Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended June 30, 2009**

 

**CommissionFile Number: 000-51961**

 

**BehringerHarvard Opportunity REIT I, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **Maryland**                                                    | ** ** | **20-1862323**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other Jurisdiction of Incorporation or  Organization) |       | (I.R.S. Employer

Identification 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 former fiscalyear, if changed since last report)

 

Indicate by check markwhether 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

 

Indicate by check markwhether the Registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files). Yes o No o

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-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:

 

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

 

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

 

As of July 31, 2009,the Registrant had 55,551,355 shares of common stock outstanding.

 

 

 

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Table ofContents

 

**BEHRINGERHARVARD OPPORTUNITY REIT I, INC.**

**FORM 10-Q**

**QuarterEnded June 30, 2009**

 
| ** **             | ** **                                                                                                      | **Page** |
|------------------------|-----------------------------------------------------------------------------------------------------------------|----------|
|                   |                                                                                                            |     |
|                   | **PART I**                                                                                                 |     |
|                   | **FINANCIAL INFORMATION**                                                                                       |     |
|                   |                                                                                                            |     |
| **Item 1.**            | **Financial Statements (Unaudited)**                                                                            |     |
|                   |                                                                                                            |     |
|                   | Consolidated Balance Sheets as of  June 30, 2009 and December 31, 2008                                | 3        |
|                   |                                                                                                            |     |
|                   | Consolidated  Statements of Operations for the Three and Six Months Ended June 30,  2009 and 2008          | 4        |
|                   |                                                                                                            |     |
|                   | Consolidated Statements of  Equity and Comprehensive Loss for the Six Months Ended June 30, 2009 and  2008 | 5        |
|                   |                                                                                                            |     |
|                   | Consolidated Statements of  Cash Flows for the Six Months Ended June 30, 2009 and 2008                     | 6        |
|                   |                                                                                                            |     |
|                   | Notes to  Consolidated Financial Statements                                                                     | 7        |
|                   |                                                                                                            |     |
| **Item 2.**            | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                 | 26       |
|                   |                                                                                                            |     |
| **Item 3.**            | **Quantitative  and Qualitative Disclosures About Market Risk**                                                 | 39       |
|                   |                                                                                                            |     |
| **Item 4T.**           | **Controls and  Procedures**                                                                                    | 40       |
|                   |                                                                                                            |     |
| **PART II**       |
| **OTHER  INFORMATION** |
|                   |                                                                                                            |     |
| **Item 1.**            | **Legal Proceedings**                                                                                           | 41       |
|                   |                                                                                                            |     |
| **Item 1A.**           | **Risk Factors**                                                                                                | 41       |
|                   |                                                                                                            |     |
| **Item 2.**            | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                | 41       |
|                   |                                                                                                            |     |
| **Item 3.**            | **Defaults  Upon Senior Securities**                                                                            | 42       |
|                   |                                                                                                            |     |
| **Item 4.**            | **Submission  of Matters to a Vote of Security Holders**                                                        | 43       |
|                   |                                                                                                            |     |
| **Item 5.**            | **Other Information**                                                                                           | 43       |
|                   |                                                                                                            |     |
| **Item 6.**            | **Exhibits**                                                                                                    | 43       |
|                   |                                                                                                            |     |
| **Signature**          |                                                                                                            | 44       |

 

2

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Table ofContents

 

**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.Financial Statements.**

** **

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

 

**ConsolidatedBalance Sheets**

** **

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

 

(Unaudited)

 
| ** **                                                                                                                                                                                         | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                         | ** ** | **2009**          | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                                                                         |       |              |       |                  |       |
| Real estate                                                                                                                                                                                        |       |              |       |                  |       |
| Land and improvements, net                                                                                                                                                                         |       | $                 | 131,345    |                  | $          | 131,028 |   |
| Buildings and improvements, net                                                                                                                                                                    |       | 416,802           |       | 416,821               |       |
| Real estate under development                                                                                                                                                                      |       | 18,229            |       | 17,306                |       |
| Total real estate                                                                                                                                                                                  |       | 566,376           |       | 565,155               |       |
|                                                                                                                                                                                               |       |              |       |                  |       |
| Condominium inventory                                                                                                                                                                              |       | 88,310            |       | 94,723                |       |
| Cash and cash equivalents                                                                                                                                                                          |       | 18,083            |       | 25,260                |       |
| Restricted cash                                                                                                                                                                                    |       | 6,163             |       | 4,134                 |       |
| Accounts receivable, net                                                                                                                                                                           |       | 16,643            |       | 14,946                |       |
| Prepaid expenses and other assets                                                                                                                                                                  |       | 3,072             |       | 3,550                 |       |
| Leasehold interests, net                                                                                                                                                                           |       | 23,796            |       | 23,160                |       |
| Investments in unconsolidated joint ventures                                                                                                                                                       |       | 62,990            |       | 62,316                |       |
| Furniture, fixtures and equipment, net                                                                                                                                                             |       | 13,083            |       | 13,932                |       |
| Deferred financing fees, net                                                                                                                                                                       |       | 5,115             |       | 6,407                 |       |
| Notes receivable                                                                                                                                                                                   |       | 41,626            |       | 36,542                |       |
| Lease intangibles, net                                                                                                                                                                             |       | 25,011            |       | 28,303                |       |
| Other intangibles, net                                                                                                                                                                             |       | 8,686             |       | 9,025                 |       |
| Receivables from related parties                                                                                                                                                                   |       | 1,544             |       | 3,413                 |       |
| Total assets                                                                                                                                                                                       |       | $                 | 880,498    |                  | $          | 890,866 |   |
|                                                                                                                                                                                               |       |              |       |                  |       |
| **Liabilities and Equity**                                                                                                                                                                         |       |              |       |                  |       |
| Notes payable                                                                                                                                                                                      |       | $                 | 433,240    |                  | $          | 416,179 |   |
| Accounts payable                                                                                                                                                                                   |       | 3,425             |       | 6,073                 |       |
| Payables to related parties                                                                                                                                                                        |       | 1,415             |       | 1,643                 |       |
| Acquired below-market leases, net                                                                                                                                                                  |       | 14,967            |       | 17,567                |       |
| Accrued and other liabilities                                                                                                                                                                      |       | 23,190            |       | 26,037                |       |
| Total liabilities                                                                                                                                                                                  |       | 476,237           |       | 467,499               |       |
|                                                                                                                                                                                               |       |              |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                  |       |              |       |                  |       |
|                                                                                                                                                                                               |       |              |       |                  |       |
| **Equity**                                                                                                                                                                                         |       |              |       |                  |       |
|                                                                                                                                                                                               |       |              |       |                  |       |
| Behringer Harvard Opportunity REIT I, Inc.  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, 55,190,612 and 54,836,985 shares issued and outstanding at  June 30, 2009, and December 31, 2008, respectively |       | 6                 |       | 5                     |       |
| Additional paid-in capital                                                                                                                                                                         |       | 492,464           |       | 489,139               |       |
| Accumulated distributions and net loss                                                                                                                                                             |       | (84,581           | )          | (66,085               | )          |
| Accumulated other comprehensive loss                                                                                                                                                               |       | (4,678            | )          | (5,194                | )          |
| Total Behringer Harvard Opportunity REIT  I, Inc. Stockholders’ Equity                                                                                                                   |       | 403,211           |       | 417,865               |       |
| Noncontrolling interest                                                                                                                                                                            |       | 1,050             |       | 5,502                 |       |
| Total equity                                                                                                                                                                                       |       | 404,261           |       | 423,367               |       |
| Total liabilities and equity                                                                                                                                                                       |       | $                 | 880,498    |                  | $          | 890,866 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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

** **

**ConsolidatedStatements of Operations and Comprehensive Income**

** **

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

 

(Unaudited)

 
| ** **                                                                          | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                                                                          | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| **Revenues**                                                                        |       |                                 |       |                               |       |   |   |   |   |
| Rental revenue                                                                      |       | $                                    | 15,755     |                               | $          | 14,172 |   | $ | 31,581 |   | $ | 26,385 |   |
| Hotel revenue                                                                       |       | 674                                  |       | 1,234                              |       | 1,498 |   | 3,195 |   |
| Condominium sales                                                                   |       | 8,109                                |       | —                             |       | 11,929 |   | — |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Total revenues                                                                      |       | 24,538                               |       | 15,406                             |       | 45,008 |   | 29,580 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| **Expenses**                                                                        |       |                                 |       |                               |       |   |   |   |   |
| Property operating expenses                                                         |       | 6,653                                |       | 5,823                              |       | 13,158 |   | 11,349 |   |
| Cost of condominium sales                                                           |       | 8,178                                |       | —                             |       | 12,020 |   | — |   |
| Interest expense                                                                    |       | 4,057                                |       | 2,676                              |       | 8,191 |   | 4,947 |   |
| Real estate taxes                                                                   |       | 2,125                                |       | 1,786                              |       | 4,435 |   | 3,331 |   |
| Impairment charge                                                                   |       | 2,732                                |       | —                             |       | 2,732 |   | — |   |
| Property management fees                                                            |       | 599                                  |       | 684                                |       | 1,199 |   | 1,198 |   |
| Asset management fees                                                               |       | 1,441                                |       | 1,011                              |       | 2,779 |   | 1,943 |   |
| General and administrative                                                          |       | 1,668                                |       | 905                                |       | 2,984 |   | 1,822 |   |
| Advertising costs                                                                   |       | 217                                  |       | 630                                |       | 399 |   | 1,145 |   |
| Depreciation and amortization                                                       |       | 7,251                                |       | 6,112                              |       | 15,014 |   | 11,767 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Total expenses                                                                      |       | 34,921                               |       | 19,627                             |       | 62,911 |   | 37,502 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Interest income                                                                     |       | 36                                   |       | 554                                |       | 79 |   | 1,535 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Loss before income taxes and equity inlosses of unconsolidated  joint ventures      |       | (10,347                              | )          | (3,667                             | )          | (17,824 | ) | (6,387 | ) |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Provision for income taxes                                                          |       | (47                                  | )          | (52                                | )          | (98 | ) | (99 | ) |
| Equity in losses of unconsolidated joint ventures                                   |       | (1,456                               | )          | (671                               | )          | (1,581 | ) | (1,531 | ) |
| Net loss                                                                            |       | (11,850                              | )          | (4,390                             | )          | (19,503 | ) | (8,017 | ) |
| Add: Net loss attributable to the noncontrolling  interest                          |       | 2,756                                |       | 1,466                              |       | 5,077 |   | 2,916 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Net loss attributable to Behringer Harvard  Opportunity REIT I, Inc.           |       | $                                    | (9,094     | )                                  | $          | (2,924 | ) | $ | (14,426 | ) | $ | (5,101 | ) |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Weighted average shares outstanding:                                                |       |                                 |       |                               |       |   |   |   |   |
| Basic and diluted                                                                   |       | 55,211                               |       | 54,474                             |       | 55,122 |   | 54,344 |   |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| Loss per share attributable to Behringer Harvard  Opportunity REIT I, Inc.     |       |                                 |       |                               |       |   |   |   |   |
| Basic and diluted                                                                   |       | $                                    | (0.16      | )                                  | $          | (0.05 | ) | $ | (0.27 | ) | $ | (0.09 | ) |
|                                                                                |       |                                 |       |                               |       |   |   |   |   |
| **Comprehensive income:**                                                           |       |                                 |       |                               |       |   |   |   |   |
| Net loss                                                                            |       | $                                    | (11,850    | )                                  | $          | (4,390 | ) | $ | (19,503 | ) | $ | (8,017 | ) |
| Other comprehensive income (loss)                                                   |       |                                 |       |                               |       |   |   |   |   |
| Foreign  currency translation gain (loss)                                           |       | 1,996                                |       | (164                               | )          | 210 |   | (140 | ) |
| Unrealized gain on interest rate derivatives                                        |       | 671                                  |       | 2,463                              |       | 597 |   | 175 |   |
| Reclassifications due to hedging activities                                         |       | 17                                   |       | —                             |       | 216 |   | — |   |
| Total other comprehensive income                                                    |       | 2,684                                |       | 2,299                              |       | 1,023 |   | 35 |   |
| Comprehensive loss                                                                  |       | (9,166                               | )          | (2,091                             | )          | (18,480 | ) | (7,982 | ) |
| Comprehensive loss attributable to the  noncontrolling interest                     |       | 2,234                                |       | 1,383                              |       | 4,570 |   | 2,933 |   |
| Comprehensive loss attributable to Behringer  Harvard Opportunity REIT I, Inc. |       | $                                    | (6,932     | )                                  | $          | (708 | ) | $ | (13,910 | ) | $ | (5,049 | ) |

 

*See Notesto Consolidated Financial Statements.*

 

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Table ofContents

 

 

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

** **

**Consolidated Statements of Equity**

** **

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

 

