Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**[Mark One]**
| **x** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|---------------------------------------------------------------------------------------------------------|

 

**For the quarterly period ended September 30, 2008**

 

**OR**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------------------------|

 

**For thetransition period from               to**

 

**Commission File Number: 000-51961**

 

**BehringerHarvard Opportunity REIT I, Inc.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Maryland**                                                    | ** ** | **20-1862323**                      |
|-----------------------------------------------------------------|------------|-------------------------------------|
| (State or other Jurisdiction of  Incorporation or Organization) |       | (I.R.S. EmployerIdentification No.) |

 

**15601 Dallas Parkway, Suite 600, Addison, Texas75001**

(Address of Principal Executive Offices) (ZIP Code)

 

Registrant’s Telephone Number, Including AreaCode:** (866) 655-3600**

 

**None**

(Former name, former address and formerfiscal year, if changed since last report)

** **

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

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (check one):

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

 

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

 

Asof October 31, 2008, the Registrant had 54,799,037 shares of common stockoutstanding.

 

 

 

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Tableof Contents

 

**BEHRINGERHARVARD OPPORTUNITY REIT I, INC.**

**FORM 10-Q**

**Quarter Ended September 30, 2008**

 
| ** **             | ** **                                                                                                                                                                | **Page**   |
|------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                   |                                                                                                                                                                      |       |
|                   | **PART I  FINANCIAL INFORMATION**                                                                                                                                    |       |
|                   |                                                                                                                                                                      |       |
| **Item 1.**            | **Financial  Statements (Unaudited)**                                                                                                                                     |       |
|                   |                                                                                                                                                                      |       |
|                   | Consolidated  Balance Sheets as of September 30, 2008 and December 31, 2007                                                                                     | 3          |
|                   |                                                                                                                                                                      |       |
|                   | Consolidated  Statements of Operations for the Three and Nine Months Ended  September 30, 2008 and 2007                                                              | 4          |
|                   |                                                                                                                                                                      |       |
|                   | Consolidated Statements of  Stockholders’ Equity and Comprehensive Loss for the Year Ended  December 31, 2007 and the Nine Months Ended September 30, 2008 | 5          |
|                   |                                                                                                                                                                      |       |
|                   | Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2008  and 2007                                                                        | 6          |
|                   |                                                                                                                                                                      |       |
|                   | Notes to Consolidated Financial Statements                                                                                                                                | 7          |
|                   |                                                                                                                                                                      |       |
| **Item 2.**            | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                                           | **23**     |
| ** **             | ** **                                                                                                                                                                | ** ** |
| **Item 3.**            | **Quantitative  and Qualitative Disclosures About Market Risk**                                                                                                           | **33**     |
| ** **             | ** **                                                                                                                                                                | ** ** |
| **Item 4T.**           | **Controls and  Procedures**                                                                                                                                              | **34**     |
| ** **             | ** **                                                                                                                                                                | ** ** |
| **PART II**       |
| **OTHER  INFORMATION** |
|                   |                                                                                                                                                                      |       |
| **Item 1.**            | **Legal  Proceedings**                                                                                                                                                    | 35         |
|                   |                                                                                                                                                                      |       |
| **Item 1A.**           | **Risk  Factors**                                                                                                                                                         | 35         |
|                   |                                                                                                                                                                      |       |
| **Item 2.**            | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                                          | 35         |
|                   |                                                                                                                                                                      |       |
| **Item 3.**            | **Defaults Upon  Senior Securities**                                                                                                                                      | 37         |
|                   |                                                                                                                                                                      |       |
| **Item 4.**            | **Submission of  Matters to a Vote of Security Holders**                                                                                                                  | 37         |
|                   |                                                                                                                                                                      |       |
| **Item 5.**            | **Other  Information**                                                                                                                                                    | 37         |
|                   |                                                                                                                                                                      |       |
| **Item 6.**            | **Exhibits**                                                                                                                                                              | 37         |
|                   |                                                                                                                                                                      |       |
| **Signature**          |                                                                                                                                                                      | 38         |

 

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

**Behringer Harvard Opportunity REITI, Inc.**

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

(Unaudited)

 
| ** **                                                                                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| **Assets**                                                                                                                                                                                              |       |                   |       |                  |       |
| **Real estate**                                                                                                                                                                                         |       |                   |       |                  |       |
| Land and improvements, net                                                                                                                                                                              |       | $                      | 134,211    |                  | $          | 107,428 |   |
| Buildings and improvements, net                                                                                                                                                                         |       | 396,189                |       | 287,237               |       |
| Real estate under development                                                                                                                                                                           |       | 41,143                 |       | 75,729                |       |
| **Total real estate**                                                                                                                                                                                   |       | 571,543                |       | 470,394               |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| Condominium inventory                                                                                                                                                                                   |       | 97,086                 |       | 75,547                |       |
| Cash and cash equivalents                                                                                                                                                                               |       | 43,589                 |       | 78,498                |       |
| Restricted cash                                                                                                                                                                                         |       | 5,657                  |       | 4,731                 |       |
| Accounts receivable, net                                                                                                                                                                                |       | 11,816                 |       | 7,736                 |       |
| Prepaid expenses and other assets                                                                                                                                                                       |       | 5,909                  |       | 3,493                 |       |
| Leasehold interests, net                                                                                                                                                                                |       | 36,943                 |       | 41,543                |       |
| Investments in unconsolidated joint  ventures                                                                                                                                                           |       | 64,334                 |       | 36,445                |       |
| Furniture, fixtures and equipment, net                                                                                                                                                                  |       | 13,300                 |       | 9,173                 |       |
| Deferred financing fees, net                                                                                                                                                                            |       | 7,270                  |       | 3,755                 |       |
| Notes receivable                                                                                                                                                                                        |       | 1,943                  |       | 1,719                 |       |
| Notes receivable from related parties                                                                                                                                                                   |       | 34,599                 |       | 7,841                 |       |
| Lease intangibles, net                                                                                                                                                                                  |       | 30,294                 |       | 27,096                |       |
| Other intangibles, net                                                                                                                                                                                  |       | 10,107                 |       | 10,651                |       |
| Receivables from related parties                                                                                                                                                                        |       | 2,210                  |       | 73                    |       |
| **Total assets**                                                                                                                                                                                        |       | $                      | 936,600    |                  | $          | 778,695 |   |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                           |       |                   |       |                  |       |
| Notes payable                                                                                                                                                                                           |       | $                      | 424,435    |                  | $          | 243,902 |   |
| Accounts payable                                                                                                                                                                                        |       | 6,974                  |       | 9,300                 |       |
| Payables to related parties                                                                                                                                                                             |       | 1,498                  |       | 901                   |       |
| Acquired below-market leases, net                                                                                                                                                                       |       | 18,993                 |       | 18,851                |       |
| Distributions payable                                                                                                                                                                                   |       | 1,349                  |       | 1,373                 |       |
| Accrued liabilities                                                                                                                                                                                     |       | 19,621                 |       | 21,750                |       |
| Other liabilities                                                                                                                                                                                       |       | 2,390                  |       | 1,223                 |       |
| **Total liabilities**                                                                                                                                                                                   |       | 475,260                |       | 297,300               |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                       |       |                   |       |                  |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Minority interest**                                                                                                                                                                                   |       | 10,931                 |       | 15,335                |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **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, 54,691,638 and 54,056,354 shares issued and outstanding at  September 30, 2008, and December 31, 2007, respectively |       | 5                      |       | 5                     |       |
| Additional paid-in capital                                                                                                                                                                              |       | 487,680                |       | 481,521               |       |
| Accumulated distributions and net loss                                                                                                                                                                  |       | (37,828                | )          | (14,982               | )          |
| Accumulated other comprehensive income  (loss)                                                                                                                                                          |       | 552                    |       | (484                  | )          |
| **Total stockholders’ equity**                                                                                                                                                                     |       | 450,409                |       | 466,060               |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                                     |       | $                      | 936,600    |                  | $          | 778,695 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

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

**ConsolidatedStatements of Operations(in thousands, except per share amounts)**

(Unaudited)

 
| ** **                                                                                             | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                             | ** ** | **September 30,**           | ** ** | **September 30,**          | ** ** |
| ** **                                                                                             | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenues**                                                                                           |       |                             |       |                            |       |   |   |   |   |
| Rental revenue                                                                                         |       | $                                | 15,192     |                            | $          | 7,899 |   | $ | 41,577 |   | $ | 19,220 |   |
| Hotel revenue                                                                                          |       | 2,045                            |       | 2,602                           |       | 5,240 |   | 3,220 |   |
| Condominium sales                                                                                      |       | 4,315                            |       | —                          |       | 4,315 |   | — |   |
|                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| **Total revenues**                                                                                     |       | 21,552                           |       | 10,501                          |       | 51,132 |   | 22,440 |   |
|                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| **Expenses**                                                                                           |       |                             |       |                            |       |   |   |   |   |
| Property operating expenses                                                                            |       | 6,880                            |       | 4,107                           |       | 18,229 |   | 7,490 |   |
| Cost of condominium sales                                                                              |       | 4,331                            |       | —                          |       | 4,331 |   | — |   |
| Interest expense                                                                                       |       | 4,113                            |       | 1,759                           |       | 9,059 |   | 4,061 |   |
| Real estate taxes                                                                                      |       | 1,980                            |       | 1,023                           |       | 5,311 |   | 2,256 |   |
| Property management fees                                                                               |       | 583                              |       | 268                             |       | 1,781 |   | 546 |   |
| Asset management fees                                                                                  |       | 1,456                            |       | 714                             |       | 3,399 |   | 1,509 |   |
| General and administrative                                                                             |       | 1,209                            |       | 307                             |       | 3,032 |   | 1,016 |   |
| Advertising costs                                                                                      |       | 708                              |       | 158                             |       | 1,853 |   | 781 |   |
| Depreciation and amortization                                                                          |       | 6,783                            |       | 3,692                           |       | 18,550 |   | 8,040 |   |
|                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| **Total expenses**                                                                                     |       | 28,043                           |       | 12,028                          |       | 65,545 |   | 25,699 |   |
|                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Interest income                                                                                        |       | 706                              |       | 1,366                           |       | 2,241 |   | 2,939 |   |
|                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| **Loss before income taxes, minority interest  and equity in losses of unconsolidated joint ventures** |       | (5,785                           | )          | (161                            | )          | (12,172 | ) | (320 | ) |
|                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| Provision for income taxes                                                                             |       | (47                              | )          | (46                             | )          | (146 | ) | (71 | ) |
| Equity in losses of unconsolidated joint  ventures                                                     |       | (1,987                           | )          | (227                            | )          | (3,518 | ) | (295 | ) |
| Minority interest                                                                                      |       | 2,334                            |       | 146                             |       | 5,250 |   | (210 | ) |
|                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| **Net loss**                                                                                           |       | $                                | (5,485     | )                               | $          | (288 | ) | $ | (10,586 | ) | $ | (896 | ) |
|                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| **Weighted average shares outstanding:**                                                               |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted                                                                                      |       | 54,611                           |       | 42,450                          |       | 54,433 |   | 31,154 |   |
|                                                                                                   |       |                             |       |                            |       |   |   |   |   |
| **Loss per share:**                                                                                    |       |                             |       |                            |       |   |   |   |   |
| Basic and diluted                                                                                      |       | $                                | (0.10      | )                               | $          | (0.01 | ) | $ | (0.19 | ) | $ | (0.03 | ) |

 

*See Notes to Consolidated FinancialStatements.*

 

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

**ConsolidatedStatements of Stockholders’ Equity and Comprehensive Loss(in thousands, except share amounts)**

(Unaudited)

 
| ** **                                     | ** ** | ** **                 | ** ** | ** **            | ** ** | ** **         | ** ** | ** **        | ** ** | ** **  | ** ** | **Accumulated**   | ** ** | **Accumulated**    | ** ** | ** **             | ** ** |
|------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|--------------------|------------|-------------------|------------|-------------|------------|-------------------|------------|--------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | **Distributions** | ** ** | **Other**   | ** ** | **Total**         | ** ** |
| ** **                                     | ** ** | **Number of**         | ** ** | **Par**               | ** ** | **Number of** | ** ** | **Par**           | ** ** | **Paid-In** | ** ** | **and**           | ** ** | **Comprehensive**  | ** ** | **Stockholders’** | ** ** |
| ** **                                     | ** ** | **Shares**                 | ** ** | **Value**             | ** ** | **Shares**         | ** ** | **Value**         | ** ** | **Capital** | ** ** | **Net loss** | ** ** | **Income  (Loss)** | ** ** | **Equity**             | ** ** |
| Balance at January 1, 2007                |       | 1,000                      |       | $                     | —     |               | 18,202,576 |              | $          | 2           |       | $                 | 159,906    |               | $          | (461                   | )          | $ | — |   | $ | 159,447 |   |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Issuance of common stock, net                  |       | —                     |       | —                |       | 35,081,049         |       | 3                 |       | 314,226     |       | —            |       | —             |       | 314,229                |       |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Redemption of common stock                     |       | —                     |       | —                |       | (148,951           | )          | —            |       | (1,366      | )          | —            |       | —             |       | (1,366                 | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Distributions declared on common stock         |       | —                     |       | —                |       | —             |       | —            |       | —      |       | (10,665           | )          | —             |       | (10,665                | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Shares issued pursuant to Distribution         |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Reinvestment Plan, net                         |       | —                     |       | —                |       | 921,680            |       | —            |       | 8,755       |       | —            |       | —             |       | 8,755                  |       |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Comprehensive loss:                            |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Net loss                                       |       | —                     |       | —                |       | —             |       | —            |       | —      |       | (3,856            | )          | —             |       | (3,856                 | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Other comprehensive loss:                      |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Foreign currency translation loss              |       | —                     |       | —                |       | —             |       | —            |       | —      |       | —            |       | (121               | )          | (121                   | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Unrealized losses on interest rate derivatives |       | —                     |       | —                |       | —             |       | —            |       | —      |       | —            |       | (363               | )          | (363                   | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Total comprehensive loss                       |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       | (4,340                 | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Balance at December 31, 2007              |       | 1,000                      |       | —                |       | 54,056,354         |       | 5                 |       | 481,521     |       | (14,982           | )          | (484               | )          | 466,060                |       |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Redemption of common stock                     |       | —                     |       | —                |       | (342,590           | )          | —            |       | (3,130      | )          | —            |       | —             |       | (3,130                 | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Distributions declared on common stock         |       | —                     |       | —                |       | —             |       | —            |       | —      |       | (12,260           | )          | —             |       | (12,260                | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Shares issued pursuant to Distribution         |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Reinvestment Plan, net                         |       | —                     |       | —                |       | 977,874            |       | —            |       | 9,289       |       | —            |       | —             |       | 9,289                  |       |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Comprehensive loss:                            |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Net loss                                       |       | —                     |       | —                |       | —             |       | —            |       | —      |       | (10,586           | )          | —             |       | (10,586                | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Other comprehensive loss:                      |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Foreign currency translation loss              |       | —                     |       | —                |       | —             |       | —            |       | —      |       | —            |       | 1,505              |       | 1,505                  |       |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Unrealized gains on interest rate derivatives  |       | —                     |       | —                |       | —             |       | —            |       | —      |       | —            |       | (469               | )          | (469                   | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Total comprehensive loss                       |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       | (9,550                 | )          |
|                                           |       |                       |       |                  |       |               |       |              |       |        |       |              |       |               |       |                   |       |
| Balance at September 30, 2008             |       | 1,000                      |       | $                     | —     |               | 54,691,638 |              | $          | 5           |       | $                 | 487,680    |               | $          | (37,828                | )          | $ | 552 |   | $ | 450,409 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**ConsolidatedStatements of Cash Flows**

**(inthousands)**

(Unaudited)

