of inception) through December 31,2007:

 
| ** **                                             | ** ** | **2008 Quarters Ended** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                             | ** ** | **March 31**                 | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                                                   |       |                              |       |   |   |   |   |   |   |
| Revenue                                                |       | $                                 | —     |   | $ | — |   | $ | — |   | $ | 913 |   |
| Net income (loss)                                      |       | $                                 | (64        | ) | $ | (175 | ) | $ | 87 |   | $ | (97 | ) |
| Basic and diluted weighted average shares  outstanding |       | 22                                |       | 969 |   | 3,864 |   | 6,529 |   |
| Basic and diluted income (loss) per share              |       | $                                 | (2.86      | ) | $ | (0.18 | ) | $ | 0.02 |   | $ | (0.01 | ) |

 
| ** **                                             | ** ** | **2007 Quarters Ended** | ** ** |
|--------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                             | ** ** | **March 31**                 | ** ** | **June 30** | ** ** | **September 30** | ** ** | **December 31** | ** ** |
|                                                   |       |                              |       |   |   |   |   |   |   |
| Revenue                                                |       | $                                 | —     |   | $ | — |   | $ | — |   | $ | — |   |
| Net loss                                               |       | $                                 | —     |   | $ | — |   | $ | — |   | $ | (52 | ) |
| Basic and diluted weighted average shares  outstanding |       | 22                                |       | 22 |   | 22 |   | 22 |   |
| Basic and diluted loss per share                       |       | $                                 | —     |   | $ | — |   | $ | — |   | $ | (2.30 | ) |

 

*****

 

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### **REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

### ** **

Tothe Board of Directors and Stockholders of

BehringerHarvard Opportunity REIT I, Inc.

Addison,Texas

 

We have audited theconsolidated financial statements of Behringer Harvard Opportunity REIT II, Inc.and subsidiaries (the “Company”) as of December 31, 2008 and 2007, and forthe year ended December 31, 2008 and the period from January 9, 2007(date of inception) through December 31, 2007 and have issued our reportthereon dated March 31, 2009; such financial statements and report areincluded elsewhere in this Form 10-K. Our audits also included the consolidated financial statement scheduleof the Company listed in Item 15.  Thefinancial statement schedule is the responsibility of the Company’smanagement.  Our responsibility is toexpress an opinion based on our audits. In our opinion, such consolidated financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly, in all material respects, the information set forththerein.

 

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

 

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**Behringer Harvard Opportunity REIT II, Inc.**

**Real Estate and Accumulated Depreciation**

**Schedule III**

**December 31, 2008**

 
| ** **             | ** ** | ** **   | ** ** | ** **       | ** ** | **Initial cost** | ** ** | **Cost capitalized** | ** ** | **Gross amount**   | ** ** | ** **                    | ** ** | ** **       | ** ** | ** **       | ** ** | ** **   | ** ** |
|------------------------|------------|--------------|------------|------------------|------------|-----------------------|------------|---------------------------|------------|-------------------------|------------|-------------------------------|------------|------------------|------------|------------------|------------|--------------|------------|
| ** **             | ** ** | ** **   | ** ** | ** **       | ** ** | **Land and**     | ** ** | **Building and**     | ** ** | **subsequent**          | ** ** | **carried at**           | ** ** | **Accumulated**  | ** ** | **Year of** | ** ** | **Date**     | ** ** | **Depreciable** | ** ** |
| **Property Name** | ** ** | **Location** | ** ** | **Encumbrances** | ** ** | **improvements**      | ** ** | **improvements**          | ** ** | **to acquisition** | ** ** | **close of period** | ** ** | **depreciation** | ** ** | **construction** | ** ** | **acquired** | ** ** | **life** | ** ** |
|                   |       |         |       |             |       |                  |       |                      |       |                    |       |                          |       |             |       |             |       |         |       |   |   |
| 1875 Lawrence          |       | Denver,  CO  |       | 18,500           |       | 9,000                 |       | 26,102                    |       | 36                      |       | 35,138                        |       | 174              |       | 1982             |       | 10/28/2008   |       |   | (1) |
| Totals                 |       |         |       | $                | 18,500     |                  | $          | 9,000                     |       | $                       | 26,102     |                          | $          | 36               |       | $                | 35,138     |         | $          | 174 |   |   |   |   |   |   |   |
|                        |            |              |            |                  |            |                       |            |                           |            |                         |            |                               |            |                  |            |                  |            |              |            |  |  |  |  |  |  |  |  |

 

----

(1) Buildingsare 25 years

 

Asummary of activity for real estate and accumulated depreciation for the yearended December 31, 2008 is as follows:

 

| **Real Estate:**               |   |   |   |
|--------------------------------|--------|--------|--------|
| Balance at beginning of period |   | $      | — |   |
| Acquisitions                   |   | 35,138 |   |
| Cost of real estate sold       |   | — |   |
| Balance at end of the period   |   | $      | 35,138 |   |
|                           |   |   |   |
| **Accumulated depreciation:**  |   |   |   |
| Balance at beginning of period |   | $      | — |   |
| Depreciation expense           |   | 174    |   |
| Disposals                      |   | — |   |
| Balance at end of the period   |   | $      | 174    |   |

 

*****

 