(Unaudited)

 
| ** **                                                     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **     | ** ** | ** **        | ** ** | ** **  | ** ** | **Accumulated** | ** ** | **Accumulated**    | ** ** | ** **         | ** ** | ** ** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|-------------------|------------|----------------|------------|-------------------|------------|-------------|------------|-----------------|------------|--------------------|------------|--------------------|------------|------------|------------|
| ** **                                                     | ** ** | **Convertible  Stock** | ** ** | **Common  Stock** | ** ** | **Additional** | ** ** | **Distributions** | ** ** | **Other**   | ** ** | ** **      | ** ** | ** **         | ** ** |
| ** **                                                     | ** ** | **Number  of**         | ** ** | **Par**           | ** ** | **Number  of** | ** ** | **Par**           | ** ** | **Paid-In** | ** ** | **and**         | ** ** | **Comprehensive**  | ** ** | **Noncontrolling** | ** ** | **Total**  | ** ** |
| ** **                                                     | ** ** | **Shares**             | ** ** | **Value**         | ** ** | **Shares**     | ** ** | **Value**         | ** ** | **Capital** | ** ** | **Net  Loss**   | ** ** | **Income  (Loss)** | ** ** | **Interest**       | ** ** | **Equity** | ** ** |
| **For the six months ended June 30, 2009:**               |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Balance  at January 1, 2009                               |       | 1,000                  |       | $                 | —     |           | 54,836,985 |              | $          | 5           |       | $               | 489,139    |               | $          | (66,085            | )          | $          | (5,194     | ) | $ | 5,502 |   | $ | 423,367 |   |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Redemption  of common stock                                    |       |                   |       |              |       | (72,537        | )          |              |       | (724        | )          |            |       |               |       |               |       | (724       | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Distributions  declared on common stock                        |       |                   |       |              |       |           |       |              |       |        |       | (4,070          | )          |               |       |               |       | (4,070     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Contributions  from non-controlling interest                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | 118                |       | 118        |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Shares  issued pursuant to Distribution Reinvestment Plan, net |       |                   |       |              |       | 426,164        |       | 1                 |       | 4,049       |       |            |       |               |       |               |       | 4,050      |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Comprehensive  loss:                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Net  loss                                                      |       |                   |       |              |       |           |       |              |       |        |       | (14,426         | )          |               |       | (5,077             | )          | (19,503    | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Other  comprehensive income:                                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Foreign  currency translation gain (loss)                      |       |                   |       |              |       |           |       |              |       |        |       |            |       | (229               | )          | 439                |       | 210        |       |
| Unrealized  gain on interest rate derivatives                  |       |                   |       |              |       |           |       |              |       |        |       |            |       | 529                |       | 68                 |       | 597        |       |
| Reclassifications  due to hedging activities                   |       |                   |       |              |       |           |       |              |       |        |       |            |       | 216                |       | —             |       | 216        |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Total  comprehensive loss                                      |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | (4,570             | )          | (18,480    | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Balance  at June 30, 2009                                 |       | 1,000                  |       | $                 | —     |           | 55,190,612 |              | $          | 6           |       | $               | 492,464    |               | $          | (84,581            | )          | $          | (4,678     | ) | $ | 1,050 |   | $ | 404,261 |   |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| **For the six months ended June 30, 2008:**               |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Balance  at January 1, 2008                               |       | 1,000                  |       | $                 | —     |           | 54,056,354 |              | $          | 5           |       | $               | 481,521    |               | $          | (14,982            | )          | $          | (473       | ) | $ | 15,324 |   | $ | 481,395 |   |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Redemption  of common stock                                    |       |                   |       |              |       | (219,660       | )          |              |       | (2,011      | )          |            |       |               |       |               |       | (2,011     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Distributions  declared on common stock                        |       |                   |       |              |       |           |       |              |       |        |       | (8,130          | )          |               |       |               |       | (8,130     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Contributions  from non-controlling interest                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | 942                |       | 942        |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Shares  issued pursuant to Distribution Reinvestment Plan, net |       |                   |       |              |       | 653,263        |       |              |       | 6,204       |       |            |       |               |       |               |       | 6,204      |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Comprehensive  loss:                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Net  loss                                                      |       |                   |       |              |       |           |       |              |       |        |       | (5,101          | )          |               |       | (2,916             | )          | (8,017     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Other  comprehensive income:                                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Foreign  currency translation gain (loss)                      |       |                   |       |              |       |           |       |              |       |        |       |            |       | (177               | )          | 37                 |       | (140       | )          |
| Unrealized  losses on interest rate derivatives                |       |                   |       |              |       |           |       |              |       |        |       |            |       | 229                |       | (54                | )          | 175        |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Total  comprehensive loss                                      |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | (2,933             | )          | (7,982     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Balance  at June 30, 2008                                 |       | 1,000                  |       | $                 | —     |           | 54,489,957 |              | $          | 5           |       | $               | 485,714    |               | $          | (28,213            | )          | $          | (421       | ) | $ | 13,333 |   | $ | 470,418 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

5

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Table of Contents

 

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

** **

**Consolidated Statements of Cash Flows**

** **

**(in thousands)**

 

(Unaudited)

** **
| ** **                                                                                        | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                        | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| **Cash flows from operating activities:**                                                         |       |                               |       |   |   |
| Net  loss                                                                                         |       | $                                  | (19,503    | ) | $ | (8,017 | ) |
| Adjustments  to reconcile net loss to net cash flows provided by (used in) operating  activities: |       |                               |       |   |   |
| Depreciation  and amortization                                                                    |       | 12,697                             |       | 9,438 |   |
| Amortization  of deferred financing fees                                                          |       | 1,609                              |       | 797 |   |
| Impairment  charge                                                                                |       | 2,732                              |       | — |   |
| Equity  in losses of unconsolidated joint ventures                                                |       | 1,581                              |       | 1,531 |   |
| Gain  on derivatives                                                                              |       | (306                               | )          | — |   |
| Unrealized  loss on derivatives                                                                   |       | —                             |       | 91 |   |
| Change  in accounts receivable                                                                    |       | (1,640                             | )          | (2,864 | ) |
| Change  in condominium inventory                                                                  |       | 6,021                              |       | (16,408 | ) |
| Change  in prepaid expenses and other assets                                                      |       | 531                                |       | (700 | ) |
| Change  in accounts payable                                                                       |       | (1,049                             | )          | 309 |   |
| Change  in accrued and other liabilities                                                          |       | 1,828                              |       | 2,584 |   |
| Change  in payables to related parties                                                            |       | 1,642                              |       | (568 | ) |
| Addition  of lease intangibles                                                                    |       | (868                               | )          | (1,060 | ) |
| Cash  provided by (used in) operating activities                                                  |       | 5,275                              |       | (14,867 | ) |
|                                                                                              |       |                               |       |   |   |
| **Cash flows from investing activities:**                                                         |       |                               |       |   |   |
| Escrow  deposits and pre-acquisition costs on real estate to be acquired                          |       | —                             |       | (857 | ) |
| Purchases  of real estate properties                                                              |       | —                             |       | (45,708 | ) |
| Investment  in unconsolidated joint ventures                                                      |       | (2,256                             | )          | (1,594 | ) |
| Capital  expenditures for real estate under development                                           |       | (8,827                             | )          | (20,934 | ) |
| Capital  expenditures for real estate under development of consolidated borrowers                 |       | (583                               | )          | (21,239 | ) |
| Additions  of property and equipment                                                              |       | (5,032                             | )          | (3,333 | ) |
| Change  in restricted cash                                                                        |       | (2,027                             | )          | (3,757 | ) |
| Investment  in notes receivable                                                                   |       | (5,084                             | )          | (11,682 | ) |
| Distributions  from unconsolidated joint venture                                                  |       | —                             |       | 696 |   |
| Fees  paid to related party for mezzanine loan arrangements                                       |       | —                             |       | (1,795 | ) |
| Cash  used in investing activities                                                                |       | (23,809                            | )          | (110,203 | ) |
|                                                                                              |       |                               |       |   |   |
| **Cash flows from financing activities:**                                                         |       |                               |       |   |   |
| Financing  costs                                                                                  |       | (470                               | )          | (1,456 | ) |
| Proceeds  from notes payable                                                                      |       | 16,437                             |       | 57,811 |   |
| Proceeds  from mortgages of consolidated borrowers                                                |       | 1,700                              |       | 18,415 |   |
| Net  borrowings on senior secured revolving credit facility                                       |       | 8,600                              |       | — |   |
| Payments  on notes payable                                                                        |       | (11,674                            | )          | (79 | ) |
| Redemptions  of common stock                                                                      |       | (724                               | )          | (2,011 | ) |
| Distributions                                                                                     |       | (1,419                             | )          | (1,955 | ) |
| Contributions  from noncontrolling interest holders                                               |       | 1,339                              |       | 1,024 |   |
| Distributions  to noncontrolling interest holders                                                 |       | (250                               | )          | (176 | ) |
| Change  in payables to related parties                                                            |       | —                             |       | (328 | ) |
| Cash  provided by financing activities                                                            |       | 13,539                             |       | 71,245 |   |
|                                                                                              |       |                               |       |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                                     |       | (2,182                             | )          | (18 | ) |
|                                                                                              |       |                               |       |   |   |
| Net  change in cash and cash equivalents                                                          |       | (7,177                             | )          | (53,843 | ) |
| Cash  and cash equivalents at beginning of the period                                             |       | 25,260                             |       | 78,498 |   |
|                                                                                              |       |                               |       |   |   |
| Cash  and cash equivalents at end of the period                                                   |       | $                                  | 18,083     |   | $ | 24,655 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

6

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Table ofContents

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**1.         Business**

 

***Organization***

 

Behringer HarvardOpportunity 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.

 

We invest in and operatecommercial real estate or real estate-related assets located in and outside theUnited States on an opportunistic basis. In particular, we focus on acquiring properties with significant possibilitiesfor short-term capital appreciation, such as those requiring development,redevelopment, or repositioning, or those located in markets and submarketswith higher volatility, lower barriers to entry, and high growthpotential.  We have acquired a widevariety of properties, including office, industrial, retail, hospitality,recreation and leisure, multifamily, and other properties.  We have purchased existing and newlyconstructed properties and properties under development or construction,including multifamily properties.  We havealso originated two mezzanine loans.  Wecompleted our first property acquisition in March 2006, and, as of June 30,2009, we wholly-owned 11 properties and consolidated five properties throughinvestments in joint ventures.  Inaddition, we are the mezzanine lender for two multifamily properties that weconsolidate as variable interest entities and we have been deemed the primarybeneficiaries, both of which were fully operational as of June 30,2009.  We also have noncontrolling,unconsolidated ownership interests in three properties and one investment in ajoint venture consisting of 22 properties that are accounted for using theequity method.

 

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 externallymanaged and advised by Behringer Harvard Opportunity Advisors I, LLC (“BehringerOpportunity Advisors I”), a Texas limited liability company formed in June 2007.  Behringer Opportunity Advisors I isresponsible for managing our day-to-day affairs and for identifying and makingacquisitions and investments on our behalf.

 

Our office islocated at 15601 Dallas Parkway, Suite 600, Addison, Texas 75001, and ourtoll-free telephone number is (866) 655-3600. The name Behringer Harvard is the property of Behringer HarvardHoldings, LLC (“Behringer Harvard Holdings”) and is used by permission.

 

**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, 2008,which was filed with the Securities and Exchange Commission (“SEC”) on March 31,2009.  Certain information and footnotedisclosures normally included in financial statements prepared in accordancewith accounting 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.

 

Theresults for the interim periods shown in this report are not necessarilyindicative of future financial results. The accompanying consolidated balance sheet as of June 30, 2009,the consolidated statements of operations for the three and six months ended June 30,2009 and 2008, and consolidated statements of stockholders’ equity and cash flowsfor the six months ended June 30, 2009 and 2008 have not been audited byour independent registered public accounting firm.  In the opinion of management, theaccompanying unaudited consolidated financial statements include alladjustments necessary to fairly present our consolidated financial position asof June 30, 2009 and December 31, 2008 and our consolidated resultsof operations and cash flows for the periods ended June 30, 2009 and2008.  Such adjustments are of a normalrecurring nature.  We have reclassifiedcertain prior-year amounts to conform to the current-year’s presentation.

 

Wehave evaluated subsequent events after the balance sheet date of June 30,2009 through August 14, 2009, which is the date the financial statementswere issued.

 

**3.         Summary of Significant AccountingPolicies**

 

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

 

The preparation offinancial statements in conformity with GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the

 

7

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Tableof Contents

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

date of the financialstatements and the reported amounts of revenues and expenses during thereporting period.  These estimatesinclude such items as purchase price allocation for real estate acquisitions,impairment of long-lived assets, depreciation and amortization, and allowancefor doubtful accounts.  Actual resultscould differ from those estimates.

 

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

 

Our consolidated financialstatements include our accounts and the accounts of other subsidiaries overwhich we have control.  All inter-companytransactions, balances and profits have been eliminated in consolidation.  Interests in entities acquired will beevaluated based on applicable GAAP, which includes the requirement toconsolidate entities deemed to be variable interest entities (“VIE”) in whichwe are the primary beneficiary.  If theinterest in the entity is determined not to be a VIE, then the entities will beevaluated for consolidation based on legal form, economic substance, and theextent to which we have control and/or substantive participating rights underthe respective ownership agreement.  Inthe Notes to Consolidated Financial Statements, all dollar and share amounts intabulation are in thousands of dollars and shares, respectively, unlessotherwise noted.

 

There are judgments andestimates involved in determining if an entity in which we have made aninvestment is a VIE and, if so, whether we are the primary beneficiary.  The entity is evaluated to determine if it isa VIE by, among other things, calculating the percentage of equity being riskedcompared to the total equity of the entity. Determining expected future losses involves assumptions of various possibilitiesof the results of future operations of the entity, assigning a probability toeach possibility, and using a discount rate to determine the net present valueof those future losses.  A change in thejudgments, assumptions, and estimates outlined above could result inconsolidating an entity that should not be consolidated or accounting for aninvestment using the equity method that should in fact be consolidated, theeffects of which could be material to our financial statements.

 

***RealEstate***

 

Upon theacquisition of real estate properties, we recognize the assets acquired, theliabilities assumed, and any noncontrolling interest as of the acquisitiondate, measured at their fair values.  Theacquisition date is the date on which we obtain control of the real estateproperty.  These assets acquired andliabilities assumed may consist of buildings, any assumed debt, identifiedintangible assets and asset retirement obligations.  Identified intangible assets generallyconsist of the above-market and below-market leases, in-place leases, in-placetenant improvements and tenant relationships. Goodwill is recognized as of the acquisition date and measured as theaggregate fair value of the consideration transferred and any noncontrollinginterests in the acquiree over the fair value of identifiable net assetsacquired.  Likewise, a bargain purchasegain is recognized in current earnings when the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree isless than the fair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in theperiod incurred.

 

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

 

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

 

The fair value of anytangible assets acquired, consisting of land, land improvements, buildings, buildingimprovements, tenant improvements, and furniture, fixtures and equipment, isdetermined 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 respective estimateduseful lives ranging from 25 years for commercial office property to 39 yearsfor hotel/mixed-use property using the straight-line method.  Building improvements are depreciated overtheir estimated useful lives ranging from 7 to 25 years.  Tenant improvements are depreciated over theterm of the respective leases.  Landimprovements are depreciated over the estimated useful life of 15 years, andfurniture, fixtures, and equipment are depreciated over estimated useful livesranging from five to seven years using the straight-line method.  Our leasehold interest is depreciated overits remaining contractual life, or approximately 101 years.