** **
| ** **                                                                                       | ** ** | **Nine months**             | ** ** | **Nine months**             | ** ** |
|--------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                                                                       | ** ** | **ended**                        | ** ** | **ended**                        | ** ** |
| ** **                                                                                       | ** ** | **September 30, 2008** | ** ** | **September 30, 2007** | ** ** |
| **Cash flows from operating activities:**                                                        |       |                             |       |                             |       |
| Net loss                                                                                         |       | $                                | (10,586    | )                                | $          | (896 | ) |
| Adjustments to reconcile net loss to net cash  flows (used in) provided by operating activities: |       |                             |       |                             |       |
| Depreciation and amortization                                                                    |       | 15,079                           |       | 6,435                            |       |
| Amortization of deferred financing fees                                                          |       | 1,480                            |       | 987                              |       |
| Minority interest                                                                                |       | (5,250                           | )          | 210                              |       |
| Equity in losses of unconsolidated joint  ventures                                               |       | 3,518                            |       | 295                              |       |
| Net change in fair value of derivatives                                                          |       | 1,110                            |       | —                           |       |
| Change in accounts receivable                                                                    |       | (4,079                           | )          | (3,843                           | )          |
| Change in condominium inventory                                                                  |       | (20,601                          | )          | (12,739                          | )          |
| Change in prepaid expenses and other assets                                                      |       | (3,115                           | )          | 670                              |       |
| Change in accounts payable                                                                       |       | (976                             | )          | 3,262                            |       |
| Change in other liabilities                                                                      |       | 1,169                            |       | (541                             | )          |
| Change in accrued liabilities                                                                    |       | 3,450                            |       | 594                              |       |
| Change in payables to related parties                                                            |       | (1,074                           | )          | 469                              |       |
| Addition of lease intangibles                                                                    |       | (1,771                           | )          | (324                             | )          |
| **Cash used in operating activities**                                                            |       | (21,646                          | )          | (5,421                           | )          |
|                                                                                             |       |                             |       |                             |       |
| **Cash flows from investing activities:**                                                        |       |                             |       |                             |       |
| Purchases of real estate properties                                                              |       | (47,473                          | )          | (243,171                         | )          |
| Acquisition of interest in unconsolidated  joint ventures                                        |       | (31,553                          | )          | (22,587                          | )          |
| Capital expenditures for real estate under  development                                          |       | (28,316                          | )          | (11,587                          | )          |
| Capital expenditures for real estate under  development of consolidated borrowers                |       | (24,823                          | )          | (21,018                          | )          |
| Additions of property and equipment                                                              |       | (4,796                           | )          | (9,458                           | )          |
| Change in restricted cash                                                                        |       | (925                             | )          | (6,773                           | )          |
| Investment in notes receivable                                                                   |       | (26,983                          | )          | (14,226                          | )          |
| Distributions from unconsolidated joint  venture                                                 |       | 696                              |       | —                           |       |
| Fees paid to related party for mezzanine  loan arrangements                                      |       | (2,405                           | )          | (553                             | )          |
| **Cash used in investing activities**                                                            |       | (166,578                         | )          | (329,373                         | )          |
|                                                                                             |       |                             |       |                             |       |
| **Cash flows from financing activities:**                                                        |       |                             |       |                             |       |
| Financing costs                                                                                  |       | (3,011                           | )          | (1,261                           | )          |
| Proceeds from notes payable                                                                      |       | 117,014                          |       | 54,603                           |       |
| Proceeds from mortgages of consolidated  borrowers                                               |       | 23,285                           |       | 13,652                           |       |
| Net borrowings on senior secured revolving  credit facility                                      |       | 58,000                           |       | —                           |       |
| Payments on notes payable                                                                        |       | (37,673                          | )          | (30                              | )          |
| Issuance of common stock                                                                         |       | —                           |       | 293,215                          |       |
| Purchase of interest rate cap                                                                    |       | —                           |       | (154                             | )          |
| Redemptions of common stock                                                                      |       | (3,130                           | )          | (789                             | )          |
| Offering costs                                                                                   |       | —                           |       | (29,440                          | )          |
| Distributions                                                                                    |       | (2,994                           | )          | (1,710                           | )          |
| Contributions from minority interest  holders                                                    |       | 1,870                            |       | 2,004                            |       |
| Distributions to minority interest holders                                                       |       | (829                             | )          | —                           |       |
| Change in subscriptions for common stock                                                         |       | —                           |       | 637                              |       |
| Change in subscription cash received                                                             |       | —                           |       | (638                             | )          |
| Change in payables to related parties                                                            |       | (328                             | )          | (2,151                           | )          |
| **Cash provided by financing activities**                                                        |       | 152,204                          |       | 327,938                          |       |
|                                                                                             |       |                             |       |                             |       |
| Effect of exchange rate changes on cash and  cash equivalents                                    |       | 1,111                            |       | —                           |       |
|                                                                                             |       |                             |       |                             |       |
| Net change in cash and cash equivalents                                                          |       | (34,909                          | )          | (6,856                           | )          |
| Cash and cash equivalents at beginning of  the period                                            |       | 78,498                           |       | 54,639                           |       |
|                                                                                             |       |                             |       |                             |       |
| Cash and cash equivalents at end of the  period                                                  |       | $                                | 43,589     |                             | $          | 47,783 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

6

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Table of Contents

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

**1.         Business**

 

***Organization***

 

BehringerHarvard Opportunity REIT I, Inc. (which may be referred to as the “Company,”“we,” “us,” or “our”) was incorporated in November 2004 as a Marylandcorporation and has elected to be taxed, and currently qualifies, as a realestate investment trust (“REIT”) for federal income tax purposes.

 

Weinvest in and operate real estate or real estate-related assets on anopportunistic basis.  In particular, wefocus on acquiring properties with significant possibilities for short-termcapital appreciation, such as those requiring development, redevelopment orrepositioning, or those located in markets and submarkets with highervolatility, lower barriers to entry, and high growth potential.  We may acquire a wide variety of properties,including office, industrial, retail, hospitality, recreation and leisure,multifamily, and other properties. We may purchase existing or newlyconstructed properties or properties under development or construction,including multifamily properties for conversion into condominiums.  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 may investin collateralized mortgage-backed securities, mortgage, bridge or mezzanineloans, and Section 1031 tenant-in-common interests, or in entities thatmake investments similar to the foregoing.

 

Substantiallyall of our business is conducted through Behringer Harvard Opportunity OP I,LP, a Texas limited partnership organized in November 2004 (“BehringerHarvard OP I”), or subsidiaries thereof. Our wholly-owned subsidiary, BHO, Inc., a Delaware corporation,owns less than a 0.1% interest in Behringer Harvard OP I as its sole generalpartner.  The remaining interest ofBehringer Harvard OP I is held as a limited partner’s interest by BHO BusinessTrust, a Maryland business trust, which is our wholly-owned subsidiary.

 

We are externally managed and advised by Behringer Harvard OpportunityAdvisors I, LLC (“Behringer Opportunity Advisors I”), a Texas limited liabilitycompany formed in June 2007. Behringer Opportunity Advisors I is responsible for managing ourday-to-day affairs and for identifying and making acquisitions and investmentson our behalf.  Prior to June 30, 2007, we were advised by BehringerHarvard Opportunity Advisors I LP, which was merged into Behringer OpportunityAdvisors I solely to reorganize the entity as a limited liability company.

 

Our commonstock is not currently listed on a national exchange.  Unless liquidated earlier, we anticipatecausing the shares of common stock to be listed for trading on a nationalsecurities exchange or liquidating our real estate portfolio on or before thesixth anniversary of the termination of our offering of common stock to thepublic on December 28, 2007.  In theevent that we do not obtain such listing prior to the sixth anniversary of thetermination of our public offering, unless a majority of our board of directorsand a majority of our independent directors extend such date, our charterrequires us to begin the sale of our properties and liquidation of our assets.

 

**2.         Interim Unaudited Financial Information**

 

Theaccompanying consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto included in ourAnnual Report on Form 10-K for the year ended December 31, 2007,which was filed with the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)have been condensed or omitted in this report on Form 10-Q pursuant to therules and regulations of the SEC.

 

The resultsfor the interim periods shown in this report are not necessarily indicative offuture financial results.  Theaccompanying consolidated balance sheet and consolidated statement ofstockholders’ equity as of September 30, 2008 and consolidated statementsof operations and cash flows for the periods ended September 30, 2008 and2007 have not been audited by our independent registered public accountingfirm.  In the opinion of management, theaccompanying unaudited consolidated financial statements include alladjustments necessary to present fairly our consolidated financial position asof September 30, 2008 and December 31, 2007 and our consolidatedresults of operations and cash flows for the periods ended September 30,2008 and 2007.  Such adjustments are of anormal recurring nature.

 

**3.         Summary of Significant AccountingPolicies**

 

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

 

Thepreparation of financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the 

 

7

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates include such items as purchase price allocation for real estateacquisitions, impairment of long-lived assets, depreciation and amortization,and allowance for doubtful accounts. Actual results could differ from those estimates.

 

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

 

Ourconsolidated financial statements include our accounts, the accounts ofvariable interest entities (“VIEs”) in which we are the primary beneficiary,and the accounts of other subsidiaries over which we have control.  All inter-company transactions, balances, andprofits have been eliminated in consolidation. Interests in entities acquired are evaluated based on FinancialAccounting Standards Board (“FASB”) Interpretation (“FIN”) 46R, “Consolidationof Variable Interest Entities,” which requires the consolidation of VIEs inwhich we are deemed to be the primary beneficiary.  If the interest in the entity is determinednot to be a VIE under FIN 46R, then the entities are evaluated for consolidationunder the American Institute of Certified Public Accountants’ Statement ofPosition 78-9, “Accounting for Investments in Real Estate Ventures,” andEmerging Issues Task Force 04-5, “Determining Whether a General Partner, or theGeneral Partners as a Group, Controls a Limited Partnership or Similar EntityWhen the Limited Partners Have Certain Rights.”

 

***Real Estate and Other Intangible Assets***

 

Uponthe acquisition of real estate properties, we allocate the purchase price ofthose properties to the tangible assets acquired, consisting of land, inclusiveof associated rights, land improvements, buildings, building improvements,furniture, fixtures and equipment, identified intangible assets, assetretirement obligations, and assumed liabilities based on their relative fairvalues in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142*,*“Goodwill and Other Intangible Assets.”  Identified intangible assets consist of thefair value of above-market and below-market leases, in-place leases, in-placetenant improvements, in-place leasing commissions, and tenant relationships.

 

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

 

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

 

Wedetermine the fair value of assumed debt by calculating the net present valueof the scheduled debt payments using interest rates for debt with similar termsand remaining maturities that management believes we could obtain.  Any difference between the fair value andstated value of the assumed debt is recorded as a discount or premium andamortized over the remaining life of the loan.

 

Thefair value of any tangible assets acquired, expected to consist of land, landimprovements, buildings, building improvements, and furniture, fixtures andequipment, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to the tangible assets. Land values are derived from appraisals and building values arecalculated as replacement cost less depreciation or management’s estimates ofthe relative fair value of these assets using discounted cash flow analyses orsimilar methods.  Furniture, fixtures,and equipment values are determined based on current reproduction orreplacement cost less depreciation and other estimated allowances based onphysical, functional, or economic factors. The values of the buildings are depreciated over their respectiveestimated useful lives ranging from 25 years for commercial office property to39 years for hotel/mixed-use property using the straight-line method.  Land improvements are depreciated over theestimated useful life of 15 years, and furniture, fixtures, and equipment aredepreciated over estimated useful lives ranging from five to seven years usingthe straight-line method.  Our leaseholdinterest is depreciated over its remaining contractual life, or approximately101 years.

 

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

 

8

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

Thetotal value of identified real estate intangible assets that we may acquire inthe future 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 leasesincluding 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.

 

Weamortize the value of in-place leases acquired in the future to expense overthe term of the respective leases.  Thevalue of tenant relationship intangibles is amortized to expense over the initialterm and any anticipated renewal periods, but in no event does the amortizationperiod for intangible assets exceed the remaining depreciable life of thebuilding.  Should a tenant terminatetheir lease, the unamortized portion of the in-place lease value and tenantrelationship intangibles would be charged to expense.  As of September 30, 2008, the estimatedremaining useful lives for acquired lease intangibles range from less than oneyear to 12 years.

 

Otherintangible assets include the value of identified hotel trade names andin-place property tax abatements.  Thesefair values are based on management’s estimates of the relative fair value ofthese assets using discounted cash flow analyses or similar methods.  The value of the trade names is amortizedover their respective estimated useful life of 20 years using the straight-linemethod and the value of the in-place property tax abatement is amortized overits estimated term of 10 years using the straight-line method.

 

Anticipatedamortization expense associated with the acquired lease intangibles andacquired other intangible assets as of September 30, 2008 is as follows(amounts in thousands):

 
| ** **                               | ** ** | ** ** | **Lease /  Other  Intangibles** | ** ** |
|------------------------------------------|------------|------------|--------------------------------------|------------|
| October 1, 2008 - December 31, | 2008       |       | $                                    | 488        |   |
|                                     | 2009       |       | 1,763                                |       |
|                                     | 2010       |       | 2,007                                |       |
|                                     | 2011       |       | 1,477                                |       |
|                                     | 2012       |       | 1,239                                |       |
|                                          |            |            |                                      |            |  |

 

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

 
| ** **                                       | ** ** | ** **             | ** ** | ** **        | ** ** | ** **      | ** ** | **Acquired**     | ** ** | ** **    | ** ** | ** **      | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|---------------|------------|-----------------|------------|
| ** **                                       | ** ** | **Buildings and** | ** ** | **Land and** | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** | **Leasehold** | ** ** | **Other**       | ** ** |
| **As of September 30, 2008** | ** ** | **Improvements**       | ** ** | **Improvements**  | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** | **Interest**  | ** ** | **Intangibles** | ** ** |
| Cost                                             |       | $                      | 413,351    |              | $          | 134,422         |       | $                | 40,249     |          | $          | (26,240         | )          | $ | 37,252 |   | $ | 11,339 |   |
| Less: depreciation and amortization              |       | (17,162                | )          | (211              | )          | (9,955          | )          | 7,247            |       | (309          | )          | (1,232          | )          |
|                                             |       |                   |       |              |       |            |       |             |       |          |       |            |       |
| Net                                              |       | $                      | 396,189    |              | $          | 134,211         |       | $                | 30,294     |          | $          | (18,993         | )          | $ | 36,943 |   | $ | 10,107 |   |

 
| ** **                          | ** ** | ** **         | ** ** | ** **       | ** ** | ** **      | ** ** | **Acquired**     | ** ** | ** **    | ** ** | ** **      | ** ** |
|-------------------------------------|------------|--------------------|------------|------------------|------------|-----------------|------------|------------------|------------|---------------|------------|-----------------|------------|
| ** **                          | ** ** | **Buildings  and** | ** ** | **Land and**     | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** | **Leasehold** | ** ** | **Other**       | ** ** |
| **As of December 31, 2007**    | ** ** | **Improvements**   | ** ** | **Improvements** | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** | **Interest**  | ** ** | **Intangibles** | ** ** |
| Cost                                |       | $                  | 293,886    |             | $          | 107,498         |       | $                | 32,211     |          | $          | (22,445         | )          | $ | 41,577 |   | $ | 11,339 |   |
| Less: depreciation and amortization |       | (6,649             | )          | (70              | )          | (5,115          | )          | 3,594            |       | (34           | )          | (688            | )          |
|                                |       |               |       |             |       |            |       |             |       |          |       |            |       |
| Net                                 |       | $                  | 287,237    |             | $          | 107,428         |       | $                | 27,096     |          | $          | (18,851         | )          | $ | 41,543 |   | $ | 10,651 |   |

 

9

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

***Condominium Inventory***

 

Condominiuminventory is stated at the lower of cost or fair market value.  In addition to land acquisition costs, landdevelopment costs and construction costs, costs include interest and realestate taxes, which are capitalized during the period beginning with thecommencement of development and ending with the completion of construction.

 

Forcondominium inventory, at each reporting date, management compares theestimated fair value less costs to sell to the carrying value.  An impairment charge is recorded to theextent that the fair value less costs to sell is less than the carrying value.  We determine the estimated fair value ofcondominiums based on comparable sales in the normal course of business underexisting and anticipated market conditions. This evaluation takes into consideration estimated future sellingprices, costs incurred to date, estimated additional future costs, andmanagement’s plans for the property. There were no impairment charges for the nine months ended September 30,2008 or 2007.  However, we may experienceimpairment of our condominium inventory in the future.

 

***Cash and Cash Equivalents***

 

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

 

***Restricted Cash***

 

Asrequired by our lenders, restricted cash is held in escrow accounts for realestate taxes and other reserves for our consolidated properties.

 

***Accounts Receivable***

 

Accountsreceivable primarily consist of receivables from our hotel operators andtenants related to our other consolidated properties.  The allowance for doubtful accounts was $0.3million and $0.1 million as of September 30, 2008 and December 31,2007, respectively.

 

***Prepaid Expenses and Other Assets***

 

***               ***Prepaid expenses and other assets includeprepaid directors’ and officers’ insurance, prepaid advertising,pre-acquisition costs related to probable purchases of properties, the fairvalue of certain derivative instruments, as well as inventory, prepaidinsurance, and prepaid real estate taxes of our consolidated properties.  Inventory consists of food, beverages,linens, glassware, china, and silverware and is carried at the lower of cost ormarket value.