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**EXHIBITINDEX**

 
| **Exhibit** | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                      |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Number**  | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1         |       | Second Articles of Amendment and Restatement as amended by the First  Articles of Amendment and the Second Articles of Amendment (incorporated by  reference to Exhibit 3.1 to Form 10-Q filed on November 14,  2008)                                                                                                                                                                            |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2         |       | Amended and Restated Bylaws (incorporated by reference to  Exhibit 3.2 to Pre-Effective Amendment No. 3 to the Company’s  Registration Statement on Form S-11, Commission File  No. 333-140887)                                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1         |       | Form of Subscription Agreement (included as Exhibit B to  supplement no. 12)                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.2         |       | Distribution Reinvestment Plan (included as Exhibit C to prospectus)                                                                                                                                                                                                                                                                                                                                       |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.3         |       | Share Redemption Program (incorporated by reference from the  description under “Description of Shares — Share Redemption Program” in the  prospectus)                                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.4         |       | Form of Escrow Agreement (incorporated by reference to  Exhibit 4.4 to Pre-Effective Amendment No. 2 to the Company’s  Registration Statement on Form S-11, Commission File  No. 333-140887)                                                                                                                                                                                      |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.5         |       | Statement regarding restrictions on transferability of shares of  common stock (to appear on stock certificates or to be sent upon request and  without charge to stockholders issued shares without certificates)  (incorporated by reference to Exhibit 4.5 to Pre-Effective Amendment  No. 3 to the Company’s Registration Statement on Form S-11,  Commission File No. 333-140887) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.1        |       | Form of Dealer Manager Agreement, incorporated by reference to  Exhibit 1.1 to Pre-Effective Amendment No. 2 to the Company’s  Registration Statement on Form S-11, Commission File No. 333-140887                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2        |       | Selected Dealer Agreement, dated May 1, 2008, by and among  Behringer Harvard Opportunity REIT II, Inc., Behringer Securities LP,  Behringer Harvard Opportunity Advisors II LP, Behringer Harvard Holdings, LLC  and Ameriprise Financial Services, Inc., incorporated by reference to  Exhibit 1.1 to Form 8-K filed on May 2, 2008                                             |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3        |       | Form of Advisory Management Agreement (incorporated by reference  to Exhibit 10.1 to Pre-Effective Amendment No. 3 to the Company’s  Registration Statement on Form S-11, Commission File  No. 333-140887)                                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4        |       | First Amendment to Advisory Management Agreement by and between  Behringer Harvard Opportunity REIT II, Inc. and Behringer Harvard  Opportunity Advisors II LP dated August 13, 2008 (incorporated by  reference to Exhibit 10.1 to Form 8-K filed August 14, 2008)                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.5        |       | Amended and Restated Property Management and Leasing Agreement by and  amount Behringer Harvard Opportunity REIT II, Inc., Behringer Harvard  Opportunity OP II LP and Behringer Harvard Opportunity II Management  Services, LLC dated August 13, 2008 (incorporated by reference to Exhibit 10.2  to Form 8-K filed August 14, 2008)                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.6        |       | 2007 Amended and Restated Incentive Award Plan (incorporated by  reference to Exhibit 10.3 to Pre-Effective Amendment No. 4 to the  Company’s Registration Statement on Form S-11, Commission File  No. 333-140887)                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.7        |       | Form of License Agreement (incorporated by reference to  Exhibit 10.4 to Pre-Effective Amendment No. 3 to the Company’s  Registration Statement on Form S-11, Commission File  No. 333-140887)                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.8        |       | Real Estate Purchase and Sale Agreement by and between Harvard  Property Trust, LLC, as buyer, and Principal Life Insurance Company, as  seller, dated September 19, 2008 (incorporated by reference to  Form 8-K filed November 3, 2008)                                                                                                                                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.9        |       | Assignment and Assumption of Real Estate Purchase and Sale Agreement  by and between Harvard Property Trust, LLC, as assignor, and Behringer  Harvard Opportunity OP II LP, as assignee, dated September 22, 2008  (incorporated by reference to Form 8-K filed November 3, 2008)                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.10       |       | Loan Agreement made between Behringer Harvard 1875 Lawrence,  LLC, as borrower, and Mutual of Omaha Bank, as lender, incorporated by  reference to Exhibit 10.1 to Form 8-K filed January 7, 2009                                                                                                                                                                                                |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.11       |       | Promissory Note made between Behringer Harvard 1875 Lawrence,  LLC, as borrower, and Mutual of Omaha Bank, as lender, incorporated by  reference to Exhibit 10.2 to Form 8-K filed January 7, 2009                                                                                                                                                                                               |

 

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Table of Contents

 
| 10.12  |   | Limited Guaranty Agreement by Behringer Harvard Opportunity  REIT II, Inc., as guarantor, in favor of Mutual of Omaha Bank, as  lender, incorporated by reference to Exhibit 10.3 to Form 8-K filed  January 7, 2009                                                                 |
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| 10.13  |   | Deed of Trust, Security Agreement, Financing Statement,  Assignment of Leases and Rents, and Fixture Filing by Behringer Harvard 1875  Lawrence, LLC, as borrower, to Mutual of Omaha Bank, as beneficiary,  incorporated by reference to Exhibit 10.4 to Form 8-K filed  January 7, 2009 |
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| 10.14* |   | Commercial Lease Agreement, as amended,  between Principal Life Insurance Company, as landlord, and Policy  Studies, Inc., as tenant                                                                                                                                                                |
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| 21.1   |   | List of Subsidiaries, incorporated by reference to Exhibit 21.1  to the Company’s Post-Effective Amendment no. 5 to its Registration Statement  on Form S-11, Commission File No. 333-140887                                                                                         |
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| 31.1*  |   | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                         |
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| 31.2*  |   | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                                                         |
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| 32.1*  |   | Section 1350 Certifications**                                                                                                                                                                                                                                                                       |

 

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*Filedherewith

 

**Inaccordance with Item 601(b)(32) of Regulation S-K, this Exhibit is notdeemed “filed” for purposes of Section 18 of the Exchange Act or otherwisesubject to the liabilities of that section. Such certifications will not be deemed incorporated by reference intoany filing under the Securities Act or the Exchange Act, except to the extentthat the registration specifically incorporates it by reference.

 

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