 

We determine the value ofabove-market and below-market in-place leases for acquired properties based onthe present value (using an interest rate that reflects the risks associatedwith the leases acquired) of the difference between (1) 

 

8

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Tableof Contents

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

the contractual amountsto be paid pursuant to the in-place leases and (2) management’s estimateof current market lease rates for the corresponding in-place leases, measuredover a period equal to (a) the remaining non-cancelable lease term forabove-market leases, or (b) the remaining non-cancelable lease term plusany fixed rate renewal options for below-market leases.  We record the fair value of above-market andbelow-market leases as intangible assets or intangible liabilities,respectively, and amortize them as an adjustment to rental income over thedetermined lease term.

 

The total value ofidentified real estate intangible assets for acquired properties is furtherallocated to in-place lease values and tenant relationships based on ourevaluation of the specific characteristics of each tenant’s lease and ouroverall relationship with that respective tenant.  The aggregate value of in-place leasesacquired and tenant relationships is determined by applying a fair valuemodel.  The estimates of fair value ofin-place leases 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.

 

We amortize the value ofin-place leases acquired in the future to expense over the term of therespective leases.  The value of tenantrelationship intangibles is amortized to expense over the initial term and anyanticipated renewal periods, but in no event does the amortization period forintangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, theunamortized portion of the in-place lease value and tenant relationshipintangibles would be charged to expense. As of June 30, 2009, the estimated remaining useful lives foracquired lease intangibles range from less than one year to approximately 12years.

 

Other intangible assetsinclude the value of identified hotel trade names and in-place property taxabatements.  These fair values are basedon management’s estimates of the relative fair value of these assets usingdiscounted cash flow analyses or similar methods.  The value of the trade names is amortizedover its 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 ten years using the straight-line method.

 

Anticipated amortizationexpense associated with the acquired lease intangibles and acquired otherintangible assets as of June 30, 2009 is as follows:

 
| ** **                                 | ** ** | **Lease / Other  Intangibles** | ** ** |
|--------------------------------------------|------------|--------------------------------|------------|
| July 1, 2009 - December 31, 2009 |       | $                              | 815        |   |
| 2010                                       |       | 1,806                          |       |
| 2011                                       |       | 1,282                          |       |
| 2012                                       |       | 1,039                          |       |
| 2013                                       |       | 890                            |       |
|                                            |            |                                |            |  |

 

Accumulateddepreciation and amortization related to our consolidated investments in realestate assets and intangibles were as follows:

 
| ** **                           | ** ** | ** **         | ** ** | ** **       | ** ** | ** **      | ** ** | **Acquired**     | ** ** | ** **    | ** ** | ** **      | ** ** |
|--------------------------------------|------------|--------------------|------------|------------------|------------|-----------------|------------|------------------|------------|---------------|------------|-----------------|------------|
| ** **                           | ** ** | **Buildings and**  | ** ** | **Land and**     | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** | **Leasehold** | ** ** | **Other**       | ** ** |
| **As of  June 30, 2009**        | ** ** | **Improvements**   | ** ** | **Improvements** | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** | **Interest**  | ** ** | **Intangibles** | ** ** |
| Cost                                 |       | $                  | 447,144    |             | $          | 131,746         |       | $                | 38,924     |          | $          | (25,605         | )          | $ | 24,293 |   | $ | 10,439 |   |
| Less:  depreciation and amortization |       | (30,342            | )          | (401             | )          | (13,913         | )          | 10,638           |       | (497          | )          | (1,753          | )          |
|                                 |       |               |       |             |       |            |       |             |       |          |       |            |       |
| Net                                  |       | $                  | 416,802    |             | $          | 131,345         |       | $                | 25,011     |          | $          | (14,967         | )          | $ | 23,796 |   | $ | 8,686 |   |
|                                 |       |               |       |             |       |            |       |             |       |          |       |            |       |
|                                 |       |               |       |             |       |            |       | **Acquired**     |       |          |       |            |       |
| ** **                           | ** ** | **Buildings  and** | ** ** | **Land  and**    | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** | **Leasehold** | ** ** | **Other**       | ** ** |
| **As of December 31, 2008**     | ** ** | **Improvements**   | ** ** | **Improvements** | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** | **Interest**  | ** ** | **Intangibles** | ** ** |
| Cost                                 |       | $                  | 438,228    |             | $          | 131,299         |       | $                | 39,399     |          | $          | (25,917         | )          | $ | 23,477 |   | $ | 10,439 |   |
| Less:  depreciation and amortization |       | (21,407            | )          | (271             | )          | (11,096         | )          | 8,350            |       | (317          | )          | (1,414          | )          |
|                                 |       |               |       |             |       |            |       |             |       |          |       |            |       |
| Net                                  |       | $                  | 416,821    |             | $          | 131,028         |       | $                | 28,303     |          | $          | (17,567         | )          | $ | 23,160 |   | $ | 9,025 |   |

 

9

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Table ofContents

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

***CondominiumInventory***

 

Condominium inventory isstated 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 ofconstruction.  At June 30, 2009,condominium inventory consisted of $18.2 million of finished units and $70.1million of work in progress.  As of December 31,2008, condominium inventory consisted of $9.3 million of finished units and$85.4 million of work in progress.

 

For condominiuminventory, at each reporting date, management compares the estimated fair valueless costs to sell to the carrying value. An adjustment is recorded to the extent that the fair value less coststo sell is less than the carrying value. We determine the estimated fair value of condominiums based oncomparable sales in the normal course of business under existing and anticipatedmarket conditions.  This evaluation takesinto consideration estimated future selling prices, costs incurred to date,estimated additional future costs, and management’s plans for theproperty.  There were no inventoryvaluation adjustments related to our condominium inventory for the three or sixmonths ended June 30, 2009 or 2008. However, we may experience valuation adjustments to our condominiuminventory in the future.

 

***Cash and Cash Equivalents***

 

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

 

***RestrictedCash***

 

As required by ourlenders, restricted cash is held in escrow accounts for real estate taxes andother reserves for our consolidated properties.

 

***AccountsReceivable***

 

Accounts receivableprimarily consist of straight-line rental revenue receivables of $9.6 millionand $8.6 million as of June 30, 2009 and December 31, 2008,respectively, and receivables from our hotel operators and tenants related toour other consolidated properties.  Theallowance for doubtful accounts was $0.2 million for both June 30, 2009and December 31, 2008, respectively.

 

***PrepaidExpenses and Other Assets***

 

Prepaid expenses andother assets include prepaid directors’ and officers’ insurance, prepaidadvertising, the fair value of certain derivative instruments, as well asinventory, prepaid insurance, and real estate taxes of our consolidatedproperties.  Inventory consists of food,beverages, linens, glassware, china, and silverware and is carried at the lowerof cost or market value.

 

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

 

Furniture, fixtures, andequipment are recorded at cost and are depreciated using the straight-linemethod over their estimated useful lives of five to seven years.  Maintenance and repairs are charged tooperations as incurred while renewals or improvements to such assets arecapitalized.  Accumulated depreciationassociated with our furniture, fixtures, and equipment was $4.8 million and$3.5 million as of June 30, 2009 and December 31, 2008,respectively.

 

***InvestmentImpairment***

 

For real estate we whollyown, we monitor events and changes in circumstances indicating that thecarrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstancesare present, we assess potential impairment by comparing estimated futureundiscounted operating cash flows expected to be generated over the life of theasset and from its eventual disposition to the carrying amount of theasset.  In the event that the carryingamount exceeds the estimated future undiscounted operating cash flows, werecognize an impairment loss to adjust the carrying amount of the asset toestimated fair value.  We considerprojected future undiscounted cash flows, trends, strategic decisions regardingfuture development plans, and other factors in our assessment of whetherimpairment conditions exist.  While webelieve our estimates of future cash flows are reasonable, differentassumptions regarding factors such as market rents, economic conditions, andoccupancy rates could significantly affect these estimates.

 

In addition, we evaluateour investments in unconsolidated joint ventures and our investments in theChase Park working capital loan and Royal Island bridge loans at each reportingdate and if we believe there is an other than temporary decline in marketvalue, or if it is probable we will not collect all principal and interest inaccordance with the terms of the 

 

10

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Tableof Contents

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

working capital or bridgeloans, we will record an impairment charge based on these evaluations.  While we believe it is currently probable wewill collect all scheduled principal and interest with respect to our workingcapital and bridge loans, current market conditions with respect to creditavailability and with respect to real estate market fundamentals create asignificant amount of uncertainty.  Giventhis, any future adverse development in market conditions would cause us tore-evaluate our conclusions, and could result in material impairment chargeswith respect to our working capital or bridge loans.

 

In evaluating ourinvestments for impairment, management may use appraisals and makes 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.  The value of our properties held fordevelopment depends on market conditions, including estimates of the projectstart date as well as estimates of future demand for the property type underdevelopment.  We have analyzed trends andother information related to each potential development and incorporated thisinformation as well as our current outlook into the assumptions we use in ourimpairment analyses.  Due to the judgmentand assumptions applied in the estimation process with respect to impairments,including the fact that limited market information regarding the value ofcomparable land exists at this time, it is possible actual results could differsubstantially from those estimated.

 

As a result of thedifficult economic conditions that continued into the second quarter of 2009including the general weakness in market rental rates, we evaluated certain ofour real estate investments for potential impairment as of June 30,2009.  Based on our analyses, we recordeda non-cash impairment charge of $2.7 million related to our leasehold interestin an office building in London, England.

 

Other than the impairmentcharge discussed above, we believe the carrying value of our operating realestate assets, properties under development, investments in unconsolidatedjoint ventures, and working capital and bridge loans is currentlyrecoverable.  However, if marketconditions worsen beyond our current expectations, or if changes in ourdevelopment strategy significantly affect any key assumptions used in our fairvalue calculations, we may need to take additional charges in future periodsfor impairments related to existing assets. Any such non-cash charges would have an adverse effect on ourconsolidated financial position and results of operations.

 

***DeferredFinancing Fees***

 

Deferred financing feesare recorded at cost and are amortized to interest income for notes receivableand interest expense for notes payable using a straight-line method thatapproximates the effective interest method over the life of the relateddebt.  Accumulated amortization ofdeferred financing fees was $6.6 million and $4.9 million as of June 30,2009 and December 31, 2008, respectively.

 

***DerivativeFinancial Instruments***

 

Our objective in usingderivatives is to add stability to interest expense and to manage our exposureto interest rate movements or other identified risks and to minimize thevariability caused by foreign currency translation risk related to our netinvestment in foreign real estate.  Toaccomplish these objectives, we use various types of derivative instruments tomanage fluctuations in cash flows resulting from interest rate riskattributable to changes in the benchmark interest rate of LIBOR.  These instruments include LIBOR-basedinterest rate swaps and caps.  For ournet investments in foreign real estate, we use foreign exchange put/calloptions to eliminate the impact of foreign currency exchange movements on ourfinancial position.

 

We measure our derivativeinstruments and hedging activities at fair value and record them as an asset orliability, depending on our rights or obligations under the applicablederivative contract.  For derivativesdesignated as fair value hedges, the changes in the fair value of both thederivative instrument and the hedged items are recorded in earnings.  Derivatives used to hedge the exposure tovariability in expected future cash flows, or other types of forecastedtransactions, are considered cash flow hedges. For derivatives designated as cash flow hedges, the effective portionsof changes in fair value of the derivatives are reported in other comprehensiveincome (loss) and are subsequently reclassified into earnings when the hedgeditem affects earnings.  For derivativesdesignated as net investment hedges, changes in fair value are reported inother comprehensive income (loss) as part of the foreign currency translationgain or loss.  Changes in fair value ofderivative instruments not designated as hedges and ineffective portions ofhedges are recognized in earnings in the affected period.  We assess the effectiveness of each hedgingrelationship by comparing the changes in fair value or cash flows of thederivative hedging instrument with the changes in fair value or cash flows ofthe designated hedged item or transaction.

 

11

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Table ofContents

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

As of June 30,2009, we do not have any derivatives designated as fair value hedges, nor arederivatives being used for trading or speculative purposes.  See Notes 5 and 13 for further informationregarding our derivative financial instruments.

 

***Foreign Currency Translation***

 

Forour international investments where the functional currency is other than theU.S. dollar, assets and liabilities are translated using period-end exchangerates, while the statement of operations amounts are translated using theaverage 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).

 

TheBritish pound is the functional currency for our Becket House investmentoperating in London, England and the Euro is the functional currency for theoperations of our Central Europe Joint Venture. Wealso maintain Euro-denominated bank accounts that are translated into U.S.dollars at the current exchange rate at each reporting period.  The resulting translation adjustmentsare recorded as a separate component of accumulated other comprehensive income(loss) in our consolidated statement of equity. The cumulative foreign currency translation adjustment was a loss of$2.5 million and $2.2 million as of June 30, 2009 and December 31,2008, respectively.

 

***AccumulatedOther Comprehensive Income (Loss)***

 

Accumulated other comprehensive income (loss) (“AOCI”),which is reported in the accompanying consolidated statement of equity,consists of gains and losses affecting equity that are excluded from net income(loss) under GAAP.  The components ofaccumulated other comprehensive income (loss) consist of foreign currency translationgains and losses and unrealized gains and losses on derivatives designated ashedges.

 

***RevenueRecognition***

 

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 $1.1 million and $2.3 million was recognized in rental revenues forthe six months ended June 30, 2009 and 2008, respectively.  Hotel revenue is derived from the operationsof The Lodge & Spa at Cordillera and consists of guest room, food andbeverage, and other revenue, and is recognized as the services are rendered.

 

Revenues from the salesof condominiums are recognized when sales are closed and title passes to thenew owner, the new owner’s initial and continuing investment is adequate todemonstrate a commitment to pay for the condominium, the new owner’s receivableis not subject to future subordination and we do not have a substantialcontinuing involvement with the new condominium.  Amounts received prior to closing on sales ofcondominiums are recorded as deposits in our financial statements.