 

***Furniture, Fixtures, and Equipment***

 

Furniture,fixtures, and equipment are recorded at cost and are depreciated using thestraight-line method over their estimated useful lives of five to sevenyears.  Maintenance and repairs arecharged to operations as incurred while renewals or improvements to such assetsare capitalized.  Accumulateddepreciation associated with our furniture, fixtures, and equipment was $2.9million and $1.4 million as of September 30, 2008 and December 31, 2007,respectively.

 

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

 

Forreal estate we wholly-own, our management monitors events and changes incircumstances indicating that the carrying amounts of the real estate assetsmay not be recoverable.  When such eventsor changes in circumstances occur, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset and from its eventual disposition, to the carryingamount of the asset.  In the event thatthe carrying amount exceeds the estimated future undiscounted operating cashflows, we recognize an impairment loss to adjust the carrying amount of theasset to estimated fair value.  Therewere no impairment charges for the nine months ended September 30, 2008 or2007.

 

Forreal estate we own through an investment in a limited partnership, jointventure, or other similar investment structure, at each reporting date,management compares the estimated fair value of our investment to the carryingvalue.  An impairment charge is recordedto the extent the fair value of our investment is less than the carrying amountand the decline in value is determined to be other than a temporarydecline.  There were no impairment chargesfor the nine months ended September 30, 2008 or 2007.  However, we may experience impairment of ourreal estate properties in the future.

 

***Notes Receivable***

 

Fornotes receivable, management reviews the terms and conditions underlying theoutstanding notes receivable.  Ifmanagement determines that it is probable that all amounts due under the termsof the note will not be collected, an 

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

impairmentcharge is recorded to the extent that the investment in the note exceedsmanagement’s estimate of the fair value of the collateral securing suchnote.  There were no impairment chargesfor the nine months ended September 30, 2008 or 2007.  However, we may experience impairment of ournotes receivable in the future.

 

***Deferred Financing Fees***

 

Deferredfinancing fees are recorded at cost and are amortized to interest income fornotes receivable and interest expense for notes payable using a straight-linemethod that approximates the effective interest method over the life of therelated debt.  Accumulated amortizationof deferred financing fees was $2.9 million and $1.2 million as of September 30,2008 and December 31, 2007, respectively.

 

***Derivative Financial Instruments***

 

Ourobjective in using derivatives is to add stability to interest expense and tomanage our exposure to interest rate movements or other identified risks and tominimize the variability caused by foreign currency translation risk related toour net investment in foreign real estate. To accomplish these objectives, we use various types of derivativeinstruments to manage fluctuations in cash flows resulting from interest raterisk attributable to changes in the benchmark interest rate of LIBOR.  These instruments include LIBOR-basedinterest rate swaps and caps.  For ournet investment in a foreign real estate property, we use foreign currency forwardexchange contracts to eliminate the impact of foreign currency exchangemovements on our financial position.

 

Wemeasure our derivative instruments and hedging activities at fair value andrecord them as an asset or liability, depending on our rights or obligationsunder the applicable derivative contract. For derivatives designated as fair value hedges, the changes in the fairvalue of both the derivative instrument and the hedged items are recorded inearnings.  Derivatives used to hedge theexposure to variability in expected future cash flows, or other types offorecasted transactions, are considered cash flow hedges.  For derivatives designated as cash flowhedges, the effective portions of changes in fair value of the derivatives arereported in other comprehensive income (loss) and are subsequently reclassifiedinto earnings when the hedged item affects earnings.  For derivatives designated as net investmenthedges, changes in fair value are reported in other comprehensive income (loss)as part of the foreign currency translation gain or loss.  Changes in fair value of derivativeinstruments not designated as hedges and ineffective portions of hedges arerecognized in earnings in the affected period. We assess the effectiveness of each hedging relationship by comparingthe changes in fair value or cash flows of the derivative hedging instrumentwith the changes in fair value or cash flows of the designated hedged item ortransaction.

 

As of September 30, 2008, we do not have any derivatives designatedas fair value hedges, nor are derivatives being used for trading or speculativepurposes.

 

***Asset Retirement Obligations***

 

We record the fair value of any conditional assetretirement obligations in accordance with FIN 47, “Accounting for Conditional AssetRetirement Obligations.”  As part of theanticipated renovation and redevelopment of acquired properties, we may incurfuture costs for the abatement of regulated materials, primarilyasbestos-containing materials, as required under environmental regulations.  Our estimate of the fair value of theliabilities is based on future anticipated costs to be incurred for the legalremoval or remediation of the regulated materials.

 

***Foreign Currency Translation***

 

For our international investments where the functionalcurrency is other than the US dollar, assets and liabilities are translatedusing period-end exchange rates, while the statement of operations amounts aretranslated using the average exchange rates for the respective period.  Differences arising from the translation ofassets and liabilities in comparison with the translation of the previousperiods or from initial recognition during the period are included as aseparate component of accumulated other comprehensive income (loss).

 

Wemaintain Euro-denominated bank accounts that are translated into U.S. dollarsat the current exchange rate at each reporting period.  The resulting translation adjustments are recorded as a separatecomponent of accumulated other comprehensive income (loss) in our consolidatedstatement of stockholders’ equity.  Thecumulative foreign currency translation adjustment was $1.5 million and $0.1million for the nine months ended September 30, 2008 and the year ended December 31,2007, respectively.

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

***Accumulated Other Comprehensive Income (Loss)***

 

Accumulated othercomprehensive income (loss), which is reported in the accompanying consolidatedstatement of stockholders’ equity, consists of gains and losses affectingequity that are excluded from net income (loss) under GAAP.  The components of accumulated othercomprehensive income (loss) consist of foreign currency translation gains andlosses and unrealized gains and losses on derivatives designated as hedgesunder SFAS No. 133.

 

***Revenue Recognition***

 

We recognizerental income generated from leases on real estate assets on a straight-linebasis over the terms of the respective leases, including the effect of rentholidays, if any.  Straight-line rentalrevenue of $3 million was recognized in rental revenues for both the ninemonths ended September 30, 2008 and 2007. Hotel revenue is derived from the operations of The Lodge & Spaat Cordillera and consists of guest room, food and beverage, and other revenue,and is recognized as the services are rendered.

 

Revenuesfrom the sales of condominiums are recognized when sales are closed and titlepasses to the new owner, the new owner’s initial and continuing investment isadequate to demonstrate a commitment to pay for the condominium, the new owner’sreceivable is not subject to future subordination and we do not have asubstantial continuing involvement with the new condominium in accordance withSFAS No. 66, “Accounting for Sales of Real Estate.”  Amounts received prior to closing on sales ofcondominiums are recorded as deposits in our financial statements.

 

***Advertising Costs***

 

Marketingcosts, including the costs of model units and their furnishings, incurred inconnection with the sale of condominiums are deferred and recorded as costs ofsales when revenue is recognized. Certain prepaid costs are capitalized and expensed over the stated termsof the contract.  All other advertisingcosts are expensed as incurred.

 

***Income Taxes***

 

Weelected to be taxed, and qualified, as a REIT under Sections 856 through 860 ofthe Internal Revenue Code of 1986, as amended (the “Code”), beginning with theyear ended December 31, 2006.  Weare organized and operate in such a manner as to qualify for taxation as a REITunder the Code, and we intend to continue to operate in such a manner, but noassurance can be given that we will operate in a manner so as to qualify orremain qualified as a REIT.  To qualifyas a REIT, we must meet a number of organizational and operationalrequirements, including a requirement that we distribute at least 90% of ourREIT taxable income to our stockholders. As a REIT, we generally will not be subject to federal income tax at thecorporate level except for the operations of our wholly-owned taxable REITsubsidiaries.  We have three taxable REITsubsidiaries that own and/or provide management and development services tocertain of our investments in real estate and real estate under development.

 

For the ninemonths ended September 30, 2008 and 2007, we recognized a current anddeferred tax provision of approximately $0.1 million and less than $0.1million, respectively, related to the Texas margin tax.

 

***Stock-Based Compensation***

 

Wehave a stock-based incentive award plan for our directors and consultants andfor employees, directors, and consultants of our affiliates.  We account for our incentive award plan inaccordance with SFAS No. 123R, “Share-Based Payment.”  Awards are granted at the fair market valueon the date of grant with fair value estimated using the Black-Scholes-Mertonoption valuation model, which incorporates assumptions surrounding volatility,dividend yield, the risk-free interest rate, expected life, and the exerciseprice as compared to the underlying stock price on the grant date.  SFAS No. 123R also requires the taxbenefits associated with these share-based payments to be classified asfinancing activities in the consolidated statement of cash flows, rather thanas operating cash flows as required under previous regulations.  For the nine months ended September 30,2008 and 2007, we had no significant compensation cost related to our incentiveaward plan.

 

***Concentration of Credit Risk***

 

AtSeptember 30, 2008, we had cash and cash equivalents and restricted cashon deposit in financial institutions in excess of federally insuredlevels.  We regularly monitor the financialstability of the financial institutions and believe that we are not exposed toany significant credit risk.

 

***Minority Interest***

 

Wehold a primary beneficiary interest as a lender in two variable interestentities that own real estate properties and thus, we consolidate theiraccounts with and into our accounts. Minority interest represents the noncontrolling 

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

ownershipinterest’s proportionate share of the equity in our consolidated real estateinvestments consisting of the 5%, 10%, 10%, 30%, and 20% unaffiliated partners’share of the equity in Chase Park Plaza, The Lodge & Spa atCordillera, Rio Salado Business Center, Frisco Square, and Becket House,respectively, as well as 100% of the equity of the two properties weconsolidate under FIN 46R as a lender and primary beneficiary.  Income and losses are allocated to minorityinterest holders based on their ownership percentage.

 

***Reportable Segments***

 

SFASNo. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” establishes standards for reporting financial and descriptiveinformation about an enterprise’s reportable segments.  We have determined that we have onereportable segment, with activities related to the ownership, development andmanagement of real estate assets.  Our incomeproducing properties generated 100% of our consolidated revenues for the ninemonths ended September 30, 2008 and 2007. Our chief operating decision maker evaluates operating performance on anindividual property level.  Therefore,our properties are aggregated into one reportable segment for the nine monthsended September 30, 2008 and 2007.

 

***Loss per Share***

 

Lossper share is calculated based on the weighted average number of sharesoutstanding during each period.  As of September 30,2008 and 2007, we had options to purchase 54,583 and 39,583 shares of commonstock outstanding at a weighted average exercise price of $9.21 and $9.10,respectively.  These options are excludedfrom the calculation of earnings per share for the nine months ended September 30,2008 and 2007 because the effect would be anti-dilutive.

 

# **4.         New Accounting Pronouncements**

# ** **

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157 establishes a single authoritativedefinition of fair value, sets out a framework for measuring fair value, andrequires additional disclosures about fair value measurements.  SFAS No. 157applies only to fair value measurements that are already required or permittedby other accounting standards.  Our adoption of SFAS No. 157, on January 1,2008, did not have a material effect on our consolidated results of operationsor financial position.

 

InFebruary 2008, the FASB staff issued Staff Position No. 157-2, “EffectiveDate of FASB Statement No. 157” (“FSP SFAS 157-2”). FSP SFAS 157-2 delayedthe effective date of SFAS No. 157 for non-financial assets andnon-financial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually).  We are currently assessingthe effect FSP SFAS No. 157-2 may have on our disclosures in our financialstatements.

 

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

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  This Statement replaces SFAS No. 141, “BusinessCombinations,” but retains the fundamental requirement that the acquisitionmethod of accounting, 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 SFAS No. 141, which appliedonly to business combinations in which control was obtained by transferringconsideration.  SFAS No. 141(R) appliesthe same method of accounting (the acquisition method) to all transactions andother events in which one entity obtains control over one or more otherbusinesses.  This Statement also makes certain other modifications to SFASNo. 141, including a broader definition of a business and the requirementthat acquisition related costs are expensed as incurred.  This Statementapplies to business combinations occurring on or after the beginning of thefirst annual reporting period beginning on or after December 15,2008.  Early adoption is notallowed.  The acquisition of real estateproperty has been determined to meet the definition of a business combinationas defined in SFAS No. 141(R). Therefore, beginning January 1, 2009, we will no longer capitalizeacquisition related costs for future acquisitions of real estate properties,but will expense such costs as incurred.

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements - An amendment of ARB No. 51.” This Statement amends Accounting Research Bulletin No. 51 to establish

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

accountingand reporting standards for the noncontrolling interest in a subsidiary and forthe deconsolidation of a subsidiary.  It clarifies that a noncontrollinginterest in a subsidiary, which is sometimes referred to as minority interest,is an ownership interest in the consolidated entity that should be reported asequity in the consolidated financial statements.  Among otherrequirements, this Statement requires consolidated net income to be reported atamounts that include the amounts attributable to both the parent and thenoncontrolling interest.  It also requires disclosure, on the face of theconsolidated 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.

 

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

 

**5.         Assetsand Liabilities Measured at Fair Value**

 

On January 1, 2008, we adopted SFAS No. 157, as amended.  SFAS No. 157 defines fair value,establishes a framework for measuring fair value, and expands disclosures aboutfair value measurements.  SFAS No. 157applies to reported balances that are required or permitted to be measured atfair value under existing accounting pronouncements; accordingly, the standarddoes not require any new fair value measurements of reported balances.

 

SFAS No. 157 emphasizes that fair value is a market-basedmeasurement, not an entity-specific measurement.  Therefore, a fair value measurement should bedetermined based on the assumptions that market participants would use inpricing the asset or liability.  As abasis for considering market participant assumptions in fair valuemeasurements, SFAS No. 157 establishes a fair value hierarchy thatdistinguishes between market participant assumptions based on market dataobtained from sources independent of the reporting entity (observable inputsthat are classified within Levels 1 and 2 of the hierarchy) and the reportingentity’s own assumptions about market participant assumptions (unobservableinputs classified within Level 3 of the hierarchy).

 

Level 1 inputs utilize quoted prices (unadjusted) in active markets foridentical assets and liabilities that we have the ability to access.  Level 2 inputs are inputs other than quotedprices included in Level 1 that are observable for the asset or liability,either directly or indirectly.  Level 2inputs may include quoted prices for similar assets and liabilities in activemarkets, as well as inputs that are observable for the asset or liability(other than quoted prices), such as interest rates, foreign exchange rates, andyield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs forthe asset or liability that are typically based on an entity’s own assumptions,as there is little, if any, related market activity.  In instances where the determination of thefair value measurement is based on inputs from different levels of the fairvalue hierarchy, the level in the fair value hierarchy within which the fairvalue measurement falls is based on the lowest level input that is significantto the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fairvalue measurement in its entirety requires judgment, and considers factorsspecific to the asset or liability.

 

*Derivative financial instruments*

 

Currently, we use interest rate swaps and caps to manage our interestrate risk and foreign currency exchange forward contracts to manage the impactof foreign currency movements on our financial position for our net investmentsin foreign real estate joint ventures. The valuation of these instruments is determined using widely acceptedvaluation techniques including discounted cash flow analysis on the expected cashflows of each derivative.  This analysisreflects the contractual terms of the derivatives, including the period tomaturity, and uses observable market-based inputs, including interest ratecurves, implied volatilities, and foreign currency exchange rates.

 

To comply with the provisions of SFAS No. 157, we incorporatecredit valuation adjustments to appropriately reflect both our ownnonperformance risk and the respective counterparty’s performance risk in thefair value measurements.  Although wehave determined that the majority of the inputs used to value our derivativesfall within Level 2 of the fair value hierarchy, the credit valuationadjustments associated with our derivatives utilize Level 3 inputs, such asestimates of current credit spreads, to evaluate the likelihood of default byitself and its counterparties.  However,as

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

ofSeptember 30, 2008, we have assessed the significance of the impact of thecredit valuation adjustments on the overall valuation of our derivativepositions and have determined that the credit valuation adjustments are notsignificant to the overall valuation of our derivatives.  As a result, we have determined that ourderivative valuations in their entirety are classified in Level 2 of the fairvalue hierarchy.

 

The following fair value hierarchy table presents information about ourassets and liabilities measured at fair value on a recurring basis as of September 30,2008 (amounts in thousands):

 
| ** **                       | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** |
|----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| **Assets**                       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| Derivative financial instruments |       | $                | —     |             | $          | 3,536            |       | $          | —     |   | $ | 3,536 |   |
|                             |       |             |       |             |       |             |       |       |       |
| **Liabilities**                  |       |             |       |             |       |             |       |       |       |
| Derivative financial instruments |       | $                | —     |             | $          | 941              |       | $          | —     |   | $ | 941 |   |

 

Derivative financial instruments classified as assets are included inother assets on the balance sheet while derivative financial instrumentsclassified as liabilities are included in other liabilities.

 

**6.         Acquisitions**

 

Between July 29, 2008 and August 26, 2008, weacquired a 50% interest in a portfolio of 21 properties located in the CzechRepublic, Poland, and Slovakia (“Central Europe Portfolio”), through a jointventure (the “Central Europe Joint Venture”). The purchase price for our 50% interest in these 21 properties was €16.1million (approximately $25.6 million), excluding closing and acquisitioncosts.  On October 3, 2008, theCentral Europe Joint Venture acquired an additional property in Hungary, bringingthe number of properties in the Central Europe Portfolio to 22.  The purchase price for our 50% interest inthe Hungarian property was €0.2 million (approximately $0.3 million), excludingclosing and acquisition costs.  We usedproceeds from our offering of common stock to the public and borrowings fromour senior secured revolving credit facility to acquire the Central EuropePortfolio.

 

**7.         Real Estate Investments**

 

Asof September 30, 2008, we wholly-owned eleven properties and consolidatedfive properties through investments in joint ventures.  In addition, we are the mezzanine lender fortwo multi-family properties that we consolidate under FIN 46R, one underdevelopment and the other fully operational as of September 30, 2008.  In addition, we have noncontrolling,unconsolidated ownership interests in four properties and one investment in ajoint venture consisting of 21 properties that are accounted for using theequity method.  Capital contributions,distributions, and profits and losses of these properties are allocated inaccordance with the terms of the applicable partnership agreement.  The following table presents certaininformation about our unconsolidated properties as of September 30, 2008and December 31, 2007 (amounts in thousands):

 
| ** **                   | ** ** | ** **              | ** ** | **Carrying Value of Investment** | ** ** |
|------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **Ownership  Interest** | ** ** | **September 30,  2008**                    | ** ** | **December 31,  2007** | ** ** |
| Royal Island                 |       | 31                      | %          | $                                               | 23,485     |   | $ | 22,801 |   |
| Royal Island - Rock House    |       | 16                      | %          | 624                                             |       | — |   |
| GrandMarc at Westberry Place |       | 50                      | %          | 7,029                                           |       | 7,765 |   |
| GrandMarc at the Corner      |       | 50                      | %          | 5,103                                           |       | 5,879 |   |
| Central Europe Joint Venture |       | 50                      | %          | 28,093                                          |       | — |   |
| Total                        |       |                    |       | $                                               | 64,334     |   | $ | 36,445 |   |

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

Our investments in unconsolidated joint ventures asof September 30, 2008 and December 31, 2007 consisted of ourproportionate share of the combined assets and liabilities of our investmentproperties as follows (amounts in thousands):

 
| ** **                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Real estate assets, net      |       | $                      | 366,376    |                  | $          | 167,188 |   |
| Cash and cash equivalents    |       | 34,912                 |       | 1,985                 |       |
| Other assets                 |       | 19,319                 |       | 3,290                 |       |
| Total assets                 |       | $                      | 420,607    |                  | $          | 172,463 |   |
|                         |       |                   |       |                  |       |
| Notes payable                |       | $                      | 243,067    |                  | $          | 75,838 |   |
| Other liabilities            |       | 28,837                 |       | 4,536                 |       |
| Total liabilities            |       | 271,904                |       | 80,374                |       |
|                         |       |                   |       |                  |       |
| Equity                       |       | 148,703                |       | 92,089                |       |
| Total liabilities and equity |       | $                      | 420,607    |                  | $          | 172,463 |   |

 

For the three and nine months ended September 30,2008, we recognized $2 million and $3.5 million, respectively, of equity inlosses as compared to losses of $0.2 million and $0.3 million for the three andnine months ended September 30, 2007, respectively.  Our equity in losses from these investmentsis our proportionate share of the combined losses of our unconsolidated jointventures for the three and nine months ended September 30, 2008 and 2007as follows (amounts in thousands):

 
| ** **                       | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue                          |       | $                                                        | 4,662      |                                                    | $          | 174 |   | $ | 8,977 |   | $ | 174 |   |
|                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating expenses:              |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating expenses               |       | 2,031                                                    |       | (44                                                     | )          | 4,358 |   | 178 |   |
| Property taxes                   |       | 216                                                      |       | 664                                                     |       | 659 |   | 664 |   |
| Total operating expenses         |       | 2,247                                                    |       | 620                                                     |       | 5,017 |   | 842 |   |
|                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Operating income (loss)          |       | 2,415                                                    |       | (446                                                    | )          | 3,960 |   | (668 | ) |
|                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Non-operating expenses:          |       |                                                     |       |                                                    |       |   |   |   |   |
| Depreciation and amortization    |       | 2,111                                                    |       | 40                                                      |       | 4,245 |   | 45 |   |
| Interest and other, net          |       | 4,582                                                    |       | 186                                                     |       | 7,504 |   | 186 |   |
| Total non-operating expenses     |       | 6,693                                                    |       | 226                                                     |       | 11,749 |   | 231 |   |
|                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Net loss                         |       | $                                                        | (4,278     | )                                                       | $          | (672 | ) | $ | (7,789 | ) | $ | (899 | ) |
|                             |       |                                                     |       |                                                    |       |   |   |   |   |
| Company’s share of net loss |       | $                                                        | (1,987     | )                                                       | $          | (227 | ) | $ | (3,518 | ) | $ | (295 | ) |

 

**8.         Variable InterestEntities**

 

In2006, we agreed to provide secured mezzanine financing with an aggregateprincipal amount of up to $22.7 million to unaffiliated third-partyentities that own apartment communities under development (the “Alexan Voss” inHouston, Texas and “Alexan Black Mountain” in Henderson, Nevada properties,respectively).  These entities also havesecured construction loans with third-party lenders, with an aggregateprincipal amount of up to $68.6 million. Our mezzanine loans are subordinate to the construction loans.  In addition, we have entered into optionagreements allowing us to purchase the ownership interests in Alexan Voss andAlexan Black Mountain after each project’s substantial completion.  Alexan Black Mountain is fully operational asof September 30, 2008; however, the notice to exercise our option topurchase an ownership interest in the property has not yet been provided asprescribed in the option agreement.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

Based on ourevaluation, we have determined that these entities meet the criteria ofvariable interest entities under FIN 46R and that we are the primarybeneficiary of these variable interest entities.  Therefore, we have consolidated the entities,including the related real estate assets and third-party constructionfinancing.  As of September 30,2008, there was $90.2 million of real estate-related assets and real estateunder development related to Alexan Voss and Alexan Black Mountain, whichcollateralizes the outstanding principal balance of the construction andmezzanine loans of $85.5 million.  Thethird-party construction lenders have no recourse to the general credit of usas the primary beneficiary, but their loans are guaranteed by the owners of thevariable interest entities.  As of September 30,2008, the outstanding principal balance under our mezzanine loans was $22.7million, which is eliminated, along with accrued interest and loan originationfees, upon consolidation.

 

InMay 2007, for an initial cash investment of $20 million, we acquired anapproximate 31% equity interest as a limited partner in the development andconstruction of a resort hotel, spa, golf course, marina, and residences onthree islands located in the Commonwealth of The Bahamas (“Royal Island”).  In December 2007, we committed up to $40million as a bridge loan to the Royal Island entity for the continuingconstruction and development of the property, of which $34.6 million wasoutstanding to us at September 30, 2008. Based on our evaluation, we have determined that the entity meets thecriteria of a variable interest entity under FIN 46R but that we are not theprimary beneficiary.  Accordingly, we donot consolidate the Royal Island entity and instead account for it under theequity method of accounting in accordance with Statement of Position 78-9, asamended and interpreted.  At September 30,2008, there was approximately $118.6 million of real estate-related assets andreal estate under development related to Royal Island.

 

**9.         Notes Receivable**

 

Welease the hotel portion of the Chase Park Plaza property to the hotel operator,an unaffiliated entity that owns the remaining 5% of Chase Park Plaza.  In conjunction with the lease agreement, wemade a working capital and inventory loan of up to $1.9 million to the hoteloperator in December 2006.  Theinterest rate under the note is fixed at 5% per annum.  The term of the note is the earlier of December 31,2016 or the termination of the related hotel lease agreement.  Annual payments of interest only are requiredeach December with any remaining balance payable at the maturitydate.  In accordance with the hotel leaseagreement, the tenant will receive a reduction in its base rental payment duein January in the amount of the interest paid on the promissory note inthe previous December.  This reduction inthe lease payment is reflected as a straight-line adjustment to base rentalrevenue.  At September 30, 2008, thenote receivable balance was $1.9 million.

 

InDecember 2007, we participated in a bridge loan financing arrangement forthe continuing development and construction of Royal Island.  Theaggregate principal amount available under the bridge loan is $60 millionconsisting of three tranches.  Under the bridge loan we have agreed tolend a tranche of up to $40 million, which is subordinate to the other twotranches.  The bridge loan accrues interest at the one-month LIBOR rateplus 8% per annum with accrued interest and principal payable at the maturitydate, December 20, 2008, and is secured by the Royal Islandproperty.  Under the terms of the loan documents, the bridge loan may beextended once for a period of six months upon the satisfaction of certainconditions with notice given by the borrower by November 20, 2008 and apayment of an extension fee.  To date not all of the conditions have beensatisfied and there is no assurance that they will be satisfied. Discussions between the bridge loan lenders and the borrower to extend thematurity date of the loan have begun; however, there are no assurances that theloan maturity date will be extended.  At September 30, 2008, the loanbalance owed to us was $34.6 million, with an annual interest rate of11.9%.  In addition, $1.9 million of accrued interest and fees is includedin receivables from related parties at September 30, 2008.

 

**10.      Capitalized Costs**

 

Wecapitalize interest, property taxes, insurance, and construction costs to realestate under development.  During thenine months ended September 30, 2008, we capitalized $47.2 million of suchcosts associated with real estate under development and certain investmentsaccounted for by the equity method, including $8.4 million and $0.2 million,respectively, in interest and deferred financing costs.

 

Certainredevelopment costs including interest, property taxes, insurance, andconstruction costs associated with Chase Park Plaza and The Lodge &Spa at Cordillera have been capitalized to condominium inventory on ourconsolidated balance sheet at September 30, 2008.  During the nine months ended September 30,2008, we capitalized a total of $25.9 million of such costs associated with thecondominium redevelopment at Chase Park Plaza and The Lodge & Spa atCordillera, including $4.2 million of interest and deferred financing costs.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

Duringthe third quarter of 2008, $1.4 million in costs were transferred from realestate under development to land on our balance sheet.  Also, during the third quarter of 2008, $14.9million and $0.5 million of real estate under development costs weretransferred to building and improvements and to furniture, fixtures, andequipment, respectively, on our balance sheet.

 

# **11.      Notes Payable**

# ** **

Our notespayable balance was $424.4 million at September 30, 2008, as compared to$243.9 million at December 31, 2007, and consists of borrowings andassumptions of debt related to our property acquisitions as well as the notespayable of our mezzanine borrowers we consolidate under FIN 46R.  Each ofour mortgage loans is collateralized by one or more of our properties.  AtSeptember 30, 2008, our notes payable interest rates ranged from 5% to6.8%, with a weighted average interest rate of approximately 5.9%.  Of our$424.4 million in notes payable at September 30, 2008, $384.4 millionrepresented debt subject to variable interest rates.  At September 30,2008, our notes payable have maturity dates that range from January 2009to January 2016.  Our loan agreements generally stipulate that wecomply with certain reporting and financial covenants.  These covenantsinclude among other things, notifying the lender of any change in managementand maintaining minimum debt service coverage ratios.  At September 30,2008, we are not aware of any non-compliance with our debt covenants under ourloan agreements.

 

OnFebruary 13, 2008, we entered into a senior secured revolving creditfacility providing for up to $75 million of secured borrowings.  The initial credit facility allows us toborrow up to $75 million in revolving loans, of which up to $20 million isavailable for issuing letters of credit. Loans under the credit facility bear interest at an annual rate that isequal to or a combination of (1) the LIBOR plus an applicable margin that,depending upon the debt service coverage ratio, may vary from 1.5% to 1.7%, or (2) theprime rate plus an applicable margin that, depending upon the debt servicecoverage ratio, may vary from 0% to 0.2%. The credit facility matures on February 13, 2011.  The credit facility is secured by a firstlien on certain real property assets.

 

The creditfacility may be increased to up to $150 million upon satisfaction of certainconditions including additions to the collateral pool.  We have unconditionally guaranteed payment ofthe $75 million senior secured revolving credit facility.  As of September 30, 2008, borrowingsunder the credit facility were $58 million. The proceeds were used to fund ongoing costs at our developmentproperties, to fund a portion of our acquisition of the Central EuropePortfolio, and for general corporate purposes. On November 6, 2008, we paid down on the credit facility in theamount of $20 million.

 

OnJuly 30, 2008, the existing debt of Frisco Square was replaced with a new$57.8 million credit agreement (“Frisco Square Loan”) with two banks.  The Frisco Square Loan consists of fiveseparate tranches with varying payment terms and bears interest at annual ratesbased on LIBOR plus applicable margins ranging from 1.9% to 2.5%.  The Frisco Square Loan is secured by FriscoSquare and matures on July 11, 2011, except for a $25.8 million tranchewhich matures July 28, 2009.  Wehave unconditionally guaranteed payment of the Frisco Square Loan.  The balance of the Frisco Square Loan was$56.2 million at September 30, 2008.

 

The followingtable summarizes our contractual obligations for principal payments as of September 30,2008 (amounts in thousands):

 
| **Principal Payments Due:**          | ** ** | ** ** | ** ** |
|------------------------------------------------|------------|------------|------------|
| October 1, 2008 - December 31,  2008 |       | $          | 116        |   |
| 2009                                           |       | 81,642     |       |
| 2010                                           |       | 190,297    |       |
| 2011                                           |       | 113,646    |       |
| 2012                                           |       | 1,660      |       |
| Thereafter                                     |       | 35,908     |       |
| Unamortized  premium                           |       | 1,166      |       |
|                                           |       |       |       |
|                                           |       | $          | 424,435    |   |

 

# **12.      Derivative Instruments and HedgingActivities**

 

InJune 2007, we entered into two interest rate cap agreements associatedwith our Santa Clara Tech Center property. In November 2007, we entered into a foreign currency forwardcontract to hedge our net investment in Becket House.  In December 2007, we entered intointerest rate swap and interest rate cap agreements associated with Chase Park

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

Plazaand Becket House. The swap and cap agreements related to Becket House were notdesignated a hedge until December 31, 2007.  Accordingly, the change in their fair valuethrough December 31, 2007 was reported in our consolidated statement ofoperations as a component of interest expense. In July 2008, we entered into a foreign currency forward contact tohedge our net investment in the Central Europe Joint Venture.

 

Wemay be exposed to the risk associated with variability of interest rates thatmight impact our cash flows and the results of operations.  Thehedging strategy of entering into interest rate caps and swaps, therefore, isto eliminate or reduce, to the extent possible, the volatility of cashflows.  In addition, we may be exposed to foreign currency exchangerisk related to our net investments in the Becket House leasehold interest andthe Central Europe Joint Venture. Accordingly, our hedging strategy is to protect our net investments inforeign currency denominated entities against the risk of adverse changes inforeign currency to U.S. dollar exchange rates.