 

***Advertising Costs***

 

Marketing costs, including the costs of model unitsand their furnishings, incurred in connection with the sale of condominiums aredeferred and recorded as costs of sales when revenue is recognized.  Certain prepaid costs are capitalized andexpensed over the stated terms of the contract. All other advertising costs are expensed as incurred.

 

***IncomeTaxes***

 

We elected to be taxed,and qualified, as a REIT under Sections 856 through 860 of the Internal RevenueCode of 1986, as amended (the “Code”), beginning with the year ended December 31,2006.  We are organized and operate insuch a manner as to qualify for taxation as a REIT under the Code, and weintend to continue to operate in such a manner, but no assurance can be giventhat we will operate in a manner so as to qualify or remain qualified as aREIT.  To qualify as a REIT, we must meeta number of organizational and operational requirements, including arequirement that we distribute at least 90% of our REIT taxable income to ourstockholders.  As a REIT, we generallywill not be subject to federal income tax at the corporate level except for theoperations of our wholly-owned taxable REIT subsidiaries.  We have three taxable REIT subsidiaries thatown and/or provide management and development services to certain of ourinvestments in real estate and real estate under development.

 

On May 18,2006, the State of Texas enacted a law which replaced the existing statefranchise tax with a “margin tax,” effective January 1, 2007.  For both periods in the six months ended June 30,2009 and 2008, we recognized a current and deferred tax provision of $0.1million related to the Texas margin tax.

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

***Stock-BasedCompensation***

 

We have a stock-basedincentive award plan for our directors and consultants and for employees,directors, and consultants of our affiliates. Awards are granted at the fair market value on the date of grant withfair value estimated using the Black-Scholes-Merton option valuation model,which incorporates assumptions surrounding volatility, dividend yield, therisk-free interest rate, expected life, and the exercise price as compared tothe underlying stock price on the grant date. The tax benefits associated with these share-based payments areclassified as financing activities in the consolidated statement of cashflows.  For the six months ended June 30,2009 and 2008, we had no significant compensation cost related to our incentiveaward plan.

 

***Concentrationof Credit Risk***

 

At June 30, 2009 andDecember 31, 2008, we had cash and cash equivalents deposited in certainfinancial institutions in excess of federally insured levels.  We have diversified our cash and cashequivalents between several banking institutions in an attempt to minimizeexposure to any one of these entities. We regularly monitor the financial stability of these financialinstitutions and believe that we are not exposed to any significant credit riskin cash and cash equivalents or restricted cash.  The Federal Deposit Insurance Corporation, or“FDIC,” generally only insures limited amounts per depositor per insuredbank.  Beginning October 3, 2008 through December 31, 2009, theFDIC will insure up to $250,000 per depositor per insured bank; on January 1,2010, the standard coverage limit will return to $100,000 for most depositcategories.  Unlimited deposit insurancecoverage will be available to our non-interest bearing transaction accountsheld at those institutions participating in FDIC’s Temporary LiquidityGuarantee Program through December 31, 2009.

 

***Noncontrolling Interest***

 

We hold a primarybeneficiary interest as a lender in two variable interest entities that ownreal estate properties and thus, we consolidate their accounts with and intoour accounts.  Noncontrolling interestrepresents the noncontrolling ownership interest’s proportionate share of theequity in our consolidated real estate investments including the 5%, 8%, 10%,16%, and 20% unaffiliated partners’ share of the equity in Chase Park Plaza,The Lodge & Spa at Cordillera, Rio Salado Business Center, FriscoSquare, and Becket House, respectively, as well as 100% of the equity of thetwo VIEs we consolidated as a lender and primary beneficiary.  Income and losses are allocated tononcontrolling interest holders based on their ownership percentage.

 

***ReportableSegments***

 

We have determined thatwe have one reportable segment, with activities related to the ownership,development and management of real estate assets.  Our income producing properties generated100% of our consolidated revenues for the six months ended June 30, 2009and 2008.  Our chief operating decisionmaker evaluates operating performance on an individual property level.  Therefore, our properties are aggregated intoone reportable segment.

 

***Earnings per Share***

 

Earnings (loss) per shareis calculated based on the weighted average number of shares outstanding duringeach period.  As of June 30, 2009and 2008, we had options to purchase 69,583 and 39,583 shares of common stockoutstanding at a weighted average exercise price of $8.99 and $9.10,respectively.  These options are excludedfrom the calculation of earnings per share for the three and six months ended June 30,2009 and 2008 because the effect would be anti-dilutive.

 

***Inflation***

 

The real estate markethas not been affected significantly by inflation in the past several years dueto the relatively low inflation rate. However, we include provisions in the majority of our tenant leases thatwould protect us from the impact of inflation. These provisions include reimbursement billings for common areamaintenance charges, real estate tax and insurance reimbursements on a persquare foot basis, or in some cases, annual reimbursement of operating expensesabove a certain per square foot allowance.

 

**4.         New Accounting Pronouncements**

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 160, “Noncontrolling Interests inConsolidated Financial Statements - An amendment of ARB No. 51.” This Statement amends Accounting Research Bulletin No. 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  It clarifies thata noncontrolling interest in a subsidiary, which is sometimes referred to asminority interest, is an ownership interest in the 

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

consolidated entity thatshould be reported as equity in the consolidated financial statements. Among other requirements, this Statement requires consolidated net income to bereported at amounts that include the amounts attributable to both the parentand the noncontrolling interest.  It also requires disclosure, on the faceof the consolidated income statement, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest.  ThisStatement was effective for fiscal years, and interim periods within thosefiscal years, beginning on or after December 15, 2008.

 

In April 2009, theFASB issued FASB Staff Position (“FSP”) FAS 157-4, “Determining Fair Value Whenthe Volume and Level of Activity for the Asset or Liability Have SignificantlyDecreased and Identifying Transactions That Are Not Orderly,” which providesadditional guidance for estimating fair value in accordance with SFAS No. 157when the volume and level of activity for the asset or liability havesignificantly decreased.  We adopted the provisions of FSP FAS 157-4effective April 1, 2009, and it did not have a material effect on ourconsolidated financial statements.

 

In April 2009, the FASB issued FSPs 115-2 and124-2, *“*Recognition and Presentation of Other-Than-Temporary Impairments,”**to amend the currentother-than-temporary impairment guidance for debt securities. The intent ofthese FSPs is to improve the presentation and disclosure ofother-than-temporary impairment of debt and equity securities in the financialstatements. These FSPs do not amend existing recognition and measurementguidance on other-than-temporary impairment of equity securities. The FSPs willbe effective for us for the quarter ended June 30, 2009. We do not believethe adoption of these FSPs will have a material impact on our financialstatements.  We adopted the provisions ofFSPs 115-2 and 124-2 effective April 1, 2009, and it did not have amaterial effect on our consolidated financial statements.

 

In April 2009, theFASB issued FSP FAS 107-1 “Interim Disclosures about Fair Value of FinancialInstruments.”  The FSP amends SFAS No. 107“Disclosures about Fair Value of Financial Instruments” to require an entity toprovide disclosures about fair value of financial instruments in interimfinancial information.  This FSP is to beapplied prospectively and is effective for interim and annual periods endedafter June 15, 2009 with early adoption permitted for periods ending afterMarch 15, 2009.  We have includedthe required disclosures in this quarterly report on Form 10-Q for thequarter ended June 30, 2009 (See Note 9).

 

In May 2009, the FASB issued SFAS No. 165, “SubsequentEvents” (“SFAS No. 165”).  SFAS No. 165establishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued.  Itrequires the disclosure of the date through which an entity has evaluatedsubsequent events and the basis for that date; that is, whether the daterepresents the actual date the financial statements were issued or wereavailable to be issued.  SFAS No. 165is effective for interim and annual financial periods ending after June 15,2009.  We have included the requireddisclosures in this quarterly report on Form 10-Q for the quarter ended June 30,2009.

 

In June 2009, the FASB issued SFAS No. 167, “Amendmentsto FASB Interpretation No. 46(R)” (“SFAS No. 167”).  SFAS No. 167 eliminates Interpretation46(R)’s exceptions to consolidating qualifying special-purpose entities,contains new criteria for determining the primary beneficiary, and increasesthe frequency of required reassessments to determine whether a company is theprimary beneficiary of a VIE.  SFAS No. 167also contains a new requirement that any term, transaction, or arrangement thatdoes not have a substantive effect on an entity’s status as a VIE, a company’spower over a VIE, or a company’s obligation to absorb losses or its rights toreceive benefits of an entity must be disregarded in applying Interpretation46(R)’s provisions.  SFAS No. 167 isapplicable for annual periods after November 15, 2009 and interim periodsthereafter.  We are currently assessingthe impact, if any, on our consolidated financial statements.

 

**5.         Assets and Liabilities Measured at FairValue**

 

Fair valuemeasurements are determined based on the assumptions that market participantswould use in pricing the asset or liability. As a basis for considering market participant assumptions in fair valuemeasurements, a fair value hierarchy that distinguishes between marketparticipant assumptions based on market data obtained from sources independentof the reporting entity (observable inputs that are classified within Levels 1and 2 of the hierarchy) and the reporting entity’s own assumptions about marketparticipant assumptions (unobservable inputs classified within Level 3 of thehierarchy) has been established.

 

Level 1 inputsutilize quoted prices (unadjusted) in active markets for identical assets andliabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1that are observable for the asset or liability, either directly orindirectly.  Level 2 inputs may includequoted prices for similar assets and liabilities in active markets, as well asinputs that are observable for the asset or liability (other than quotedprices), such as interest rates, foreign exchange rates, and yield curves thatare observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability thatare typically based on an entity’s own assumptions, as there is little, if any,related market activity.  In instanceswhere the determination of the fair value measurement is based on inputs fromdifferent levels 

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

of the fair valuehierarchy, the level in the fair value hierarchy within which the fair valuemeasurement falls is based on the lowest level input that is significant to thefair 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.

 

*Derivativefinancial instruments*

 

Currently, we useinterest rate swaps and caps to manage our interest rate risk and foreignexchange put/call options to manage the impact of foreign currency movements onour financial position for our net investments in foreign real estate jointventures.  The valuation of theseinstruments is determined using widely accepted valuation techniques includingdiscounted cash flow analysis on the expected cash flows of eachderivative.  This analysis reflects thecontractual terms of the derivatives, including the period to maturity, anduses observable market-based inputs, including interest rate curves, impliedvolatilities, and foreign currency exchange rates.

 

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 by itselfand its counterparties.  However, as of June 30,2009, we have assessed the significance of the impact of the credit valuationadjustments on the overall valuation of our derivative positions and havedetermined that the credit valuation adjustments are not significant to theoverall valuation of our derivatives.  Asa result, we have determined that our derivative valuations in their entiretyare classified in Level 2 of the fair value hierarchy.

 

The following fairvalue hierarchy table presents information about our assets and liabilitiesmeasured at fair value on a recurring basis as of June 30, 2009:

 
| ** **                        | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| **Assets**                        | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Derivative  financial instruments |       | $           | —     |        | $          | 344         |       | $          | —     |   | $ | 344 |   |
|                              |       |        |       |        |       |        |       |       |       |
| **Liabilities**                   |       |        |       |        |       |        |       |       |       |
| Derivative  financial instruments |       | $           | —     |        | $          | 4,467       |       | $          | —     |   | $ | 4,467 |   |

 

Derivativefinancial instruments classified as assets are included in other assets on thebalance sheet while derivative financial instruments classified as liabilitiesare included in other liabilities.  SeeNotes 3 and 13 for further information regarding our use of hedginginstruments.

 

*Impairmentof Real Estate Asset*

 

As a result of thedifficult economic conditions that continued into the second quarter of 2009including the general weakness in market rental rates, we evaluated certain ofour real estate investments for potential impairment as of June 30,2009.  Based on our analyses, we recordeda non-cash impairment charge of $2.7 million related to our leasehold interestin an office building in London, England. The inputs used to calculate the fair value of this asset includedprojected cash flows and a risk-adjusted rate of return that we estimated wouldbe used by a market participant in valuing this asset.  This fair value estimate is considered Level3 of the fair value hierarchy.

 

The following fairvalue hierarchy table presents information about our asset measured at fairvalue on a nonrecurring basis as of June 30, 2009:

 
| ** **               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** | **Gain  (Loss)** | ** ** |
|--------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|------------------|------------|
| **Asset**                | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | ** **       | ** ** |
| Leasehold  interest, net |       | $           | —     |        | $          | —      |       | $          | 23,796     |             | $          | 23,796 |   | $ | (2,732 | ) |
|                          |            |             |            |             |            |             |            |            |            |                  |            |  |  |  |  |  |

 

**6.****                                     ****Fair Value Disclosure ofFinancial Instruments**

 

We determined thefollowing disclosure of estimated fair values using available marketinformation and appropriate valuation methodologies.  However, considerable judgment is necessaryto interpret market data and develop the related estimates of fair value.  Accordingly, the estimates presented hereinare not necessarily indicative of the amounts that could be realized upondisposition of the financial instruments. The use of different market assumptions and/or estimation methodologiesmay have a material effect on the estimated fair value amounts.

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

As of June 30, 2009and December 31, 2008, management estimated that the carrying value ofcash and cash equivalents, restricted cash, accounts receivable, accountspayable, accrued expenses, other liabilities, payables/receivables from relatedparties, and distributions payable were at amounts that reasonably approximatedtheir fair value based on their highly-liquid nature and/or short-termmaturities and the carrying value of notes receivable reasonably approximatedfair value based on expected interest rates for notes to similar borrowers withsimilar terms and remaining maturities.

 

The notes payable totaling$433.2 million and $416.2 million as of June 30, 2009 and December 31,2008, respectively, have a fair value of approximately $438.1 million and$418.4 million, respectively, based upon interest rates for mortgages withsimilar terms and remaining maturities that management believes we couldobtain.  Interest rate swaps and capsalong with our foreign currency exchange forward contract are recorded at theirrespective fair values in prepaid expenses and other assets for thosederivative instruments that have an asset balance and in other liabilities forthose derivative instruments that are liabilities (See Note 5).