 

Thefollowing table summarizes the notional values of our derivative financialinstruments as of September 30, 2008. The notional values provide an indication of the extent of ourinvolvement in these instruments at September 30, 2008, but do notrepresent exposure to credit, interest rate, or market risks (amounts inthousands).

 
| ** **                                               | ** ** | **Notional** | ** **   | **Interest Rate/** | ** ** | ** **   | ** **             |
|----------------------------------------------------------|------------|--------------|--------------|-------------------------|------------|--------------|------------------------|
| **Hedge Type/Description**                          | ** ** | **Value**    | ** **   | **Strike Rate**    | ** ** | **Maturity** | ** **             |
| Cash Flow Hedges                                         |       |         |         |                    |       |         |                   |
| Interest rate cap - Santa Clara Tech Center              |       | $            | 35,115       |                    | 6.00       | %            | June 15, 2010     |   |
| Interest rate cap - Santa Clara Tech Center              |       | $            | 17,000       |                    | 6.00       | %            | June 15, 2010     |   |
| Interest rate cap - Chase - Private  Residences          |       | $            | 30,000       |                    | 6.00       | %            | December 15, 2009 |   |
| Interest rate swap - Chase Park Plaza Hotel              |       | $            | 77,295       |                    | 3.82       | %            | November 15, 2010 |   |
| Interest rate cap - Becket House                         |       | £       | 12,700       |                    | 5.75       | %            | November 21, 2010 |   |
| Interest rate swap - Becket House                        |       | £       | 12,700       |                    | 5.50       | %            | November 21, 2009 |   |
|                                                     |       |         |         |                    |       |         |                   |
| Net Investment Hedges                                    |       |         |         |                    |       |         |                   |
| Foreign currency forward - Becket House                  |       | £       | 6,120        |                    | £     | 1.9644       |                   | November 23, 2011 |   |
| Foreign currency forward - Central Europe  Joint Venture |       | €       |  17,000 |                    | €     |  1.5339 |                   | July 28, 2010 |   |

 

**13.      Stockholders’Equity**

 

On November 23, 2004 (date of inception), we sold 1,000 shares ofconvertible stock and 21,739 shares of common stock to Behringer HarvardHoldings, LLC (“Behringer Harvard Holdings”) for $201,000 in cash.  Pursuant to its terms, the convertible stockgenerally is convertible into shares of our common stock with a value equal to15% of the amount by which (1) our enterprise value, including the totalamount of distributions paid to our stockholders, exceeds (2) the sum ofthe aggregate capital invested by our stockholders plus a 10% cumulative,non-compounded, annual return on such capital. At the date of issuance of theshares of convertible stock, management determined the fair value under GAAPwas less than the nominal value paid for the shares; therefore, the differenceis not material.** **Conversionof the convertible stock may be limited by our board of directors if itdetermines that full conversion may jeopardize our qualification as aREIT.  Our board of directors mayauthorize additional shares of capital stock and their characteristics withoutobtaining stockholder approval.

 

***Share Redemption Program***

 

Our board ofdirectors has authorized and adopted a share redemption program that enablesour stockholders to sell their shares to us in limited circumstances after theyhave held them for at least one year. The purchase price for the redeemed shares is set forth in theprospectus for the primary offering of our common stock, as supplemented.  Our board of directors reserves the right inits sole discretion at any time, and from time to time, to (1) waive theone-year holding period in the event of the death, disability or bankruptcy ofa stockholder or other exigent circumstances, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program. Under the terms of the plan, during any calendar year, we will notredeem in excess of 5% of the weighted average number of shares outstandingduring the twelve-month period immediately prior to the date of redemption.  In addition, our board of directors willdetermine whether we have sufficient cash from operations to repurchase shares,and such purchases will generally be limited to proceeds of our distributionreinvestment plan plus 1% of operating cash flow for the previous fiscal year(to the extent positive).  We redeemed342,590 shares of common stock for $3.1 million during the nine months ended September 30,2008, for an aggregate total of 499,323 shares of common stock redeemed sinceinception.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

***Distributions***

*** ***

We initiatedthe payment of monthly distributions in August 2006 in the amount of a 2%annualized rate of return, based on an investment in our common stock of $10.00per share and calculated on a daily record basis of $0.0005479 per share.  In December 2006, our board of directorsdeclared distributions to be paid in the first quarter of 2007 in the amount ofa 2.5% annualized rate of return, calculated on a daily record basis of$0.0006849 per share.  In March 2007,our board of directors declared distributions to be paid in the second quarterof 2007 in the amount of a 3% annualized rate of return, calculated on a dailyrecord basis of $0.0008219 per share.  Thedistribution rate has remained at 3%. Pursuant to our Second Amended and Restated Distribution ReinvestmentPlan (“Secondary DRIP”), stockholders may elect to reinvest any cashdistribution in additional shares of common stock.  We record all distributions when declared,except that the stock issued through our distribution reinvestment plan (the “DRIP”)and Secondary DRIP is recorded when the shares are actually issued.

 

The followingare the distributions declared by quarter for the nine months ended September 30,2008 and 2007 (amounts in thousands):

 
| **2008**    | ** ** | **Total  Distributions  Declared** | ** ** | **Cash  Declared** | ** ** | **DRIP**

**Declared** | ** ** |
|-------------|------------|------------------------------------|------------|--------------------|------------|------------------------|------------|
| ** **  | ** ** | ** **                         | ** ** | ** **         | ** ** | ** **             | ** ** |
| 3rd Quarter |       | $                                  | 4,129      |               | $          | 999                    |       | $ | 3,130 |   |
| 2nd Quarter |       | 4,076                              |       | 978                |       | 3,098                  |       |
| 1st Quarter |       | 4,055                              |       | 969                |       | 3,086                  |       |
|        |       | $                                  | 12,260     |               | $          | 2,946                  |       | $ | 9,314 |   |

 
| **2007**    | ** ** | **Total  Distributions  Declared** | ** ** | **Cash  Declared** | ** ** | **DRIP  Declared** | ** ** |
|-------------|------------|------------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **  | ** ** | ** **                         | ** ** | ** **         | ** ** | ** **         | ** ** |
| 3rd Quarter |       | $                                  | 3,217      |               | $          | 773                |       | $ | 2,444 |   |
| 2nd Quarter |       | 2,254                              |       | 523                |       | 1,731              |       |
| 1st Quarter |       | 1,279                              |       | 272                |       | 1,007              |       |
|        |       | $                                  | 6,750      |               | $          | 1,568              |       | $ | 5,182 |   |

 

**14.      Related Party Arrangements**

 

BehringerOpportunity Advisors I and certain of its affiliates receive fees andcompensation in connection with our offering of common stock to the public, andin connection with the acquisition, management, and sale of our assets.  We terminated our initial public offering on December 28,2007 and currently are offering shares of our common stock only to our existingstockholders through our Secondary DRIP.

 

Behringer Securities LP (“Behringer Securities”), an affiliate of ouradvisor and the dealer manager for our initial public offering, receivedcommissions of up to 7% of gross offering proceeds before reallowance ofcommissions earned by participating broker-dealers; provided that BehringerSecurities received 1% of the gross proceeds of purchases pursuant to our DRIPand does not receive any commissions for purchases pursuant to our SecondaryDRIP.  Behringer Securities reallowed100% of the commissions earned to participating broker-dealers.  In addition, up to 2% of gross proceedsbefore reallowance to participating broker-dealers was paid to BehringerSecurities as a dealer manager fee; provided that Behringer Securities did notand does not receive dealer manager fees for purchases pursuant to our DRIP orSecondary DRIP.  Behringer Securities waspermitted to reallow all or a portion of its dealer manager fees in anaggregate amount up to 2% of gross offering proceeds to broker-dealersparticipating in the public offering; provided, however, that BehringerSecurities was permitted to 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% ofgross offering proceeds for actual out-of-pocket and bona fide, separatelyinvoiced due diligence expenses incurred as fees, costs or other expenses fromthird parties.  From inception throughthe termination date of the public offering on December 28, 2007,Behringer Securities’ commissions and dealer manager fees totaled $35.6 millionand $10.7 million, respectively, and were recorded as a reduction to additionalpaid-in capital.  In the nine monthsended September 30, 2008, Behringer Securities

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

did not receive any commissionsor dealer manager fees associated with our offering of common stock to thepublic as the initial public offering terminated on December 28, 2007.

 

BehringerOpportunity Advisors I, or its affiliates, received up to 2% of gross offeringproceeds for organization and offering expenses incurred in connection with theinitial public offering; except that no organization and offering expenses wereor are reimbursed with respect to purchases made pursuant to our DRIP orSecondary DRIP.  Since our inceptionthrough the termination date of our initial public offering on December 28,2007, $10.7 million of organization and offering expenses had been incurred byBehringer Opportunity Advisors I or its predecessor-in-interest on ourbehalf.  Of this amount, less than $0.1million had been expensed as organizational costs with the remainder recordedas a reduction of additional paid-in capital. Behringer Opportunity Advisors I, or its affiliates, determines theamount of organization and offering expenses owed based on specific invoiceidentification as well as an allocation of costs to us and other BehringerHarvard programs, based on respective equity offering results of those entitiesin offering.

 

Behringer Opportunity Advisors I, or its affiliates, receivesacquisition and advisory fees of 2.5% of the contract purchase price of eachasset for the acquisition, development or construction of real property or 2.5%of the funds advanced in respect of a loan. Our advisor, or its affiliates, also receives reimbursement ofacquisition expenses up to 0.5% of the contract purchase price of each asset,or with respect to a loan, up to 0.5% of the funds advanced.  Behringer Opportunity Advisors I or itspredecessor-in-interest earned $4.7 million in acquisition and advisory feesand $0.9 million in acquisition expense reimbursements for our investments madeduring the nine months ended September 30, 2008.  In the nine months ended September 30,2007, our advisor earned $12 million in acquisition and advisory fees and $2.4million in acquisition expense reimbursements. For property acquisitions, we capitalize these fees as part of our realestate, and for loans, we defer these fees to be amortized over the loan term.

 

We pay Behringer Opportunity Advisors I or its affiliates a debtfinancing fee equal to 1% of the amount of any debt made available to us.  We incurred $2.4 million and $0.8 million ofdebt financing fees during the nine months ended September 30, 2008 and2007, respectively.

 

Wepay HPT Management Services LP, Behringer Harvard Real Estate Services, LLC, orBehringer Harvard Opportunity Management Services, LLC (collectively, “BHProperty Management”), affiliates of our advisor and our property managers,fees for management and leasing of our properties, which may be subcontractedto unaffiliated third parties.  Such feesare equal to 4.5% of gross revenues plus leasing commissions based upon thecustomary leasing commission applicable to the same geographic location of therespective property.  In the event thatwe contract directly with a non-affiliated third-party property manager inrespect of a property, we will pay BH Property Management an oversight feeequal to 1% of gross revenues of the property managed.  In no event will we pay both a property managementfee and an oversight fee to BH Property Management with respect to anyparticular property.  We incurred andexpensed such fees totaling $1.3 million and $0.4 million in the nine monthsended September 30, 2008 and 2007, respectively.

 

Wepay Behringer Opportunity Advisors I an annual asset management fee of 0.75% ofthe aggregate asset value of acquired real estate.  The fee is payable monthly in an amount equalto one-twelfth of 0.75% of the aggregate asset value as of the last day of thepreceding month.  For the nine monthsended September 30, 2008, we expensed $3.3 million of asset managementfees and capitalized $0.2 million of asset management fees to real estate. Forthe nine months ended September 30, 2007, we expensed $1.5 million ofasset management fees and capitalized $0.1 million of asset management fees.

 

We will reimburse Behringer Opportunity Advisors I or its affiliatesfor all expenses paid or incurred by them in connection with the services theyprovide to us, including direct expenses and the costs of salaries and benefitsof persons employed by those entities and performing services for us, subjectto the limitation that we will not reimburse for any amount by which ouradvisor’s operating expenses (including the asset management fee) at the end ofthe four fiscal quarters immediately preceding the date reimbursement is soughtexceeds the greater of:  (1) 2% ofour average invested assets or (2) 25% of our net income for that fourquarter period other than any additions to reserves for depreciation, bad debtsor other similar non-cash reserves and any gain from the sale of our assets forthat period.  Notwithstanding thepreceding sentence, we may reimburse the advisor for expenses in excess of thislimitation if a majority of our independent directors determines that such excessexpenses are justified based on unusual and non-recurring factors.  For the nine months ended September 30,2008, we incurred and expensed costs for administrative services totaling $0.3million.

 

AtSeptember 30, 2008, we had a payable to our advisor and its affiliates of$1.5 million.  This balance consistsprimarily of asset management fees and administrative service expenses payableto Behringer Opportunity Advisors I, management fees payable to BH PropertyManagement, and other miscellaneous payables. This payable is partially offset by a receivable from our advisor andits affiliates of $0.3 million.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

Weare dependent on Behringer Opportunity Advisors I and BH Property Managementfor certain services that are essential to us, including asset acquisition anddisposition decisions, property management and leasing services, and othergeneral administrative responsibilities. In the event that these companies were unable to provide us with therespective services, we would be required to obtain such services from othersources.

 

**15.      Stock-Based Compensation**

 

TheBehringer Harvard Opportunity REIT I, Inc. Amended and Restated 2004Incentive Award Plan (“Incentive Award Plan”) was approved by our board ofdirectors on July 19, 2005 and by our stockholders on July 25, 2005,and provides for equity awards to our directors and consultants and toemployees, directors, and consultants of our affiliates.  On July 24, 2008, we issued options topurchase 5,000 shares of our common stock at $9.50 per share to each of our threeindependent directors pursuant to the Incentive Award Plan.  The options issued pursuant to the IncentiveAward Plan become exercisable one year after the date of grant.  As of September 30, 2008, options topurchase 54,583 shares of stock were outstanding, of which 39,583 are fullyvested, at a weighted average exercise price of $9.10.  The remaining contractual life of theoutstanding options is 8.5 years. Compensation expense associated with our Incentive Award Plan was notmaterial for the three and nine months ended September 30, 2008 and 2007.

 

**16.      Supplemental Cash FlowInformation**

 

Supplementalcash flow information is summarized below (amounts in thousands).

 
| ** **                                                                                                                    | ** ** | **Nine months ended** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                                                                    | ** ** | **September 30,**          | ** ** |
| ** **                                                                                                                    | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| **Supplemental disclosure:**                                                                                                  |       |                            |       |   |   |
| Interest paid, net of amounts capitalized                                                                                     |       | $                               | 7,902      |   | $ | 3,344 |   |
| Income taxes paid                                                                                                             |       | $                               | 76         |   | $ | — |   |
|                                                                                                                          |       |                            |       |   |   |
| **Non-cash investing activities:**                                                                                            |       |                            |       |   |   |
| Property and equipment additions and  purchases of real estate in accrued liabilities                                         |       | $                               | 256        |   | $ | 466 |   |
| Capital expenditures for real estate under development  in accounts payable and accrued liabilities                           |       | $                               | 3,259      |   | $ | 5,607 |   |
| Capital expenditures for real estate under development  of consolidated borrowers in accounts payable and accrued liabilities |       | $                               | 2,468      |   | $ | — |   |
| Conversion of notes receivable to  investments in unconsolidated joint ventures                                               |       | $                               | —     |   | $ | 14,165 |   |
| Amortization of deferred financing fees in  properties under development                                                      |       | $                               | 378        |   | $ | 95 |   |
| Amortization of deferred financing fees in  properties under development of consolidated borrowers                            |       | $                               | 43         |   | $ | — |   |
|                                                                                                                          |       |                            |       |   |   |
| **Non-cash financing activities:**                                                                                            |       |                            |       |   |   |
| Common stock issued in distribution reinvestment  plan                                                                        |       | $                               | 9,286      |   | $ | 5,645 |   |
| Assumed debt on acquisition of real estate  investment                                                                        |       | $                               | 22,229     |   | $ | 29,950 |   |

 

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**Item 2.    Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

** **

The followingdiscussion and analysis should be read in conjunction with the accompanyingfinancial statements of the Company and the notes thereto:

 

**Forward-LookingStatements**

** **

Thissection contains forward-looking statements, including discussion and analysisof the financial condition of us and our subsidiaries, including entities weconsolidate under FIN 46R, our anticipated capital expenditures required tocomplete projects, amounts of anticipated cash distributions to ourstockholders in the future and other matters. These forward-looking statements are not historical facts but are theintent, belief or current expectations of our management based on theirknowledge and understanding of our business and industry.  Words such as “may,” “anticipates,” “expects,”“intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should”and variations of these words and similar expressions are intended to identifyforward-looking statements.  Thesestatements are not guarantees of future performance and are subject to risks,uncertainties and other factors, some of which are beyond our control, aredifficult to predict and could cause actual results to differ materially fromthose expressed or forecasted in the forward-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 report on Form 10-Q.  We undertake no obligation to update orrevise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events or changes to future operating results.  Factors that could cause actual results todiffer materially from any forward-looking statements made in the Form 10-Qinclude changes in general economic conditions, changes in real estateconditions, construction costs that may exceed estimates, construction delays,increases in interest rates, lease-up risks, inability to obtain new tenantsupon the expiration of existing leases, and the potential need to fund tenantimprovements or other capital expenditures out of operating cash flow.  The forward-looking statements should be readin light of the risk factors identified in the “Risk Factors” section of ourAnnual Report on Form 10-K for the year ended December 31, 2007, asfiled with the SEC.

** **

**Cautionary Note**

 

Therepresentations, warranties, and covenants made by us in any agreement filed asan exhibit to this report on Form 10-Q are made solely for the benefit ofthe parties to the agreement, including, in some cases, for the purpose ofallocating risk among the parties to the agreement, and should not be deemed tobe representations, warranties or covenants to or with any other parties.  Moreover, these representations, warrantiesor covenants should not be relied upon as accurately describing or reflectingthe current state of our affairs.

 

**Critical Accounting Policies and Estimates**

 

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

 

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

 

Ourconsolidated financial statements include our accounts, the accounts of VIEs inwhich we are the primary beneficiary and the accounts of other subsidiariesover which we have control.  Allinter-company transactions, balances and profits have been eliminated inconsolidation.  Interests in entities acquiredare evaluated for consolidation based on FIN 46R, which requires theconsolidation of VIEs in which we are deemed to be the primarybeneficiary.  If the interest in theentity is determined not to be a VIE under FIN 46R, then the entity is evaluatedfor consolidation under the American Institute of Certified Public Accountants’Statement of Position 78-9, “Accountingfor Investments in Real Estate Ventures,” and Emerging Issues Task Force04-5, “Determining Whether a GeneralPartner, or the General Partners as a Group, Controls a Limited Partnership orSimilar Entity When the Limited Partners Have Certain Rights.”

 

Thereare judgments and estimates involved in determining if an entity in which wehave made an investment is a VIE and if so, if we are the primarybeneficiary.  The entity is evaluated todetermine if it is a VIE by, among other things, calculating the percentage ofequity being risked compared to the total equity of the entity.  FIN 46R provides some

 

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guidelinesas to what the minimum equity at risk should be, but the percentage can varydepending upon the industry and/or the type of operations of the entity and itis up to management to determine that minimum percentage as it relates to ourbusiness and the facts surrounding each of our acquisitions.  In addition, even if the entity’s equity atrisk is a very low percentage, we are required by FIN 46R to evaluate theequity at risk compared to the entity’s expected future losses to determine ifthere could still in fact be sufficient equity 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 and Other IntangibleAssets***

 

Uponthe acquisition of real estate properties, we allocate the purchase price ofthose properties to the tangible assets acquired, consisting of land, inclusiveof associated rights, land improvements, buildings, building improvements,furniture, fixtures and equipment, identified intangible assets, assetretirement obligations, and assumed liabilities based on their relative fairvalues in accordance with SFAS No. 142*,*“Goodwill and Other Intangible Assets.”  Identified intangible assets consist of the fairvalue of above-market and below-market leases, in-place leases, in-place tenantimprovements, in-place leasing commissions, and tenant relationships.

 

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

 

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

 

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

 

Thefair value of any tangible assets acquired, expected to consist of land, landimprovements, buildings, building improvements, and furniture, fixtures andequipment, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to the tangible assets. Land values are derived from appraisals and building values arecalculated as replacement cost less depreciation or management’s estimates ofthe relative fair value of these assets using discounted cash flow analyses orsimilar methods.  Furniture, fixtures,and equipment values are determined based on current reproduction orreplacement cost less depreciation and other estimated allowances based onphysical, functional, or economic factors. The value of buildings is depreciated over the estimated useful livesranging from 25 years for commercial office property to 39 years forhotel/mixed-use property using the straight-line method.  Land improvements are depreciated over theestimated useful life of 15 years, and furniture, fixtures, and equipment aredepreciated over estimated useful lives ranging from five to seven years usingthe straight-line method.

 

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

 

Thetotal value of identified real estate intangible assets that we may acquire inthe future 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

 

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leasesnot been in place, including tenant improvements and commissions.  The estimates of the fair value of tenantrelationships also include costs to execute similar leases including leasingcommissions, legal costs and tenant improvements as well as an estimate of thelikelihood of renewal as determined by management on a tenant-by-tenant basis.

 

Weamortize the value of in-place leases acquired in the future to expense overthe term of the respective leases.  Thevalue of tenant relationship intangibles is amortized to expense over theinitial term and any anticipated renewal periods, but in no event does the amortizationperiod for intangible assets exceed the remaining depreciable life of thebuilding.  Should a tenant terminate itslease, the unamortized portion of the in-place lease value and tenantrelationship intangibles would be charged to expense.

 

Otherintangible assets include the value of identified hotel trade names andin-place property tax abatements.  Thesefair values are based on management’s estimates of the relative fair value ofthese assets using discounted cash flow analyses or similar methods.  The value of the trade names is amortizedover their respective estimated useful life of 20 years using thestraight-line method and the value of the in-place property tax abatement isamortized over its estimated term of 10 years using the straight-line method.

 

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

 

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

 

Forreal estate we own through an investment in a joint venture, tenant-in-commoninterest or other similar investment structure, at each reporting date,management compares the estimated fair value of our investment to the carryingvalue.  An impairment charge is recordedto the extent the fair value of our investment is less than the carrying amountand the decline in value is determined to be other than a temporary decline.

 

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

 

***Impairment of Condominium Inventory***

 

Forcondominium inventory, at each reporting date, management compares theestimated fair value less costs to sell to the carrying value.  An impairment charge is recorded to theextent that the fair value less costs to sell is less than the carryingvalue.  We determine the estimated fairvalue of condominiums based on comparable sales in the normal course ofbusiness under existing and anticipated market conditions.  This evaluation takes into considerationestimated future selling prices, costs spent to date, estimated additionalfuture costs and management’s plans for the property.

 

***Notes Receivable***

 

Fornotes receivable, management reviews the terms and conditions underlying theoutstanding notes receivable.  Ifmanagement determines that it is probable that all amounts due under the termsof the note will not be collected, an impairment charge is recorded to theextent that the investment in the note exceeds management’s estimate of thefair value of the collateral securing such note.

 

**Overview**

 

Wewere formed primarily to invest in and operate real estate or real estaterelated assets on an opportunistic basis. In particular, we focus on acquiring properties with significantpossibilities for short-term capital appreciation, such as those requiringdevelopment, redevelopment or repositioning or those located in markets withhigher volatility, lower barriers to entry, and high growth potential.  We may acquire office, industrial, retail,hospitality, multi-family and other real properties, including existing ornewly constructed properties or properties under development orconstruction.  Further, we may invest inreal 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 invest in collateralized mortgage-backed securities,mortgage, bridge or mezzanine loans, and Section 1031 tenant-in-commoninterests, or in entities that make investments similar to the foregoing.

 

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**Resultsof Operations**

 

Asof September 30, 2008, we had invested in 23 assets:  eleven consolidated wholly-owned properties;five properties consolidated through investments in joint ventures includingtwo mixed-use hotel and residential properties; two investments in an islanddevelopment accounted for under the equity method; an investment in a portfolioof 21 properties located in three Central European countries; two investmentsin student housing projects in Texas and Virginia, also accounted for under theequity method; and two apartment development properties as a mezzanine lenderconsolidated under FIN 46R.  Ourinvestment properties are located in Arizona, California, Colorado,Massachusetts, Minnesota, Missouri, Nevada, Texas, the Commonwealth of TheBahamas, London, England, the Czech Republic, Poland, and Slovakia.

 

Asof September 30, 2007, we had invested in 18 assets: ten wholly ownedproperties; three properties consolidated through investments in limitedliability companies including two mixed-use hotel and residential properties;one investment in an island development accounted for under the equity method;two investments in student housing projects in Texas and Virginia, alsoaccounted for under the equity method; and two apartment development propertiesas a mezzanine lender consolidated under FIN 46R.

 

Accordingly,our results of operations presented for the nine months ended September 30,2008 compared to the nine months ended September 30, 2007 reflectsignificant increases in most categories due to the growth of our portfolio ofproperties.

 

*Threemonths ended September 30, 2008 as compared to three months ended September 30,2007*

 

*Revenues.*Our total revenues increased by $11.1 million to $21.6 million for the threemonths ended September 30, 2008 as compared to the three months ended September 30,2007, primarily due to increased rental revenue resulting from the acquisitionof new properties from which we receive rent of $5.9 million and condominiumsales of $4.3 million.  Hotel revenuesfor the three months ended September 30, 2008 totaled $2 million, adecrease of $0.6 million as compared to the three months ended September 30,2007.  This decrease was primarilyrelated to lower occupancy at The Lodge & Spa at Cordillera.  We expect revenues to increase as availablespace at our operating properties is leased-up, properties under developmentbecome operational, and we close the sales of condominium inventory.

 

Althoughdifficult operating conditions prevailed across most U.S. housing markets, weclosed on the sale of seven condominium units at The Private Residences at TheChase Park Plaza in the third quarter ended September 30, 2008.  Of the remaining 75 units, we had 42 unitsunder sales contracts with non-refundable deposits and six units reserved withrefundable deposits.  In October 2008,we closed on the sale of four additional units that were previously under salescontacts.

 

*PropertyOperating Expenses.* Property operating expenses forthe three months ended September 30, 2008 were $6.9 million ascompared to $4.1 million for the three months ended September 30,2007.  The increase is primarily relatedto property operating expenses from new properties of $2.2 million.  In addition, two additional buildings atFrisco Square and Alexan Black Mountain were placed in service in 2008.  We expect property operating expenses toincrease as properties under development become operational and available spaceat our operating properties is leased-up.

 

*Cost ofCondominium Sales. *Costof condominium sales, relating to the sale of condominium units at The PrivateResidences at The Chase Park Plaza, for the three months ended September 30,2008 were $4.3 million.  We did not haveany such sales and related costs for the three months ended September 30,2007.

 

*InterestExpense.*Interest expense, net of amounts capitalized,for the three months ended September 30, 2008 was $4.1 million as comparedto $1.8 million for the three months ended September 30, 2007, and wasprimarily due to the increase in notes payable balances of $237 million relatedto our acquisition of real estate properties. Our total notes payable at September 30, 2008 was $424.4 million ascompared to $187.4 million at September 30, 2007.  We expect continued increases in notespayable and in the related interest expense as properties under developmentbecome operational.

 

*Real Estate Taxes.*Real estate taxes, net of amounts capitalized, for the three monthsended September 30, 2008 were $2 million as compared to $1 million for thethree months ended September 30, 2007 and were comprised of real estatetaxes from each of our consolidated properties. The increase in real estate taxes is primarily due to our increasednumber of consolidated real estate properties. We expect real estate taxes to increase as properties under developmentbecome operational and available space at our operating properties isleased-up.

 

*Property / Asset Management Fees.*Property and asset management fees for thethree months ended September 30, 2008 totaled $2 million as compared to $1million for the three months ended September 30, 2007 and were comprisedof fees incurred by our consolidated properties.  Property and asset management fees increaseddue to the additional properties acquired. In addition, Alexan Black Mountainwas placed into service in 2008.  Weexpect property and asset

 

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managementfees to increase as properties under development become operational andavailable space at our operating properties is leased-up.

 

*General and Administrative Expenses.* General and administrative expenses for thethree months ended September 30, 2008 were $1.2 million as compared to $0.3million for the three months ended September 30, 2007 and were comprisedof corporate general and administrative expenses including directors’ andofficers’ insurance premiums, auditing fees, legal fees, and otheradministrative expenses.  The increase isdue to increased corporate activity as our portfolio has grown to 23 realestate investments as of September 30, 2008 as compared to only 18investments at September 30, 2007.

 

*Depreciation and Amortization Expense.*Depreciation and amortization expense for thethree months ended September 30, 2008 was $6.8 million as compared to $3.7million for the three months ended September 30, 2007 and was comprised ofdepreciation and amortization expense from each of our consolidated operationalproperties.  The increase in depreciationand amortization expense is primarily due to the increased number of operatingproperties in 2008, including Alexan Black Mountain, Becket House, NorthboroughTower, and Crossroads.  We expectdepreciation and amortization expense to increase as development propertiesbecome operational.

 

*Equity in Losses of Unconsolidated JointVentures*. Equity in losses of unconsolidated joint ventures totaled$2 million for the three months ended September 30, 2008, as comparedto $0.2 million for the three months ended September 30, 2007, andconsisted of net losses of our five noncontrolling interests in Royal Island,GrandMarc at Westberry Place, GrandMarc at the Corner, Royal Island - RockHouse, and the Central Europe Joint Venture, as compared to only Royal Island,GrandMarc at Westberry Place, and GrandMarc at the Corner for the three monthsended September 30, 2007.

 

*MinorityInterest*. Minority interest for the three months ended September 30, 2008 was$2.3 million, as compared to $0.1 million for the three months ended September 30,2007.  For both periods, minorityinterest was a reduction of our net loss. Minority interest represents the net income or loss that is notallocable to us from properties that we consolidate.  For the three months ended September 30,2008, minority interest consisted of the results of eight investments, whereasit consisted of the results of only four investments for the three months endedSeptember 30, 2007.

 

*Nine monthsended September 30, 2008 as compared to nine months ended September 30,2007*

 

*Revenues.*Our total revenues increased by $28.7 million to $51.1 million for the ninemonths ended September 30, 2008 as compared to the nine months ended September 30,2007, primarily due to increased rental revenue resulting from the acquisitionof new properties from which we receive rent of $20.1 million, condominiumsales of $4.3 million, and an increase in rental revenues at Chase Park Plazaof $0.8 million.  Hotel revenues for thenine months ended September 30, 2008 totaled $5.2 million as compared to$3.2 million for the nine months ended September 30, 2007 and consisted ofrevenues generated by the operations of The Lodge & Spa at Cordillera,a resort and spa property acquired in June 2007.  We expect revenues to increase as availablespace at our operating properties is leased-up, properties under developmentbecome operational, and we close the sales of condominium inventory.

 

Althoughdifficult operating conditions prevailed across most U.S. housing markets, weclosed on the sale of seven condominium units at The Private Residences at TheChase Park Plaza in the third quarter ended September 30, 2008.  Of the remaining 75 units, we had 42 unitsunder sales contracts with non-refundable deposits and six units reserved withrefundable deposits.  In October 2008,we closed on the sale of four additional units that were previously under salescontacts.

 

*PropertyOperating Expenses.* Property operating expenses forthe nine months ended September 30, 2008 were $18.2 million ascompared to $7.5 million for the nine months ended September 30, 2007 andwere comprised of property operating expenses from our consolidatedproperties.  The increase is primarilyrelated to property operating expenses from new properties of $9.8million.  Further, two additionalbuildings at Frisco Square and Alexan Black Mountain were placed in service in2008.  We expect property operatingexpenses to increase as properties under development become operational andavailable space at our operating properties is leased-up.

 

*Cost ofCondominium Sales. *Costof condominium sales, relating to the sale of condominium units at The PrivateResidences at The Chase Park Plaza, for the nine months ended September 30,2008 were $4.3 million.  We did not haveany such sales and related costs for the nine months ended September 30,2007.

 

*InterestExpense.*Interest expense, net of amounts capitalized,for the nine months ended September 30, 2008 was $9.1 million as comparedto $4.1 million for the nine months ended September 30, 2007, and wasprimarily due to the increase in notes payable balances of $237 million relatedto our acquisition of real estate properties. Our total notes payable at September 30, 2008 was $424.4 million ascompared to $187.4 million at September 30, 2007.  We expect

 

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continued increases in notespayable and in the related interest expense as properties under developmentbecome operational.

 

*Real Estate Taxes.*Real estate taxes, net of amounts capitalized, for the nine monthsended September 30, 2008 were $5.3 million as compared to $2.3 million forthe nine months ended September 30, 2007 and were comprised of real estatetaxes from each of our consolidated properties. The increase in real estate taxes is primarily due to our increasednumber of consolidated real estate properties. We expect real estate taxes to increase as properties under developmentbecome operational and available space our operating properties is leased-up.

 

*Property / Asset Management Fees.*Property and asset management fees for thenine months ended September 30, 2008 totaled $5.2 million as compared to$2.1 million for the nine months ended September 30, 2007 and werecomprised of fees incurred by our consolidated properties.  Property and asset management fees increaseddue to the additional properties acquired. In addition, Alexan Black Mountain was placed into service in 2008.  We expect property and asset management feesto increase as properties under development become operational and availablespace at our operating properties is leased-up.

 

*General and Administrative Expenses.* General and administrative expenses for thenine months ended September 30, 2008 were $3 million as compared to $1million for the nine months ended September 30, 2007 and were comprised ofcorporate general and administrative expenses including directors’ and officers’insurance premiums, auditing fees, legal fees, and other administrativeexpenses.  The increase is due toincreased corporate activity as our portfolio has grown to 23 real estateinvestments as of September 30, 2008 as compared to only 18 investments atSeptember 30, 2007.

 

*Depreciation and Amortization Expense.*Depreciation and amortization expense for thenine months ended September 30, 2008 was $18.6 million as compared to $8million for the nine months ended September 30, 2007 and was comprised ofdepreciation and amortization expense from each of our consolidated operationalproperties.  The increase in depreciationand amortization expense is primarily due to the increased number of operatingproperties in 2008, including Alexan Black Mountain, Becket House, NorthboroughTower, and Crossroads.  We expectdepreciation and amortization expense to increase as development propertiesbecome operational.