 

The fair valueestimates presented herein are based on information available to our managementas of June 30, 2009 and December 31, 2008.  Although our management is not aware of anyfactors that would significantly affect the estimated fair value amounts, suchamounts have not been comprehensively revalued for purposes of theseconsolidated financial statements since that date, and current estimates offair value may differ significantly from the amounts presented herein.

 

**7.         Real Estate Investments**

 

As of June 30, 2009,we wholly-owned 11 properties and consolidated five properties throughinvestments in joint ventures.  Inaddition, we are the mezzanine lender for two multifamily properties that weconsolidate as VIEs, both fully operational as of June 30, 2009.  In addition, we have noncontrolling,unconsolidated ownership interests in three properties and one investment in ajoint venture consisting of 22 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.

 

***Investments inUnconsolidated Joint Ventures***

 

The following tablepresents certain information about our unconsolidated investments as of June 30,2009 and December 31, 2008:

 
| ** **                    | ** ** | ** **              | ** ** | **Carrying Value of Investment** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------------------------------|------------|
| **Property  Name**            | ** ** | **Ownership  Interest** | ** ** | **June 30,  2009**          | ** ** | **December 31,  2008** | ** ** |
| Royal  Island                 |       | 31                      | %          |                             | $          | 22,290 |   | $ | 22,060 |   |
| GrandMarc  at Westberry Place |       | 50                      | %          |                             | 7,336      |   | 7,324 |   |
| GrandMarc  at the Corner      |       | 50                      | %          |                             | 6,826      |   | 5,527 |   |
| Central  Europe Joint Venture |       | 49                      | %          |                             | 26,538     |   | 27,405 |   |
| Total                         |       |                    |       |                             | $          | 62,990 |   | $ | 62,316 |   |

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

Ourinvestments in unconsolidated joint ventures as of June 30, 2009 and December 31,2008 consisted of our proportionate share of the combined assets andliabilities of our investment properties as follows:

 
| ** **                    | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Real  estate assets, net      |       | $                       | 375,982    |                        | $          | 371,223 |   |
| Cash  and cash equivalents    |       | 15,655                  |       | 24,636                      |       |
| Other  assets                 |       | 4,079                   |       | 2,791                       |       |
| Total  assets                 |       | $                       | 395,716    |                        | $          | 398,650 |   |
|                          |       |                    |       |                        |       |
| Notes  payable                |       | $                       | 239,790    |                        | $          | 245,203 |   |
| Other  liabilities            |       | 21,356                  |       | 25,442                      |       |
| Total  liabilities            |       | 261,146                 |       | 270,645                     |       |
|                          |       |                    |       |                        |       |
| Equity                        |       | 134,570                 |       | 128,005                     |       |
| Total  liabilities and equity |       | $                       | 395,716    |                        | $          | 398,650 |   |

 

Forthe three and six months ended June 30, 2009, we recognized $1.5 millionand $1.6 million, respectively, of equity in losses.  Our equity in losses from these investmentsis our proportionate share of the combined losses of our unconsolidated jointventures for the three and six months ended June 30, 2009 and 2008 asfollows:

 
| ** **                        | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                        | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue                           |       | $                                    | 5,772      |                               | $          | 2,146 |   | $ | 11,372 |   | $ | 4,315 |   |
|                              |       |                                 |       |                               |       |   |   |   |   |
| Operating  expenses:              |       |                                 |       |                               |       |   |   |   |   |
| Operating  expenses               |       | 1,726                                |       | 1,681                              |       | 3,072 |   | 2,327 |   |
| Property  taxes                   |       | 201                                  |       | 222                                |       | 407 |   | 443 |   |
| Total  operating expenses         |       | 1,927                                |       | 1,903                              |       | 3,479 |   | 2,770 |   |
|                              |       |                                 |       |                               |       |   |   |   |   |
| Operating  income                 |       | 3,845                                |       | 243                                |       | 7,893 |   | 1,545 |   |
|                              |       |                                 |       |                               |       |   |   |   |   |
| Non-operating  expenses:          |       |                                 |       |                               |       |   |   |   |   |
| Depreciation  and amortization    |       | 2,486                                |       | 1,119                              |       | 4,905 |   | 2,134 |   |
| Interest  and other, net          |       | 4,333                                |       | 630                                |       | 6,244 |   | 2,922 |   |
| Total  non-operating expenses     |       | 6,819                                |       | 1,749                              |       | 11,149 |   | 5,056 |   |
|                              |       |                                 |       |                               |       |   |   |   |   |
| Net  loss                         |       | $                                    | (2,974     | )                                  | $          | (1,506 | ) | $ | (3,256 | ) | $ | (3,511 | ) |
| Company’s  share of net loss |       | $                                    | (1,456     | )                                  | $          | (671 | ) | $ | (1,581 | ) | $ | (1,531 | ) |

 

**8.         Variable Interest Entities**

 

In 2006, we agreed toprovide secured mezzanine financing with an aggregate principal amount of up to$22.7 million to unaffiliated third-party entities that own multifamilycommunities under development (the “Alexan Voss” in Houston, Texas and “AlexanBlack Mountain” in Henderson, Nevada properties, respectively).  These entities also have secured constructionloans with third-party lenders, with an aggregate principal amount of up to$68.6 million.  Our mezzanine loans aresubordinate to the construction loans. In addition, we have entered into option agreements allowing us to purchasethe ownership interests in Alexan Voss and Alexan Black Mountain after eachproject’s substantial completion and upon notification of completion from thedeveloper.  As of June 30, 2009, theoption agreement allowing us to purchase Alexan Black Mountain has expired.

 

In February 2009, wereceived the notice of completion on Alexan Voss.  Accordingly, pursuant to the optionagreement, we had ninety days from the delivery of the notice of completion toexercise our option to purchase the completed property.  We have waived our rights to purchase theproperty.  Therefore, the general partnerand mezzanine borrower at its sole discretion may elect to exercise its putoption requiring us to purchase the property within 120 days

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

upon the delivery of awritten notice.  As of August 14,2009, the general partner and mezzanine borrower have not elected to provide uswith the put notice.

 

Based on ourevaluation, we have determined that these entities meet the criteria of VIEsunder GAAP and that we are the primary beneficiary of these variable interestentities.  Therefore, we have consolidatedthe entities, including the related real estate assets and third-partyconstruction financing.  As of June 30,2009, there was $88.4 million of related real estate assets related to AlexanVoss and Alexan Black Mountain, which collateralizes the outstanding principalbalance of the construction loans.  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 June 30,2009, the outstanding principal balance under our mezzanine loans was $22.7million, which is eliminated, along with accrued interest and loan originationfees, upon consolidation.  We, as themezzanine lender, are in discussion with the mezzanine borrower and the seniorconstruction lender to restructure and extend the Alexan Black Mountain notepayable, which matures in September 2009.

 

In May 2007, for aninitial cash investment of $20 million, we acquired an approximate 31% equityinterest as a limited partner in the development and construction of a resorthotel, spa, golf course, marina, and residences on three islands located in theCommonwealth of Bahamas (“Royal Island”). In December 2007, we participated in a bridge loan financingarrangement and committed up to $40 million as a bridge loan to the RoyalIsland entity for the continuing construction and development of theproperty.  In June 2009, wepurchased the interest in the first of two superior tranches, the A-1 tranche,for $3.1 million.  The total amountoutstanding to us at June 30, 2009, including accrued interest and fees,was $41.1 million (See Note 9).  Based onour evaluation, we have determined that the entity meets the criteria of avariable interest entity but that we are not the primary beneficiary.  Accordingly, we do not consolidate the RoyalIsland entity and instead account for it under the equity method ofaccounting.  At June 30, 2009, therewas approximately $138.5 million of real estate assets under developmentrelated to Royal Island.

 

**9.         NotesReceivable**

 

*ChasePark Plaza Working Capital Loan*

 

We lease the hotelportion of the Chase Park Plaza property to the hotel operator, an unaffiliatedentity 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 June 30, 2009, the notereceivable balance was $1.9 million.

 

*RoyalIsland Bridge Loans*

 

In December 2007, weparticipated in a bridge loan financing arrangement for the continuingdevelopment and construction of Royal Island.  The aggregate principalamount available under the bridge loan was $60 million consisting of threetranches.  Under the bridge loan we agreed to lend a tranche of up to $40million, which is subordinate to the other two tranches.  The bridge loanaccrued interest at the one-month LIBOR rate plus 8% per annum with accruedinterest and principal payable at the maturity date, December 20, 2008,and is secured by the Royal Island property. In June 2009, we purchased the interest in the first of the twosuperior tranches, the A-1 tranche, for $3.1 million.

 

Under the terms of theloan documents, the bridge loan could be extended once for a period of sixmonths upon the satisfaction of certain conditions with notice given by theborrower by November 20, 2008 and a payment of an extension fee.  Atthe maturity date, not all of the conditions were satisfied and as a result,the bridge loan went into default and became a non-earning loan.  The balance owed to us at the time of defaultwas $37.7 million including accrued interest and fees.  Discussions between the bridge loan lendersand the borrower to complete a satisfactory workout plan have begun; however,there are no assurances that a workout plan will be completed or that the loanwill be reinstated by the borrower. Accordingly, we may seek other actions under the loan documents toprotect our investment including foreclosure, exercise of power of sale, orconveyance in satisfaction of deed.  Inaccordance with GAAP, from the time the loan went into default until the timethat a foreclosure occurs, a satisfactory workout is completed, or the loan isreinstated by the borrower, we do not recognize interest income on the loan.

 

In April 2009, wecollected $2.1 million in unpaid interest and fees from the borrower.  At June 30, 2009, the loan balance owedto us for both tranches was $41.1 million, which includes $1.5 million of accruedinterest and fees included

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

in receivables fromrelated parties at June 30, 2009. Of the $41.1 million balance owed to us, $3.1 million represents therecently acquired A-1 tranche.  We havenot recorded an allowance against the recorded balance as our estimate of thefair value of the Royal Island property securing the bridge loan significantlyexceeds the current carrying value of the loan, and accordingly, we believe itis probable that all of the outstanding balance is collectible.

 

While we believe it iscurrently probable we will collect all outstanding balances with respect to ournotes receivable, current market conditions with respect to credit availabilityand to fundamentals within the real estate markets instill significant levelsof uncertainty.  Accordingly, futureadverse developments in market conditions would cause us to re-evaluate ourconclusions and could result in material impairment charges.

 

**10.      Capitalized Costs**

 

We capitalize interest,property taxes, insurance, and construction costs to real estate underdevelopment.  During the six months endedJune 30, 2009 we capitalized $6.7 million of such costs associated withreal estate under development and certain investments accounted for by theequity method, including $1.2 million in interest costs.  Capitalized interest costs include interestexpense and amortization of deferred financing costs.

 

Certain redevelopmentcosts including interest, property taxes, insurance, and construction costs associatedwith Chase Park Plaza have been capitalized to condominium inventory on ourconsolidated balance sheet at June 30, 2009.  During the six months ended June 30,2009, we capitalized a total of $5.1 million of such costs associated with thecondominium redevelopment at Chase Park Plaza.

 

During the first sixmonths of 2009, $0.5 million in costs were transferred from real estate underdevelopment to land on our balance sheet. Also, during the first six months of 2009, $5.1 million and $0.3 millionof real estate under development costs were transferred to building andimprovements and to furniture, fixtures, and equipment, respectively, on ourbalance sheet.

 

# **11.      Notes Payable**

# ** **

Our notes payable balancewas $433.2 million at June 30, 2009, as compared to $416.2 million at December 31,2008, and consists of borrowings and assumptions of debt related to ourproperty acquisitions as well as the notes payable of our mezzanine borrowerswe consolidate as variable interest entities under GAAP and our borrowingsunder our $75 million senior secured credit facility.  Each of our notespayable is collateralized by one or more of our properties.  At June 30,2009, our notes payable interest rates ranged from 1.9% to 6.3%, with aweighted average interest rate of approximately 2.9%.  Of our $433.2million in notes payable at June 30, 2009, $393.6 million represented debtsubject to variable interest rates.  At June 30, 2009, our notespayable have maturity dates that range from July 2009 to January 2016. In July 2009, we extended the maturity date of the Frisco Square I, LLC(Land) loan with the lender to September 28, 2009, pending ongoingdiscussions to extend this loan for one year as permitted under the terms ofthe loan agreement.  Our loan agreementsgenerally stipulate that we comply with certain reporting and financialcovenants.  These covenants include among other things, notifying thelender of any change in management and maintaining minimum debt servicecoverage ratios.  At June 30, 2009, we are not aware of anynon-compliance with our debt covenants under our loan agreements.  We have unconditionally guaranteed payment ofthe notes payable related to Frisco Square, Chase Park Plaza Hotel, Chase —Private Residences, Northborough Tower, and Crossroads Office Park.

 

In May 2009,we entered a loan agreement with a bank to place up to $8.75 million of debt onthe Bent Tree Green property.  Thebalance of this loan as of June 30, 2009 was $6.7 million.  This loan matures on May 19, 2012 andhas a floating interest rate equal to the greater of 5.75% or the prime rate +1%.  Monthly payments of interest onlyare due from June 1, 2009 through November 1, 2010. Beginning December 1,2010, monthly payments of interest and amortized principal are due withprincipal based on a 300 month term using the applicable interest rate andcurrent balance.  A final payment of theprincipal balance and any unpaid accrued interest is due and payable on thematurity date.  The loan agreementprovides for two one-year extension options that may be exercised upon meetingcertain terms and conditions.  We haveunconditionally guaranteed payment of this loan.