 

*Equity in Losses of Unconsolidated JointVentures*. Equity in losses of unconsolidated joint ventures totaled $3.5 millionfor the nine months ended September 30, 2008 as compared to $0.3 millionfor the nine months ended September 30, 2007 and consisted of net lossesof our five noncontrolling interests in Royal Island, GrandMarc at WestberryPlace, GrandMarc at the Corner, Royal Island - Rock House and the CentralEurope Joint Venture, as compared to only Royal Island, GrandMarc at WestberryPlace, and GrandMarc at the Corner for the nine months ended September 30,2007.

 

*MinorityInterest*. Minority interest for the nine months ended September 30, 2008 was$5.3 million, a reduction of our net loss for the period.  For the nine months ended September 30,2007, minority interest was $0.2 million and increased our net loss.  Minority interest represents the net incomeor loss that is not allocable to us from properties that we consolidate.  For the nine months ended September 30,2008, minority interest consisted of the results of eight investments, whereasit consisted of the results of only four investments for the nine months ended September 30,2007.

 

**CashFlow Analysis**

 

Cashflows used in operating activities for the nine months ended September 30,2008 were $21.6 million and were comprised primarily of the net loss of $10.6million, an increase in condominium inventory of $20.6 million, offset bydepreciation and amortization expense of $15.1 million, minority interest of$5.3 million, an increase in accounts receivable of $4.1 million, and anincrease in accrued liabilities of $3.5 million.  During the nine months ended September 30,2007, cash flows used by operating activities were $5.4 million and werecomprised primarily of the net loss of $0.9 million, adjusted for depreciationand amortization expense of $6.4 million, and by an increase in condominiuminventory of $12.7 million.

 

Cashflows used in investing activities for the nine months ended September 30,2008 were $166.6 million and primarily represent purchases of real estateproperties of $47.4 million, acquisition of interest in unconsolidated jointventures totaling $31.6 million, expenditures for real estate underdevelopment, including capital expenditures of consolidated borrowers totaling$53.1 million, and investment in notes receivable of $27 million.  During the nine months ended September 30,2007, cash flows used in investing activities were $329.4 million and primarilyrepresented acquisitions of real estate totaling $243.2 million, capitalexpenditures for real estate under development including capital expendituresof consolidated borrowers totaling $32.6 million, acquisition of an interest inan unconsolidated joint venture of $22.6 million, and investment in notesreceivable of $14.2 million.

 

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Cashflows provided by financing activities for the nine months ended September 30,2008 were $152.2 million and were comprised primarily of proceeds from notespayable of $117 million, payments on notes payable of $37.7 million, netborrowings on our senior secured revolving credit facility of $58 million andproceeds from mortgages of our consolidated borrowers of $23.3 million.  During the nine months ended September 30,2007, cash flows provided by financing activities were $327.9 million and werecomprised primarily of funds received from the issuance of stock, net ofoffering costs, of $263.8 million, and proceeds from notes payable of $54.6million.

 

**Liquidityand Capital Resources**

 

Our principaldemands for funds will be for the payment of costs associated with the lease-upof available space at our operating properties including commissions, tenantimprovements, and capital improvements, for ongoing costs at our developmentproperties, for the payment of operating expenses and distributions, and forthe payment of interest and principal on our outstanding indebtedness.  Generally, cash needs for items other thancosts associated with the lease-up of available space at our operatingproperties including commissions, tenant improvements, and capital improvementsand ongoing costs at our development properties are expected to be met fromoperations and borrowings.

 

Distributionswill be authorized at the discretion of our board of directors, based on itsanalysis of our earnings, cash flow, anticipated cash flow, capital expenditurerequirements and general financial condition.  The board’s discretion willbe influenced, in substantial part, by its obligation to cause us to complywith the REIT requirements.  Until wegenerate sufficient cash flow from operations to fully fund the payment ofdistributions, we have and will continue to pay some of our distributions fromother sources. We may generate cash to pay distributions from financingactivities, components of which may include borrowings (including borrowingssecured by our assets) in anticipation of future operating cash flow andproceeds of this offering.  In addition, from time to time, ouradvisor and its affiliates may agree to waive or defer all, or a portion, ofthe acquisition, asset management or other fees or other incentives due tothem, enter into lease agreements for unleased space, pay generaladministrative expenses or otherwise supplement investor returns in order toincrease the amount of cash available to make distributions to ourstockholders.

 

We expect tofund our short-term liquidity requirements by using the short-term borrowingsand cash flow from the operations of our current investments.  Operatingcash flows are expected to increase as available space at our operatingproperties is leased-up, properties under development become operational, andwe close on the sale of condominium inventory. For both our short-term andlong-term liquidity requirements, other potential future sources of capital mayinclude proceeds from secured or unsecured financings from banks or otherlenders, proceeds from the sale of our investments, if and when any are sold,and undistributed funds from operations.  If necessary, we may usefinancings or other sources of capital in the event of unforeseen significantcapital expenditures.

 

*Debt Financings*

 

We may, fromtime to time, make mortgage, bridge, or mezzanine loans and other loans foracquisitions and investments as well as property development.  We may obtain financing at the time an assetis acquired or an investment is made or at such later time as determined to benecessary, depending on multiple factors.

 

Our notespayable increased to $424.4 million at September 30, 2008, from $243.9million at December 31, 2007, primarily as a result of notes payableassociated with property acquisitions, additional borrowings related to ourdevelopment properties as well as the notes payable of our mezzanine borrowerswe consolidate under FIN 46R.  Each ofour loans is secured by one or more of our properties.  At September 30, 2008, our notes payableinterest rates ranged from 5% to 6.8%, with a weighted average interest rate ofapproximately 5.9%.  Of our $424.4 million in notes payable at September 30,2008, $384.4 million, or 90.6%, represented debt subject to variable interestrates, although we have entered into hedging agreements with respect toapproximately $182.4 million, or 43%, of such indebtedness as of September 30,2008.  As of September 30, 2008,less than 1% of the principal amount of our loans is due this year, and 19.2%of the principal amount is due in 2009.  At September 30, 2008, ournotes payable have maturity dates that range from January 2009 to January 2016. Our loan agreements generally stipulate that we comply with certain reportingand financial covenants.  These covenantsinclude, among other things, notifying the lender of any change in managementand maintaining minimum debt service coverage ratios.  At September 30, 2008, we are not awareof any non-compliance with our debt covenants under our loan agreements.

 

Recently,the U.S. credit markets and the sub-prime residential mortgage market haveexperienced severe dislocations and liquidity disruptions.  Sub-prime mortgage loans have experienced increasingrates of delinquency, foreclosure, and loss. These and other related events have had a significant impact on thecapital markets associated not only with sub-prime mortgage-backed securities,asset-backed securities, and collateralized debt obligations, but also with theU.S. credit and financial markets as a whole. Consequently, there is greater uncertainty regarding our ability toaccess

 

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thecredit market in order to attract financing on reasonable terms.  Our ability to borrow funds to finance futureacquisitions or refinance current debt could be adversely affected by ourinability to secure permanent financing on reasonable terms, if at all.

 

Ouradvisor may, but is not required to, establish capital reserves from grossoffering proceeds, out of cash flow generated by operating properties and otherinvestments or out of non-liquidating net sale proceeds from the sale of ourproperties and other investments. Capital reserves are typically utilized for non-operating expenses suchas tenant improvements, leasing commissions and major capital expenditures.  Alternatively, a lender may require its own formulafor escrow of capital reserves.

 

*Credit Facility*

 

OnFebruary 13, 2008, we entered into a senior secured revolving creditfacility (the “Credit Agreement”) providing for up to $75 million of securedborrowings with Bank of America, as lender and administrative agent, and otherlending institutions to become a party to the Credit Agreement.  The facility under this Credit Agreementallows us to borrow up to $75 million of revolving loans including up to $20million available for issuing letters of credit.  Loans under the credit facility bear interestat an annual rate that is equal to or a combination of (1) the LIBOR plusan applicable margin that, depending upon the debt service coverage ratio, mayvary from 1.5% to 1.7%, or (2) the prime rate plus an applicable marginthat, depending upon the debt service coverage ratio, may vary from 0% to0.2%.  The credit facility matures on February 13,2011.  The credit facility is secured bya first lien on all real property assets in a collateral pool consisting ofseven wholly-owned properties.

 

Thecredit facility may be increased to up to $150 million upon satisfaction ofcertain conditions including additions to the collateral pool.  We have unconditionally guaranteed payment ofthe $75 million senior secured revolving credit facility.  We are subject to customary affirmative,negative, and financial covenants, representations, warranties, and borrowingconditions.

 

Duringthe quarter ended September 30, 2008, we borrowed $58 million, net ofpayments, from our senior secured revolving credit facility.  The proceeds were used to fund ongoing costsat our development properties, to fund a portion of our investment in theCentral Europe Joint Venture, and for general corporate purposes.  On November 6, 2008, we paid down on thecredit facility in the amount of $20 million.

 

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**Funds from Operations**

 

Funds from operations (“FFO”)is a non-GAAP financial measure that is widely recognized as a measure of REIToperating performance.  FFO is defined bythe National Association of Real Estate Investment Trusts as net income (loss),computed in accordance with GAAP, excluding extraordinary items, as defined byGAAP, and gains (or losses) from sales of property, plus depreciation andamortization on real estate assets, and after adjustments for unconsolidatedpartnerships, joint ventures, and subsidiaries. We believe that FFO is helpful to investors and our management as ameasure 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.  Historical cost accounting for real estateassets in accordance with GAAP implicitly assumes that the value of real estatediminishes predictably over time.  Sincereal estate values have historically risen or fallen with market conditions,many industry investors and analysts have considered the presentation ofoperating results for real estate companies that use historical cost accountingalone to be insufficient.  As a result,our management believes that the use of FFO, together with the required GAAPpresentations, provides a supplemental understanding of our performance and amore informed and appropriate basis on which to make decisions involvingoperating, financing and investing activities. Factors that impact FFO include start-up costs, fixed costs, delay inbuying assets, lower yields on cash held in accounts pending investment, incomefrom portfolio properties and other portfolio assets, interest rates onacquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss) oras an indication of our liquidity, nor is it indicative of funds available tofund our cash needs, including our ability to make distributions.  Our calculation of FFO for the three and ninemonths ended September 30, 2008 and 2007 is presented below (amounts inthousands):

 
| ** **                    | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|-------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net loss                      |       | $                                                    | (5,485     | )                                                   | $          | (288 | ) | $ | (10,586 | ) | $ | (896 | ) |
|                          |       |                                                 |       |                                                |       |   |   |   |   |
| Real estate depreciation (1)  |       | 5,949                                                |       | 2,072                                               |       | 12,618 |   | 4,631 |   |
| Real estate amortization (1)  |       | 2,046                                                |       | 1,446                                               |       | 6,146 |   | 3,163 |   |
|                          |       |                                                 |       |                                                |       |   |   |   |   |
| Funds from operations (FFO)   |       | $                                                    | 2,510      |                                                | $          | 3,230 |   | $ | 8,178 |   | $ | 6,898 |   |
|                          |       |                                                 |       |                                                |       |   |   |   |   |
| GAAP weighted average shares: |       |                                                 |       |                                                |       |   |   |   |   |
| Basic and diluted             |       | 54,611                                               |       | 42,450                                              |       | 54,433 |   | 31,154 |   |

 

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

 

Provided below is additional information related to selected non-cashitems included in net loss above, which may be helpful in assessing ouroperating results.

 

·      Straight-line rental revenue of $0.7 million and$3 million was recognized for the three and nine months ended September 30,2008, respectively, and $1.1 million and $3 million was recognized for thethree and nine months ended September 30, 2007, respectively;

 

·      Amortization of intangible lease assets andliabilities was recognized as a net increase to rental revenues of $1.2 millionand $3.6 million for the three and nine months ended September 30, 2008,respectively, and $0.8 million and $1.8 million for the three and nine monthsended September 30, 2007, respectively;

 

·      Amortization of intangible property tax abatementassets was recognized as an increase to real estate tax expense of $0.1 millionand $0.2 million for the three and nine months ended September 30, 2008,respectively.  Amortization of intangibleproperty tax abatement assets was recognized as an increase to real estate taxexpense of $0.1 million and $0.2 million for the three and nine months ended September 30,2007, respectively;

 

·      Bad debt expense of $0.1 million and $0.3 millionwas recognized for the three and nine months ended September 30, 2008,respectively.  Bad debt expense of$24,500 and $34,000 was recognized for the three and nine months ended September 30,2007, respectively; and

 

·      Amortization of deferred financing costs of $0.7million and $1.5 million was recognized as interest expense for mortgages andnotes payable for the three and nine months ended September 30, 2008,respectively, and $0.2 million

 

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and $0.4 million was recognized as a reduction ofinterest income for notes receivable for the three and nine months ended September 30,2008.  Amortization of deferred financingcosts of $0.2 million and $0.4 million was recognized as interest expense formortgages and notes payable for the three and nine months ended September 30,2007, respectively, and $0.1 million and $0.5 million was recognized as areduction of interest income for notes receivable for the three and nine monthsended September 30, 2007.

 

In addition, cash flows generated from FFO may be usedto fund all or a portion of certain capitalizable items that are excluded fromFFO, such as capital expenditures and payments of principal on debt, eachof which may impact the amount of cash available for distribution to ourstockholders.

 

**Distributions**

 

The distributions declared during the nine monthsended September 30, 2008 were $12.3 million and exceed FFO for the ninemonths ended September 30, 2008 by $4.1 million.  Cash amounts distributed to stockholders inexcess of FFO were funded primarily from our offering to the public.  The distributions declared during the nine monthsended September 30, 2007 were $6.8 million, which was $0.1 million lessthan FFO.  Therefore, for the nine monthsended September 30, 2007, 100% of distributions were funded from FFO.

 

Distributions as of September 30, 2008 and 2007were as follows:

 
| ** **  | ** ** | **2008**     | ** ** | **2007**   | ** ** |
|-------------|------------|--------------|------------|------------|------------|
| ** **  | ** ** | **Declared** | ** ** | **Paid**   | ** ** | **Declared** | ** ** | **Paid** | ** ** |
| ** **  | ** ** | ** **   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| 3rd Quarter |       | $            | 4,129      |       | $          | 4,126 |   | $ | 3,217 |   | $ | 2,931 |   |
| 2nd Quarter |       | 4,076        |       | 4,115      |       | 2,254 |   | 1,880 |   |
| 1st Quarter |       | 4,055        |       | 4,043      |       | 1,279 |   | 2,491 |   |
|        |       | $            | 12,260     |       | $          | 12,284 |   | $ | 6,750 |   | $ | 7,302 |   |

 

Over the long-term, weexpect that a greater percentage of our distributions will be paid from cashflow from operations (except with respect to distributions related to sales ofour assets).  However, operating performance cannot be accurately predicteddue to numerous factors, including our ability to raise and invest capital atfavorable yields, the financial performance of our investments in the currentreal estate environment, the types and mix of investments in our portfolio, andthe accounting treatment of our investments in accordance with our accountingpolicies.  As a result, future distributions declared and paid maycontinue to exceed cash flow from operations. FFO is a non-GAAP financial measure that is widely recognized as ameasure of REIT operating performance. See “Funds from Operations” on page 31for a reconciliation of FFO to our GAAP net loss.

 

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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, equity in unconsolidated joint ventures, minorityinterest, income taxes, and the gain or loss on the sale of assets.  We believe that NOI provides an accuratemeasure of the operating performance of our operating assets because NOIexcludes certain items that are not associated with management of theproperties.  To facilitate understandingof this financial measure, a reconciliation of NOI to net loss in accordancewith GAAP for the three and nine months ended September 30, 2008 and 2007is provided below (amounts in thousands).

** **
| ** **                             | ** ** | **Three months ended  September 30,** | ** ** | **Nine months ended  September 30,** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Revenues                               |       | $                                                    | 21,552     |                                                | $          | 10,501 |   | $ | 51,132 |   | $ | 22,440 |   |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Operating expenses:                    |       |                                                 |       |                                                |       |   |   |   |   |
| Property operating expenses            |       | 6,880                                                |       | 4,107                                               |       | 18,229 |   | 7,490 |   |
| Advertising costs                      |       | 708                                                  |       | 158                                                 |       | 1,853 |   | 781 |   |
| Real estate taxes                      |       | 1,980                                                |       | 1,023                                               |       | 5,311 |   | 2,256 |   |
| Property management fees               |       | 583                                                  |       | 268                                                 |       | 1,781 |   | 546 |   |
| Cost of condominium sales              |       | 4,331                                                |       | —                                              |       | 4,331 |   | — |   |
| Total operating expenses               |       | 14,482                                               |       | 5,556                                               |       | 31,505 |   | 11,073 |   |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net operating income                   |       | $                                                    | 7,070      |                                                | $          | 4,945 |   | $ | 19,627 |   | $ | 11,367 |   |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Reconciliation to Net Loss             |       |                                                 |       |                                                |       |   |   |   |   |
| Net operating income                   |       | $                                                    | 7,070      |                                                | $          | 4,945 |   | $ | 19,627 |   | $ | 11,367 |   |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Less:                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Depreciation and amortization          |       | (6,783                                               | )          | (3,692                                              | )          | (18,550 | ) | (8,040 | ) |
| General and administrative expense     |       | (1,209                                               | )          | (307                                                | )          | (3,032 | ) | (1,016 | ) |
| Interest expense                       |       | (4,113                                               | )          | (1,759                                              | )          | (9,059 | ) | (4,061 | ) |
| Asset management fees                  |       | (1,456                                               | )          | (714                                                | )          | (3,399 | ) | (1,509 | ) |
| Provision for income tax               |       | (47                                                  | )          | (46                                                 | )          | (146 | ) | (71 | ) |
| Equity in losses on unconsolidated JVs |       | (1,987                                               | )          | (227                                                | )          | (3,518 | ) | (295 | ) |
| Add:                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Interest income                        |       | 706                                                  |       | 1,366                                               |       | 2,241 |   | 2,939 |   |
| Minority interest                      |       | 2,334                                                |       | 146                                                 |       | 5,250 |   | (210 | ) |
|                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Net loss                               |       | $                                                    | (5,485     | )                                                   | $          | (288 | ) | $ | (10,586 | ) | $ | (896 | ) |

 

**Off-Balance Sheet Arrangements**

 

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

 

**Item 3.**               Quantitative and Qualitative DisclosuresAbout Market Risk.

** **

*ForeignCurrency Exchange Risk*

 

For our net investmentsin foreign real estate properties, we use British pound and Euro foreigncurrency forward exchange contracts to eliminate the impact of foreign currencymovements on our financial position.  At September 30,2008, our foreign currency forward exchange contracts was reported at theirfair value of $3.5 million within prepaid expenses and other assets in ourconsolidated balance sheet.  A 10%increase in the respective forward foreign currency - US dollar exchange ratewould result in a $3.2 million decrease in fair value.  A 10% decrease in the respective forwardforeign currency - US dollar exchange rate would result in a $3.2 millionincrease in fair value.

 

We maintain approximately$1.2 million in Euro-denominated accounts at European financialinstitutions.  Accordingly, we are notmaterially exposed to any significant foreign currency fluctuations related tothese accounts.  We

 

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do not enter intoderivatives for trading or speculative purposes, nor do we maintain any marketrisk sensitive instruments for trading or speculative purposes.

 

*InterestRate Risk*

 

We may be exposed tointerest rate changes primarily as a result of long-term debt used to acquireproperties and make loans and other permitted investments.  Our management’s objectives, with regard tointerest rate risks, are to limit the impact of interest rate changes onearnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrowprimarily at fixed rates or variable rates with the lowest margins availableand in some cases, with the ability to convert variable rates to fixedrates.  With regard to variable ratefinancing, we will assess interest rate cash flow risk by continuallyidentifying and monitoring changes in interest rate exposures that mayadversely 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.  Of our $424.4million in notes payable at September 30, 2008, $384.4 million representeddebt subject to variable interest rates, which included the mortgages payableof borrowers we consolidated under FIN 46R. If our variable interest rates increased 100 basis points, we estimatethat total annual interest cost, including interest expensed, interestcapitalized, and the effects of the interest rate caps and swaps, wouldincrease by $3.5 million.

 

At September 30, 2008,interest rate caps used to mitigate our interest rate risk classified as assetswere reported at their combined fair value of $0.1 million within prepaidexpenses and other assets.  Interest rateswaps classified as liabilities were reported at their combined fair values of$0.9 million in other liabilities at September 30, 2008.  A 100 basis point decrease in interest rateswould result in a $1.9 million net decrease in the fair value of our interestrate caps and swaps.  A 100 basis pointincrease in interest rates would result in a $2 million net increase in thefair value of our interest rate caps and swaps.

 

**Item4T.**            Controlsand Procedures.

** **

*Evaluation of Disclosure Controls and Procedures*

 

As required by Rule 13a-15(b) andRule 15d-15(b) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), our management, including our Chief Executive Officer andChief Financial Officer, evaluated, as of September 30, 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 ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures, as of September 30, 2008, were effective for the purpose ofensuring that information required to be disclosed by us in this report isrecorded, processed, summarized and reported within the time periods specifiedby the rules and forms of the Exchange Act and is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosures.

 

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

 

*Changes in Internal Control over Financial Reporting*

 

There has been no changein internal control over financial reporting that occurred during the quarterended September 30, 2008 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

** **

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** **

**PART II**

**OTHERINFORMATION**

** **

### **Item 1.**               Legal Proceedings.

### ** **

We are not party to, andour properties are not subject to, any material pending legal proceedings.

 

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

### ** **

Thefollowing risk factors update and should be read in conjunction with the riskfactors contained in the “Risk Factors” section set forth in our Annual Reporton Form 10-K for the year ended December 31, 2007.

 

**Risks Related to Our Business inGeneral**

 

*The failure of any bank in which we deposit our funds could reduce theamount of cash we have available to pay distributions and make additionalinvestments.*

 

We have diversified ourcash and 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 amounts up to $250,000 per depositor per insured bank.  At September 30, 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 may lose our deposits over$250,000.  The loss of our deposits couldreduce the amount of cash we have available to distribute or invest and couldresult in a decline in the value of your investment.

 

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

### ** **

Recently, the U.S. credit markets and the sub-prime residentialmortgage market have experienced severe dislocations and liquiditydisruptions.  Sub-prime mortgage loanshave experienced increasing rates of delinquency, foreclosure and loss.  These and other related events have had asignificant impact on the capital markets associated not only with sub-primemortgage-backed securities, asset-backed securities and collateralized debtobligations, but also with the U.S. housing, credit and financial markets as awhole.  Consequently, there is greateruncertainty regarding our ability to access the credit market in order toattract financing on reasonable terms. Our ability to borrow funds to finance future acquisitions could beadversely affected by our inability to secure permanent financing on reasonableterms, if at all.

 

### **Item 2.**               Unregistered Salesof Equity Securities and Use of Proceeds.

### ** **

**Use ofProceeds from Registered Securities**

 

Pursuant to aRegistration Statement on Form S-11 (SEC Registration No. 333-120847)filed under the Securities Act and declared effective by the SEC on September 20,2005 and a Registration Statement on Form S-11 (SEC Registration No. 333-138804)filed pursuant to Rule 462(b) under the Securities Act on November 17,2006, our initial public offering of shares of common stock (the “Offering”)consisted of (1) a maximum of 53,270,000 shares of our common stock at aprice of $10.00 per share and (2) up to 965,331 additional shares pursuantto the DRIP under which our stockholders could elect to have theirdistributions reinvested in additional shares of our common stock at a price ofup to $9.50 per share, for a total aggregate offering price of $542million.  On November 16, 2007, weterminated the DRIP component of the Offering declared effective as of September 20,2005 and commenced an offering to existing shareholders of up to 6,315,790shares of common stock at a price of $9.50 per share under our Secondary DRIPpursuant to a Registration Statement on Form S-3 (SEC Registration No. 333-146965).  On December 28, 2007, we terminated theprimary offering component of our Offering. As of December 31, 2007, we had sold approximately 54.1 millionshares of our common stock on a best efforts basis pursuant to the Offering foraggregate gross offering proceeds of approximately $538.7 million.

 

The above-stated numberof shares sold and the gross offering proceeds received in connection with theOffering does not include 21,739 shares of common stock purchased by BehringerHarvard Holdings in a private placement in 2004, prior to the commencement ofthe Offering.

 

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Fromthe commencement of the Offering through September 30, 2008, we incurredthe following expenses in connection with the issuance and distribution of theregistered securities pursuant to the Offering (amounts in thousands):

 
| **Type of Expense**    | ** ** | ** ** | ** ** |
|----------------------------------|------------|------------|------------|
| Other expenses to affiliates *   |       | $          | 56,857     |   |
| Other expenses to non-affiliates |       | 1,141      |       |
|                             |       |       |       |
| Total expenses                   |       | $          | 57,998     |   |

 

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*“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 ofthe Offering through September 30, 2008, the net offering proceeds to usfrom the Offering, after deducting the total expenses incurred and describedabove, were approximately $481.8 million. From the commencement of the Offering through September 30, 2008,we had used approximately $387 million of such net proceeds to purchaseinterests in real estate and fund development for real estate, net of notespayable, and approximately $94.8 million was invested through mezzanineloans.  Of the amount used for thepurchase of these investments, approximately $24.3 million was paid toBehringer Opportunity Advisors I (or its predecessor-in-interest) asacquisition and advisory fees and acquisition expense reimbursement.

 

**Share Redemption Program**

 

In February 2006,our board of directors adopted a share redemption program for ourinvestors.  The purchase price for theredeemed shares is set forth in the prospectus for our Offering of commonstock, as supplemented.  Our board ofdirectors reserves the right in its sole discretion at any time, and from timeto time, to (1) waive the one-year holding period in the event of thedeath, disability or bankruptcy of a stockholder or other exigentcircumstances, (2) reject any request for redemption, (3) change thepurchase price for redemptions, or (4) terminate, suspend or amend theshare redemption program.  Under theterms of the program, during any calendar year, we will not redeem in excess of5% of the weighted average number of shares outstanding during the twelve-monthperiod immediately prior to the date of redemption.  In addition, our board of directors willdetermine whether we have sufficient cash from operations to repurchase shares,and such purchases will generally be limited to proceeds from our distributionreinvestment plan plus 1% of operating cash flow for the previous fiscal year(to the extent positive).  During thequarter ended September 30, 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** | ** ** |
|-----------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| July      |       | 122,930                                             |       | $                                                | 9.10       |                                                                                                                         | —     |                                                                                                                   | (1)        |   |
| August    |       | —                                              |       | $                                                | —     |                                                                                                                         | —     |                                                                                                                   |       |   |
| September |       | —                                              |       | $                                                | —     |                                                                                                                         | —     |                                                                                                                   |       |   |
|      |       |                                                |       |                                             |       |                                                                                                                         |       |                                                                                                                   |       |
|      |       | 122,930                                             |       | $                                                | 9.10       |                                                                                                                         | —     |                                                                                                                   | (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 3.****               Defaults UponSenior Securities.**

 

None.

 

### **Item 4.**               Submission ofMatters to a Vote of Security Holders.

### ** **

TheAnnual Meeting of our stockholders was held on June 23, 2008.  The meeting was adjourned prior to taking avote on any matters and was reconvened on July 24, 2008 (the “ReconvenedMeeting”).  At the Reconvened Meeting,all nominees standing for election as directors were elected.  The following directors were elected to holdoffice for a term expiring at the 2009 Annual Meeting or until their successorsare elected and qualified, with the vote for each director being reflectedbelow:

 
| ** **                | ** ** | **Number of** | ** ** | **Number of** | ** ** |
|---------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                | ** ** | **Votes**          | ** ** | **Votes**          | ** ** |
| **Director Nominee** | ** ** | **For**            | ** ** | **Withheld**       | ** ** |
| Robert M. Behringer       |       | 26,381,193         |       | 4,708,166          |       |
| Robert S. Aisner          |       | 26,373,257         |       | 4,716,102          |       |
| Terry L. Gage             |       | 26,381,500         |       | 4,701,859          |       |
| Barbara C. Bufkin         |       | 26,363,461         |       | 4,725,898          |       |
| Steven J. Kaplan          |       | 26,366,692         |       | 4,722,667          |       |

 

Theaffirmative vote of the holders of a majority of the outstanding shares ofcommon stock represented at the Reconvened Meeting was required to elect eachdirector.

 

Inaddition, at the Reconvened Meeting, our stockholders approved our SecondArticles of Amendment and Restatement, which amended certain provisions of ourcharter.  The affirmative vote of a majority of all votes entitled to becast at the Reconvened Meeting was required to approve ourSecond Articles of Amendment and Restatement.  The aggregate number ofvotes entitled to be cast at the Reconvened Meeting was 54,380,498.  Thevote of the stockholders with respect to the approval of our SecondArticles of Amendment and Restatement is reflected below:

 
| ** **                                   | ** ** | **Number of** | ** ** | **Number of** | ** ** | **Number of** | ** ** |
|----------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                   | ** ** | **Votes**          | ** ** | **Votes**          | ** ** | **Votes**          | ** ** |
| ** **                                   | ** ** | **For**            | ** ** | **Against**        | ** ** | **Abstained**      | ** ** |
| Second Articles of Amendment and Restatement |       | 28,812,343         |       | 1,118,556          |       | 1,158,460          |       |

 

### **For additional informationregarding the revisions to our charter contained in our Second Articles ofAmendment and Restatement, please see our Current Report on Form 8-K filedwith the SEC on July 29, 2008.**

### ** **

### **Item 5.**               Other Information.

### ** **

None.

 

### **Item 6.**               Exhibits.

### ** **

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

 

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**SIGNATURE**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 

 
| ** **                     | **Behringer  Harvard Opportunity REIT I, Inc.** |
|--------------------------------|------------------------------------------------------|
| ** **                     | ** **                                           | ** ** |
|                           |                                                 |   |
| Dated:  November 14, 2008 | By:                                                  |   /s/ Gary S.  Bresky |
|                           | Gary S. Bresky                                       |
|                           | Chief Financial Officer                              |
|                           | (Principal Financial Officer)                        |

 

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**Indexto Exhibits**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                              |
|-------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                     |       | Second Articles  of Amendment and Restatement of the Registrant (previously filed in and  incorporated by reference to Form 8-K, filed on July 29, 2008)                                                                                                           |
|                    |       |                                                                                                                                                                                                                                                                         |
| 3.2                     |       | Bylaws of the  Registrant (previously filed in and incorporated by reference to Registration  Statement on Form   S-11, Commission File No. 333-120847, filed on November 30, 2004)                                                                           |
|                    |       |                                                                                                                                                                                                                                                                         |
| 3.2(a)                  |       | Amendment to  Bylaws of the Registrant (previously filed in and incorporated by reference  to Form 8-K filed on February 24, 2006)                                                                                                                                 |
|                    |       |                                                                                                                                                                                                                                                                         |
| 4.1                     |       | Form of  Subscription Agreement and Subscription Agreement Signature  Page (included as Exhibit B to the prospectus of the Registrant  filed pursuant to Rule 424(b)(3) on June 1, 2006, as  supplemented)                                     |
|                    |       |                                                                                                                                                                                                                                                                         |
| 4.2                     |       | Amended and Restated  Distribution Reinvestment Plan, effective as of April 5, 2006 (included  as Exhibit C to the prospectus of the Registrant filed pursuant to  Rule 424(b)(3) on June 1, 2006, as supplemented)                                 |
|                    |       |                                                                                                                                                                                                                                                                         |
| 4.2(a)                  |       | Second Amended and  Restated Distribution Reinvestment Plan (previously filed in and incorporated  by reference to Exhibit A to prospectus contained in Registration  Statement on Form S-3, Commission File No. 333-146965, filed on  October 26, 2007) |
|                    |       |                                                                                                                                                                                                                                                                         |
| 4.3                     |       | Automatic Purchase Plan  of the Registrant, effective as of September 20, 2005 (included as  Exhibit D to the prospectus of the Registrant filed pursuant to  Rule 424(b)(3) on June 1, 2006, as supplemented)                                      |
|                    |       |                                                                                                                                                                                                                                                                         |
| 10.1                    |       | Form of Amended  and Restated Stock Option Agreement under Amended and Restated 2004 Incentive  Award Plan (filed herewith)                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                         |
| 31.1                    |       | Rule 13a-14(a)/15d-14(a) Certification  (filed herewith)                                                                                                                                                                                                           |
|                    |       |                                                                                                                                                                                                                                                                         |
| 31.2                    |       | Rule 13a-14(a)/15d-14(a) Certification  (filed herewith)                                                                                                                                                                                                           |
|                    |       |                                                                                                                                                                                                                                                                         |
| 32.1*                   |       | Section 1350  Certifications (furnished herewith)                                                                                                                                                                                                                       |

 

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* In accordance with Item601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” forpurposes of Section 18 of the Exchange Act or otherwise subject to theliabilities of that section.  Suchcertifications will not be deemed incorporated by reference into any filingunder the Securities Act or the Exchange Act, except to the extent that theregistrant specifically incorporates it by reference.

 

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