 

In February 2008, weentered into a senior secured revolving credit facility providing for up to $75million of secured borrowings.  Theinitial credit facility allowed us to borrow up to $75 million in revolvingloans, of which up to $20 million was available for issuing letters ofcredit.  As noted above, in May 2009,we entered into a separate loan agreement with another bank to place up to$8.75 million of debt on the Bent Tree Green property, which was part of thecollateral pool securing the credit facility. Accordingly, the Bent Tree Green property has been removed from thecollateral pool.  We have unconditionallyguaranteed payment of the senior secured revolving credit facility.  The availability of credit under therevolving credit facility is limited by the terms of the credit agreement.  As of June 30, 2009, the maximum

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

availability under therevolving credit facility was $64.2 million. The outstanding balance under the revolving credit facility was $56.6million.

 

The following tablesummarizes our contractual obligations for principal payments as of June 30,2009:

 

| **Principal  Payments Due:**               | ** ** | ** ** | ** ** |
|--------------------------------------------|------------|------------|------------|
| July 1, 2009 - December 31, 2009 |       | $          | 55,025     |   |
| 2010                                       |       | 200,562    |       |
| 2011                                       |       | 132,617    |       |
| 2012                                       |       | 8,070      |       |
| 2013                                       |       | 16,664     |       |
| Thereafter                                 |       | 19,244     |       |
| Unamortized premium                        |       | 1,058      |       |
|                                       |       | $          | 433,240    |   |

 

**12.          LeasingActivity**

 

Futureminimum base rental payments due to us under non-cancelable leases in effect asof June 30, 2009 for our consolidated properties are as follows:

 

| ** **                                 | ** ** | **Future  Minimum  Lease  Payments** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| July 1, 2009 - December 31, 2009 |       | $                                    | 20,344     |   |
| 2010                                       |       | 35,362                               |       |
| 2011                                       |       | 33,406                               |       |
| 2012                                       |       | 32,274                               |       |
| 2013                                       |       | 18,756                               |       |
| Thereafter                                 |       | 48,911                               |       |
| Total                                      |       | $                                    | 189,053    |   |

 

As of June 30,2009, none of our tenants accounted for 10% or more of our aggregate annualrental revenues from our consolidated properties.  Approximately $0.1 million of contingent rentwas included in rental revenue for both the three and six months ended June 30,2009.  Less than $0.1 million and $0.2million of contingent rent was included in rental revenue for the three and sixmonths ended June 30, 2008, respectively.

 

**13.      Derivative Instruments and HedgingActivities**

 

We may be exposed to therisk associated with variability of interest rates that might impact our cashflows and the results of operations.  The hedging strategy ofentering into interest rate caps and swaps, therefore, is to eliminate orreduce, to the extent possible, the volatility of cash flows.  In addition,we may be exposed to foreign currency exchange risk related to our netinvestments in the Becket House leasehold interest and the Central Europe JointVenture.  Accordingly, our hedgingstrategy is to protect our net investments in foreign currency denominatedentities against the risk of adverse changes in foreign currency to U.S. dollarexchange rates.

 

Derivative instrumentsclassified as assets were reported at their combined fair values of $0.3million and $1.3 million in prepaid expenses and other assets at June 30,2009 and December 31, 2008, respectively. Derivative instruments classified as liabilities were reported at theircombined fair values of $4.5 million and $5.5 million in accrued and otherliabilities at June 30, 2009 and December 31, 2008,respectively.  During the six monthsended June 30, 2009 we recorded unrealized losses of $0.2 million to AOCIin our statement of equity to adjust the carrying amount of the interest rateswaps and caps qualifying as hedges at June 30, 2009.  Unrealized losses on interest ratederivatives for the six months ended June 30, 2009 reflect areclassification of unrealized losses from accumulated other comprehensive lossto interest expense of $0.2 million.

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

The following tablesummarizes the notional values of our derivative financial instruments as of June 30,2009.  The notional values provide anindication of the extent of our involvement in these instruments at June 30,2009, but do not represent exposure to credit, interest rate, or market risks:

 
| **Type / Description**                               | ** ** | **Notional  Value** | ** ** | **Interest Rate /  Strike Rate** | ** ** | **Maturity**            | ** ** | **Fair Value  Asset /  (Liability)** | ** ** |
|------------------------------------------------------|------------|---------------------|------------|----------------------------------|------------|-------------------------|------------|--------------------------------------|------------|
| 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 cap - Becket House                    |       | £12,700        |       | 5.75%                            |       | November 21,  2010 |       | $                                    | 2          |   |
| Interest  rate swap - Becket House                   |       | £12,700        |       | 5.50%                            |       | November 21,  2009 |       | $                                    | (351       | ) |
| Interest  rate swap - Crossroads                     |       | $25,000             |       | 3.10%                            |       | November 1,  2010  |       | $                                    | (795       | ) |
|                                                 |       |                |       |                             |       |                    |       |                                 |       |
| Net  Investment Hedges                               |       |                |       |                             |       |                    |       |                                 |       |
| Foreign  currency put - Becket House                 |       | £6,120         |       | £1.30                       |       | November 23,  2011 |       | $                                    | 249        |   |
| Foreign  currency put - Central Europe Joint Venture |       | €17,000        |       | €1.10                       |       | July 28,  2010     |       | $                                    | 93         |   |
| Other                                                |       |                |       |                             |       |                    |       |                                 |       |
| Interest  rate swap - Chase Park Plaza Hotel         |       | $80,594             |       | 3.82%                            |       | November 15,  2010 |       | $                                    | (3,321     | ) |

 

The table below presentsthe fair value of our derivative financial instruments as well as theirclassification on the consolidated balance sheets as of June 30, 2009 and December 31,2008.

 
| ** **                                                             | ** ** | ** **                         | ** ** | **Asset Derivatives**                  | ** ** | **Liability Derivatives**                  | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------|------------|----------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **Balance  Sheet  Location**       | ** ** | **Fair Value at  June 30,  2009** | ** ** | **Fair Value at  December 31,  2008** | ** ** | **Fair Value at  June 30,  2009** | ** ** | **Fair Value at  December 31,  2008** | ** ** |
| **Derivatives designated as hedging instruments under SFAS  133:**     |       |                               |       |                                   |       |                                       |       |   |   |   |   |
|                                                                   |       |                               |       |                                   |       |                                       |       |   |   |   |   |
| Interest  rate derivative contracts                                    |       | Prepaid  expenses and other assets |       | $                                      | 2          |                                       | $          | 6 |   | $ | — |   | $ | — |   |
| Interest  rate derivative contracts                                    |       | Accrued  and other liabilities     |       | —                                 |       | —                                     |       | (1,146 | ) | (1,468 | ) |
| Foreign  exchange contracts                                            |       | Prepaid  expenses and other assets |       | 342                                    |       | 1,267                                      |       | — |   | — |   |
|                                                                   |       |                               |       |                                   |       |                                       |       |   |   |   |   |
| Total  derivatives designated as hedging instruments under SFAS 133    |       |                               |       | $                                      | 344        |                                       | $          | 1,273 |   | $ | (1,146 | ) | $ | (1,468 | ) |
|                                                                   |       |                               |       |                                   |       |                                       |       |   |   |   |   |
| **Derivatives not designated as hedging instruments under  SFAS 133:** |       |                               |       |                                   |       |                                       |       |   |   |   |   |
|                                                                   |       |                               |       |                                   |       |                                       |       |   |   |   |   |
| Interest  rate derivative contract                                     |       | Accrued  and other liabilities     |       | $                                      | —     |                                       | $          | — |   | $ | (3,321 | ) | $ | (4,050 | ) |
|                                                                   |       |                               |       |                                   |       |                                       |       |   |   |   |   |
| Total  derivatives                                                     |       |                               |       | $                                      | 344        |                                       | $          | 1,273 |   | $ | (4,467 | ) | $ | (5,518 | ) |

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

The tables below presentthe effect of our derivative financial instruments on the consolidatedstatements of operations for the periods ended June 30, 2009 and 2008.

 

**Derivativesin SFAS 133 Cash Flow Hedging Relationships**

 
| ** **                          | ** ** | **Amount  of Gain or (Loss)  Recognized in AOCI on  Derivative (Effective Portion)** | ** ** | **Amount  of Gain or (Loss)  Reclassified from AOCI into  Income (Effective Portion)(1)** | ** ** | **Amount  of Gain or (Loss)  Recognized in AOCI on  Derivative (Effective Portion)** | ** ** | **Amount  of Gain or (Loss)  Reclassified from AOCI into  Income (Effective Portion)(1)** | ** ** |
|-------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                          | ** ** | **Three  months ended June 30,**                                                | ** ** | **Three  months ended June 30,**                                                     | ** ** | **Six  months ended June 30,**                                                  | ** ** | **Six  months ended June 30,**                                                       | ** ** |
| ** **                          | ** ** | **2009**                                                                             | ** ** | **2008**                                                                                  | ** ** | **2009**                                                                             | ** ** | **2008**                                                                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  rate derivative contracts |       | $                                                                                    | 286        |                                                                                      | $          | 2,488                                                                                |       | $                                                                                         | 17         |   | $ | — |   | $ | 407 |   | $ | 81 |   | $ | 31 |   | $ | — |   |
|                                     |            |                                                                                      |            |                                                                                           |            |                                                                                      |            |                                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Amounts related to interest ratederivative contracts are included in interest expense.

 

**Derivativesin SFAS 133 Net Investment Hedging Relationships**

 
| ** **                  | ** ** | **Amount  of Gain or (Loss)  Recognized in AOCI on  Derivative (Effective Portion)** | ** ** | **Amount  of Gain or (Loss)  Reclassified from AOCI into  Income (Effective Portion)(1)** | ** ** | **Amount  of Gain or (Loss)  Recognized in AOCI on  Derivative (Effective Portion)** | ** ** | **Amount  of Gain or (Loss)  Reclassified from AOCI into  Income (Effective Portion)(1)** | ** ** |
|-----------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Three  months ended June 30,**                                                | ** ** | **Three  months ended June 30,**                                                     | ** ** | **Six  months ended June 30,**                                                  | ** ** | **Six  months ended June 30,**                                                       | ** ** |
| ** **                  | ** ** | **2009**                                                                             | ** ** | **2008**                                                                                  | ** ** | **2009**                                                                             | ** ** | **2008**                                                                                  | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Foreign  exchange contracts |       | $                                                                                    | (653       | )                                                                                         | $          | (109                                                                                 | )          | $                                                                                         | —     |   | $ | — |   | $ | (925 | ) | $ | (154 | ) | $ | — |   | $ | — |   |
|                             |            |                                                                                      |            |                                                                                           |            |                                                                                      |            |                                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)           We do not expect to reclassify any gain or loss fromAOCI into income until the sale or upon complete or substantially completeliquidation of the respective investment in the foreign entity.

 

**DerivativesNot Designated as Hedging Instruments Under SFAS 133**

 
| ** **                         | ** ** | **Location  of Gain or (Loss)** | ** ** | **Amount  of Gain or (Loss)  Recognized in Income on  Derivative** | ** ** | **Amount  of Gain or (Loss)  Recognized in Income on  Derivative** | ** ** |
|------------------------------------|------------|---------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Recognized  in Income on**    | ** ** | **Three  months ended June 30,**                              | ** ** | **Six  months ended June 30,**                                | ** ** |
| ** **                         | ** ** | **Derivative**                  | ** ** | **2009**                                                           | ** ** | **2008**                                                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  rate derivative contract |       | Interest expense                |       | $                                                                  | 575        |                                                               | $          | — |   | $ | 754 |   | $ | — |   |
|                                    |            |                                 |            |                                                                    |            |                                                                    |            |  |  |  |  |  |  |  |  |

 

*Credit risk and collateral*

 

Our credit exposurerelated to interest rate and foreign currency derivative instruments isrepresented by the fair value of contracts with a net liability fair value atthe reporting date.  These outstandinginstruments may expose us to credit loss in the event of nonperformance by thecounterparties to the agreements. However, we have not experienced any credit loss as a result ofcounterparty nonperformance in the past.  To manage credit risk, we select and willperiodically review counterparties based on credit ratings and limit ourexposure to any single counterparty. Under our agreements with the counterparty related to our interest ratecaps of Santa Clara Tech Center and Chase — The Private Residences, cashdeposits may be required to be posted by the counterparty whenever their creditrating falls below certain levels.  Basedon our agreement with the counterparty related to our interest rate swap ofCrossroads Office Park, we may be required to post cash collateral of up to$0.6 million if the lender’s obligation to lend under our senior secured creditfacility is terminated or the lender ceases to be a party to the senior securedcredit facility and the value of the derivative is a liability on ourconsolidated balance sheet.  At June 30,2009, no collateral has been posted with our counterparties nor have ourcounterparties posted collateral with us related to our derivative instruments. See Notes 3 and 5 for further information onour derivative instruments.

 

**14.      Distributions**

 

Weinitiated the payment of monthly distributions in August 2006.  In April 2007, and through March 2009,the declared distributions rate was a 3% annualized rate of return, calculatedon a daily record basis of $0.0008219 per share.  Pursuant to our Second Amended and RestatedDistribution Reinvestment Plan (the “DRP”), stockholders may elect to reinvestany cash distribution in additional shares of common stock.  We record all distributions when declared,except that the stock issued through the DRP is recorded when the shares areactually issued.

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

Thefollowing are the distributions declared by quarter for the six months ended June 30,2009 and 2008:

 

| **2009**    | ** ** | **Cash** | ** ** | **DRP** | ** ** | **Total** | ** ** | **Per Share** | ** ** |
|-------------|------------|----------|------------|---------|------------|-----------|------------|---------------|------------|
| 2nd Quarter |       | $        | —     |    | $          | —    |       | $             | —     |   | $ | — |   |
| 1st Quarter |       | 1,063    |       | 3,007   |       | 4,070     |       | 0.07          |       |
| Total       |       | $        | 1,063      |    | $          | 3,007     |       | $             | 4,070      |   | $ | 0.07 |   |

 

| **2008**    | ** ** | **Cash** | ** ** | **DRP** | ** ** | **Total** | ** ** | **Per  Share** | ** ** |
|-------------|------------|----------|------------|---------|------------|-----------|------------|----------------|------------|
| 2nd Quarter |       | $        | 978        |    | $          | 3,098     |       | $              | 4,076      |   | $ | 0.07 |   |
| 1st Quarter |       | 969      |       | 3,086   |       | 4,055     |       | 0.07           |       |
| Total       |       | $        | 1,947      |    | $          | 6,184     |       | $              | 8,131      |   | $ | 0.14 |   |

 

On July 14, 2009, our board of directorsauthorized a quarterly distribution in the amount of $0.075 per share of commonstock, which is equivalent to an annual distribution of 3% assuming a $10 priceper share.  The distribution was payableto the common stockholders of record at the close of business on June 30,2009 and the distribution was paid on July 29, 2009.

 

**15.      Related Party Transactions**

 

Behringer OpportunityAdvisors I and certain of its affiliates receive fees and compensation inconnection with our offering of common stock to the public, and in connectionwith 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 the DRIP.

 

BehringerOpportunity Advisors I, or its affiliates, receives acquisition and advisoryfees of 2.5% of the contract purchase price of each asset for the acquisition,development or construction of real property or 2.5% of the funds advanced inrespect of a loan.  Our advisor, or itsaffiliates, also receives reimbursement of acquisition expenses up to 0.5% ofthe contract purchase price of each asset or, with respect to a loan, up to0.5% of the funds advanced.  BehringerOpportunity Advisors I or its predecessor-in-interest did not earn acquisitionand advisory fees or acquisition expense reimbursements in the six months endedJune 30, 2009.  In the six monthsended June 30, 2008, we incurred $1.7 million in acquisition and advisoryfees and $0.3 million in acquisition expense reimbursements.

 

We pay BehringerOpportunity Advisors I or its affiliates a debt financing fee equal to 1% ofthe amount of any debt made available to us. We incurred $0.1 million and $1.2 million in debt financing fees for thesix months ended June 30, 2009 and 2008, respectively.

 

We pay HPT ManagementServices LP, Behringer Harvard Real Estate Services, LLC, or Behringer HarvardOpportunity Management Services, LLC (collectively, “BH Property Management”),affiliates of our advisor and our property managers, fees for management,leasing, and construction supervision of our properties, which may besubcontracted to unaffiliated third parties. Such fees are equal to 4.5% of gross revenues plus leasing commissionsbased upon the customary leasing commission applicable to the same geographiclocation of the respective property.  Inthe event that we contract directly with a non-affiliated third-party propertymanager in respect of a property, we will pay BH Property Management anoversight fee equal to 0.5% of gross revenues of the property managed.  In no event will we pay both a propertymanagement fee and an oversight fee to BH Property Management with respect toany particular property.  We incurred andexpensed property management fees or oversight fees totaling $1 million and$0.5 million in the six months ended June 30, 2009 and 2008,respectively.  We did not incur anyconstruction management fees to BH Property Management for either of the sixmonths ended June 30, 2009 or 2008.

 

We pay BehringerOpportunity Advisors I an annual asset management fee of 0.75% of the aggregateasset value of acquired real estate.  Thefee is payable monthly in an amount equal to one-twelfth of 0.75% of theaggregate asset value as of the last day of the preceding month.  For the six months ended June 30, 2009,we expensed $2.7 million of asset management fees and capitalized less than$0.1 million of asset management fees to real estate.  For the six months ended June 30, 2008,we expensed $1.9 million of asset management fees and capitalized $0.1 millionof asset management fees to real estate.

 

We will reimburseBehringer Opportunity Advisors I or its affiliates for all expenses paid orincurred by them in connection with the services they provide to us, includingdirect expenses and the costs of salaries and benefits of persons employed bythose entities and performing services for us, subject to the limitation thatwe will not reimburse for any amount by which our advisor’s operating expenses(including the asset management fee) at the end of the four fiscal

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

quartersimmediately preceding the date reimbursement is sought exceeds the greaterof:  (1) 2% of our average investedassets or (2) 25% of our net income for that four quarter period otherthan any additions to reserves for depreciation, bad debts or other similarnon-cash reserves and any gain from the sale of our assets for thatperiod.  Notwithstanding the precedingsentence, we may reimburse the advisor for expenses in excess of thislimitation if a majority of our independent directors determines that suchexcess expenses are justified based on unusual and non-recurring factors.  For the six months ended June 30, 2009and 2008, we incurred and expensed costs for administrative services totaling$0.9 million and $0.2 million, respectively.

 

At June 30, 2009, wehad a payable to our advisor and its affiliates of $1.4 million.  This balance consists primarily of assetmanagement fees and administrative service expenses payable to BehringerOpportunity Advisors I, management fees payable to BH Property Management, andother miscellaneous payables.  Thispayable is offset by a receivable from our advisor and its affiliates of $0.1million, which is included in receivables from related parties at June 30,2009.

 

We are dependenton Behringer Opportunity Advisors I and BH Property Management for certainservices that are essential to us, including asset acquisition and dispositiondecisions, property management and leasing services, and other generaladministrative responsibilities.  In theevent that these companies were unable to provide us with the respectiveservices, we would be required to obtain such services from other sources.

 

**16.      Stock-Based Compensation**

 

The Behringer HarvardOpportunity REIT I, Inc. Amended and Restated 2004 Incentive Award Plan (“IncentiveAward Plan”) was approved by our board of directors on July 19, 2005 andby our stockholders on July 25, 2005, and provides for equity awards toour directors and consultants and to employees, directors, and consultants ofour affiliates.  In November 2008,the board of directors approved an amendment to the grantees’ stock optionagreements for all awards granted prior to December 31, 2007, settingforth a revised vesting and expiration schedule.  Accordingly, all options that were previouslyoutstanding and fully vested are subject to the revised vesting and expirationschedule as follows:  25% becomeexercisable in each of the calendar years 2010 and 2011 with the remaining 50%exercisable in the calendar year 2012. Any vested awards not exercised in the calendar year specified areforfeited and no longer exercisable.  Wedid not recognize any incremental compensation cost resulting from thesemodifications.

 

On June 22, 2009, weissued options to purchase 5,000 shares of our common stock at $8.17 per shareto each of our three independent directors pursuant to the Incentive AwardPlan.  On July 24, 2008, we issuedoptions to purchase 5,000 shares of our common stock at $9.50 per share to eachof our three independent directors pursuant to the Incentive Award Plan.  The options issued in both 2009 and 2008become exercisable one year after the date of grant.  As of June 30, 2009, options to purchase69,583 shares of stock were outstanding, of which none were fully vested, at aweighted average exercise price per share of $8.99.  The remaining contractual life of theoutstanding options is 4.4 years. Compensation expense associated with our Incentive Award Plan was notmaterial for the six months ended June 30, 2009 or 2008.

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**17.      Supplemental Cash Flow Information**

 

Supplemental cash flowinformation is summarized below.

 

| ** **                                                                                                                     | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| **Supplemental disclosure:**                                                                                                   |       |                               |       |   |   |
| Interest  paid, net of amounts capitalized                                                                                     |       | $                                  | 6,940      |   | $ | 4,639 |   |
| Income  taxes paid                                                                                                             |       | $                                  | —     |   | $ | 76 |   |
|                                                                                                                           |       |                               |       |   |   |
| **Non-cash investing activities:**                                                                                             |       |                               |       |   |   |
| Property  and equipment additions and purchases of real estate in accrued liabilities                                          |       | $                                  | 229        |   | $ | 42 |   |
| Capital  expenditures for real estate under development in accounts payable and accrued  liabilities                           |       | $                                  | 2,310      |   | $ | 7,272 |   |
| Capital  expenditures for real estate under development of consolidated borrowers in accounts  payable and accrued liabilities |       | $                                  | —     |   | $ | 3,138 |   |
| Amortization  of deferred financing fees in properties under development                                                       |       | $                                  | 149        |   | $ | 261 |   |
| Amortization  of deferred financing fees in properties under development of consolidated  borrowers                            |       | $                                  | —     |   | $ | 34 |   |
|                                                                                                                           |       |                               |       |   |   |
| **Non-cash financing activities:**                                                                                             |       |                               |       |   |   |
| Common  stock issued in distribution reinvestment plan                                                                         |       | $                                  | 3,008      |   | $ | 6,204 |   |
| Assumed  debt on acquisition of real estate investment                                                                         |       | $                                  | —     |   | $ | 22,229 |   |

 

*********

 

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**Item 2.                    Management’s Discussion andAnalysis of Financial Condition and Results of Operations.**

** **

Thefollowing discussion and analysis should be read in conjunction with theaccompanying financial statements of the Company and the notes thereto:

 

### **Forward-Looking Statements**

### ** **

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

 

### **Forward-looking statements that were true at thetime made may ultimately prove to be incorrect or false.  We caution investors not to place unduereliance on forward-looking statements, which reflect our management’s viewonly as of the date of this report on Form 10-Q.  We undertake no obligation to update or reviseforward-looking statements to reflect changed assumptions, the occurrence ofunanticipated 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 Part II, Item 1A of this report onForm 10-Q and the “Risk Factors” section of our Annual Report on Form 10-Kfor the year ended December 31, 2008, and the risks identified in Part II,Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31,2009, both as filed with the SEC.**

### ** **

**CautionaryNote**

 

The representations,warranties, and covenants made by us in any agreement filed as an exhibit tothis report on Form 10-Q are made solely for the benefit of the parties tothe agreement, including, in some cases, for the purpose of allocating riskamong the parties to the agreement, and should not be deemed to berepresentations, 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.

 

**Executive Overview**

 

We are a Marylandcorporation that was formed in November 2004 to invest and operatecommercial real estate or real-estate related assets located in or outside theUnited States on an opportunistic basis. We conduct substantially all of our business through our operatingpartnership and its subsidiaries. We are organized and qualify as a real-estateinvestment trust (“REIT”) for federal income tax purposes.

 

We are externallymanaged and advised by Behringer Harvard Opportunity Advisors I, LLC (“BehringerOpportunity Advisors I”), a Texas limited liability company formed in June 2007.  Behringer Opportunity Advisors I isresponsible for managing our day-to-day affairs and for identifying and makingacquisitions and investments on our behalf.

 

As of June 30, 2009,we had invested in 22 assets:  11consolidated wholly-owned properties; five properties consolidated throughinvestments in joint ventures, including two hotel and development propertiesand a mixed-used property; an investment in an island development accounted forunder the equity method; an investment in a portfolio of 22 properties locatedin four Central European countries accounted for under the equity method; twoinvestments in student housing projects in Texas and Virginia, also accountedfor under the equity method; and two multifamily properties deemed to bevariable interest entities that we consolidate as a mezzanine lender.  Our investment properties are located in Arizona,California, Colorado, Massachusetts, Minnesota, Missouri, Nevada, Texas,Virginia, the Commonwealth of The Bahamas, London, England, the Czech Republic,Poland, Hungary, and Slovakia.

 

*Market Outlook*

 

During 2008 andcontinuing into the first half of 2009, the U.S. and global economy experienceda significant downturn.  This downturnincluded disruptions in the broader financial and credit markets, decliningconsumer confidence, and an increase in unemployment rates.  These conditions have contributed to weakenedmarket conditions.  Due to the strugglingU.S. and global economies, we believe that overall demand for office space willcontinue to decline due to losses

 

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in the financial andprofessional services industries and that corresponding rental rates willremain weak at least through the remainder of the current year.  We also believe that tenant defaults acrossthe nation are likely to increase in the short-term.  To date, we have not experienced anysignificant tenant defaults.

 

The hospitalityindustry continues to be negatively affected by the poor global economy.  Smith Travel Research indicates that thenational overall occupancy rate for hospitality properties in the United Statesdeclined from 62.5% in the first quarter of 2008 to 55.2% in the first quarterof 2009.  The national overall AverageDaily Rate (“ADR”) has also declined, from $109.97 in the first quarter of 2008to $99.42 to the first quarter of 2009. This weakening of the hospitality industry is expected to continuethroughout the remainder of 2009.

 

The multifamilyindustry has been hard hit by the economic decline as well.  Weak U.S. labor markets and high unemploymentrates across the nation have been key factors contributing to high vacancyrates.  High supply in this industry isanother factor contributing to high vacancy rates.  Property and Portfolio Research (“PPR”)expects that vacancy rates will continue to climb through the remainder of2009.  The absence of new supply however,combined with more favorable economic news for the economy over the next fewyears, is expected to help the industry to recover within five years.

 

Ten of our realestate assets are located in Texas. These assets are located in the Dallas-Fort Worth and Houstonmetropolitan areas. These markets and Texas in general have historically beenmore resistant to recessionary trends than much of the nation.  According to PPR, office vacancy rates in theDallas-Fort Worth market continued to rise through the early part of 2009.  This was due in large part to officeemployment declines in the financial activities, professional, and businessservices industries.  However, despitethese declines, leasing activity continues and supply is not as oversaturatedin this market as in many.  Through theremainder of the year, Dallas-Fort Worth is expected to react similarly to thenation as a whole.  However, theDallas-Fort Worth market is well-positioned to grow in the long-term.  The Houston market has also been moreresistant to the recession than much of the nation but appears to be slowlycatching up with the rest of the nation in terms of vacancy trends.

 

We have severalprojects in various stages of development including Rio Salado located inPhoenix, Arizona; Frisco Square located in Frisco, Texas; The Lodge &Spa at Cordillera located in Edwards, Colorado; and, Royal Island, located inThe Bahamas.  Due in large part to thestruggling U.S. and global economies, we have decided to defer furthersubstantive development activities on these projects for the near term.

 

While it isunclear as to when the overall economy will recover, we do not expectconditions to improve significantly in the near future.  Management expects that the currentvolatility in the capital markets will continue, at least in theshort-term.  This volatility hassignificantly impacted the availability of credit for borrowers. Thistightening of credit may hinder our ability to take advantage of currentopportunities in the marketplace.  Wehave placed a high priority on maintaining strong relationships with banks andother lenders.  We believe, though theopportunities for obtaining new credit have diminished, that our strongrelationships with our lenders will ensure that opportunities for securingcredit will continue to be available to us.

 

As a result of theexisting economic conditions, our primary short-term objectives are to preservecapital and sustain property values.  Ourlong-term objectives are to realize growth in the value of our investments, toenhance the value we will receive upon the sale of our assets, to preserve,protect, and return investors’ capital contributions, to grow net cash fromoperations such that cash is available for distributions, and to provideinvestors with return of their investment. We believe that our experience in real-estate investing and ourexcellent reputation will prove beneficial and that we are well-positioned tomeet both our short-term and long-term objectives.

 

**Liquidity and Capital Resources**

 

Ourprincipal demands for funds for the next twelve months and beyond will be forthe payment of costs associated with the lease-up of available space at ouroperating properties (including commissions, tenant improvements, and capitalimprovements), for certain ongoing costs at our development properties, for thepayment of operating expenses and distributions, and for the payment ofinterest 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 improvements)and ongoing costs at our development properties are expected to be met fromoperations and borrowings.

 

Weexpect to fund our short-term liquidity requirements by using the short-termborrowings and cash flow from the operations of our current investments. Operating cash flows are expected to increase as available space at ouroperating properties is leased-up and we close on the sale of condominiuminventory. For both our short-term and long-term liquidity requirements, otherpotential future sources of capital may include proceeds from securedor unsecured financings from banks or other lenders, proceeds from thesale of our investments, if and when any are sold, and undistributed funds fromoperations.  If necessary, we may use financings or other sources ofcapital in the event of unforeseen significant capital expenditures.

 

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*Debt Financings*

 

Wemay, from time to time, make mortgage, bridge, or mezzanine loans and otherloans for investments or property development. We may obtain financing at the time an investment is made or at suchlater time as determined to be necessary, depending on multiple factors.

 

Ournotes payable increased to $433.2 million at June 30, 2009 from $416.2million at December 31, 2008 primarily as a result of notes payableassociated with properties under development, borrowings under our seniorsecured credit facility, and new borrowings associated with Bent TreeGreen.  Each of our loans is secured byone or more of our properties.  At June 30,2009, our notes payable interest rates ranged from 1.91% to 6.3%, with aweighted average interest rate of 2.9%. Generally, our notes payable mature at approximately two to ten yearsfrom origination and require payments of interest only for approximately two tofive years, with all principal and interest due at maturity.  At June 30, 2009, our notes payable hadmaturity dates that range from July 2009 to January 2016.  Our loan agreements generally stipulate thatwe comply with certain reporting and financial covenants.  These covenants include, among other things,notifying the lender of any change in management and maintaining minimum debtservice coverage ratios.  At June 30,2009, we believe we were in compliance with each of the debt covenants underour loan agreements.

 

Recently, the U.S. creditmarkets and the sub-prime residential mortgage market have experienced severedislocations and liquidity disruptions. Sub-prime mortgage loans haveexperienced increasing rates of delinquency, foreclosure and loss.  Although we have not directly or indirectlyinvested in sub-prime mortgage loans, these and other related events continueto have a significant impact on the capital markets associated not only withsub-prime mortgage-backed securities, asset-backed securities andcollateralized debt obligations, but also with the U.S. housing, credit andfinancial markets as a whole.

 

The commercial realestate debt markets are currently experiencing volatility as a result ofcertain factors, including the tightening of underwriting standards by lendersand credit rating agencies and the significant inventory of unsoldcollateralized mortgage-backed securities in the market.  Credit spreads for major sources of capitalhave widened significantly as investors have demanded a higher riskpremium.  This is resulting in lenders increasingthe cost for debt financing.

 

Current economicconditions, as well as few unmortgaged assets, negatively impact our ability tofinance capital needs through borrowings. Current market conditions also make it more difficult to refinanceassets when their mortgages mature.  Ingeneral, in the current market lenders have increased the amount of equityrequired to support either new or existing borrowings.

 

Consequently, there isgreater uncertainty regarding our ability to access the credit markets in orderto attract financing on reasonable terms. Our ability to borrow funds tofinance future acquisitions or refinance existing debt obligations could beadversely affected by our inability to secure permanent financing on reasonableterms, if at all.

 

In addition, cap ratesfor real estate properties have increased. Capitalization rates (or cap rates) and property prices move inverselyso that an increase in cap rates should, without an increase in property netoperating income, result in a decrease in property value.  Although this development is positive for newproperty acquisitions, the overall impact will likely be negative for usbecause, we believe, it will further strain our ability to finance our businessusing existing assets and to refinance debt on our existing assets because ourproperties may be viewed as less valuable.

 

Should the overall costof borrowings increase, either by increases in the index rates or by increasesin lender spreads, we will need to factor such increases into the economics ofour developments and property contributions. This may result in our investment operations generating lower overalleconomic returns and a reduced level of cash flow, which could potentiallyimpact our ability to make distributions to our stockholders at currentlevels.  In addition, the recentdislocations in the debt markets have reduced the amount of capital that isavailable to finance real estate, which, in turn: (1) leads to a declinein real estate values generally; (2) slows real estate transactionactivity; (3) reduces the loan to value upon which lenders are willing toextend debt and (4) results in difficulty in refinancing debt as itbecomes due, all of which may reasonably be expected to have a material adverseimpact on the value of real estate investments and the revenues, income or cashflow from the acquisition and operations of real properties and mortgage loans.

 

If the current debtmarket environment persists, we may modify our investment strategies in orderto seek to optimize our portfolio performance. Our strategies may include, among other options, limiting or eliminatingthe use of debt and focusing on those investments that do not require the useof leverage to meet our portfolio goals.

 

One of our principallong-term liquidity requirements includes the repayment of maturing debt,including borrowings under our senior secured credit facility discussedbelow.  The following table providesinformation with respect to the contractual maturities and scheduled principalrepayments of our indebtedness as of June 30, 2009.  The table does not represent any extensionoptions.

 

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| ** **                                                                                   | ** ** | **Payments Due by Period** | ** **   |
|----------------------------------------------------------------------------------------------|------------|----------------------------|--------------|
| ** **                                                                                   | ** ** | **2009**                   | ** **   | **2010-2011** | ** ** | **2012-2013** | ** ** | **After 2013** | ** ** | **Total** | ** ** |
| Principal  payments - fixed rate debt                                                        |       | $                          |  136    |   | $ |  927 |   | $ |  18,324 |   | $ |  19,244 |   | $ |  38,631 |   |
| Interest  payments - fixed rate debt                                                         |       | 1,172                      |         | 4,633 |   | 4,118 |   | 2,263 |   | 12,186 |   |
| Principal  payments - variable rate debt                                                     |       | 54,889                     |         | 332,252 |   | 6,410 |   | — |   | 393,551 |   |
| Interest  payments - variable rate debt (based on rates in effect as of June 30,  2009) |       | 4,819                      |         | 9,513 |   | 185 |   | — |   | 14,517 |   |
| Total                                                                                        |       | $                          |  61,016 |   | $ |  347,325 |   | $ |  29,037 |   | $ |  21,507 |   | $ |  458,885 |   |

 

Included withinthe table above are amounts due related to the Alexan Black Mountain and AlexanVoss notes payable.  The notes payablerelated to Alexan Black Mountain and Alexan Voss are not our obligation but arethe obligations of our mezzanine borrower. Of the $54.9 million variable rate debt principal payments due in 2009,$29 million is related to Alexan Black Mountain.  We, as the mezzanine lender, are indiscussion with the mezzanine borrower and the senior construction lender torestructure and extend the Alexan Black Mountain note payable which matures in September 2009.  In addition, $25.8 million of the principalpayments under variable rate debt due in 2009 is related to the Frisco SquareI, LLC (Land) loan which originally matured July 29, 2009.  We have extended the maturity date of theloan thru September 28, 2009 pending ongoing discussions to extend thisloan with the lender as permitted under the terms of the loan agreement.  Of the $332.3 million variable rate debtprincipal payments due in 2010-2011, $39.5 million is related to the Alexan Vossloan with matures in April 2010. We, as the mezzanine lender, expect to coordinate with the mezzanineborrower and the senior construction lender to extend or refinance the AlexanVoss loan.

 

*Credit Facility*

 

On February 13,2008, we entered into a senior secured revolving credit facility (the “CreditAgreement”) providing for up to $75 million of secured borrowings with Bank ofAmerica, as lender and administrative agent, and other lending institutionsthat become a party to the Credit Agreement. The credit facility is secured by a first lien on all real propertyassets in a collateral pool consisting of six wholly-owned properties.  In May 2009, we entered into a separateloan agreement with another bank to place up to $8.75 million of debt on theBent Tree Green property, which was part of the collateral pool securing thecredit facility.  Accordingly, the BentTree Green property has been removed from the collateral pool.  Loans under the credit facility bear interestat an annual rate that is equal to a combination of (1) the LIBOR plus anapplicable 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.

 

We have unconditionallyguaranteed payment of the senior secured revolving credit facility.  The availability of credit under the seniorsecured credit facility is limited by the terms of the Credit Agreement.  As of June 30, 2009, the maximumavailability under the senior secured credit facility was $64.2 million and theoutstanding balance was $56.6 million. The cash and cash equivalents on the consolidated balance sheet of $18.1million as of June 30, 2009 and additional amounts available under oursenior secured credit facility are expected to fund our short-term liquidityrequirements.  The proceeds of the seniorsecured credit facility have been used to fund ongoing costs at our developmentproperties, to fund a portion of our acquisition of the Central Europe JointVenture, and for general corporate purposes.

 

*Joint Venture Indebtedness*

 

We have noncontrolling,unconsolidated ownership investments in three properties and one investment ina joint venture consisting of 22 properties. Our effective ownership percentages range from 31% to 50%.  We exercise significant influence over, butdo not control, these entities and therefore they are presently accounted forusing the equity method of accounting. At June 30, 2009, the aggregatedebt held by unrelated parties, including both ours and our partners’ share,incurred by these ventures was approximately $165.3 million.

 

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The table belowsummarizes the outstanding debt of these properties as of June 30, 2009.

 
| ** **                    | ** ** | **Venture**   | ** ** | **Interest Rate**       | ** ** | ** **   | ** **    | ** **                | ** **             |
|-------------------------------|------------|---------------|------------|-------------------------|------------|--------------|---------------|---------------------------|------------------------|
| ** **                    | ** ** | **Ownership** | ** ** | **(as of**              | ** ** | **Carrying** | ** **    | **Maturity**              | ** **             |
| **Properties**                | ** ** | **%**         | ** ** | **June 30, 2009)** | ** ** | **Amount**   | ** **    | **Date**                  | ** **             |
|                          |       |          |       |                    |       |         |          |                      |                   |
| GrandMarc  at the Corner      |       | 50%           |       | 2.06%                   |       | $            |  26,919  |                      | June 14,  2009(3) |   |
| GrandMarc  at Westberry Place |       | 50%           |       | 2.31%                   |       | 37,690       |          | January 25,  2010(3) |                   |
| Central  Europe Joint Venture |       | 49%           |       | 2.79%(1)                |       | 100,691      |          | March 1,  2012(2)    |                   |
| Total                         |       |          |       |                    |       | $            |  165,300 |                      |                   |   |

 

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| (1)    | Represents the weighted  average interest rate of the various notes payable secured by the 22  properties in the Central Europe Joint Venture.                                                                              |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                        |
| (2)    | Represents the weighted  average maturity date of the various notes payable secured by the 22  properties in the Central Europe Joint Venture.                                                                              |
|   |                                                                                                                                                                                                                        |
| (3)    | The GrandMarc at the  Corner loan has been extended through October 12, 2009 pending the  completion of refinancing with another lender. We also expect to refinance or  extend the GrandMarc at Westberry Place loan. |

 

**Results of Operations**

 

As of June 30, 2009,we had invested in 22 assets:  11consolidated wholly-owned properties; five properties consolidated throughinvestments in joint ventures, including two hotel and development propertiesand a mixed-used property; an investment in an island development accounted forunder the equity method; an investment in a portfolio of 22 properties locatedin four Central European countries accounted for under the equity method; twoinvestments in student housing projects in Texas and Virginia, also accountedfor under the equity method; and two multifamily development properties as amezzanine lender consolidated as VIEs under GAAP.  Our investment properties are located inArizona, California, Colorado, Massachusetts, Minnesota, Missouri, Nevada,Texas, Virginia, the Commonwealth of The Bahamas, London, England, the CzechRepublic, Poland, Hungary, and Slovakia.

 

*Three months ended June 30, 2009 as comparedto three months ended June 30, 2008*

* *
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** **              | ** ** | ** ** | ** ** |
|--------------------------------|------------|------------------------|------------|-------------------------|------------|------------|------------|
| ** **                     | ** ** | **June 30,**      | ** ** | **Increase (Decrease)** | ** ** |
| ** **                     | ** ** | **2009**               | ** ** | **2008**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **(unaudited)**        | ** ** | ** **              | ** ** | ** ** | ** ** |
| Revenue:                       |       |                   |       |                    |       |       |       |   |   |
| Rental  revenue                |       | $                      | 15,755     |                    | $          | 14,172     |       | $ | 1,583 |   | 11 | % |
| Hotel  revenue                 |       | 674                    |       | 1,234                   |       | (560       | )          | -45 | % |
| Condominium  sales             |       | 8,109                  |       | —                  |       | 8,109      |       | n/a |   |
| Total  revenues                |       | $                      | 24,538     |                    | $          | 15,406     |       | $ | 9,132 |   | 59 | % |
|                           |       |                   |       |                    |       |       |       |   |   |
| Expenses:                      |       |                   |       |                    |       |       |       |   |   |
| Property  operating expenses   |       | $                      | 6,653      |                    | $          | 5,823      |       | $ | 830 |   | 14 | % |
| Cost  of condominium sales     |       | 8,178                  |       | —                  |       | 8,178      |       | n/a |   |
| Interest  expense              |       | 4,057                  |       | 2,676                   |       | 1,381      |       | 52 | % |
| Real  estate taxes             |       | 2,125                  |       | 1,786                   |       | 339        |       | 19 | % |
| Impairment  charge             |       | 2,732                  |       | —                  |       | 2,732      |       | n/a |   |
| Property  management fees      |       | 599                    |       | 684                     |       | (85        | )          | -12 | % |
| Asset  management fees         |       | 1,441                  |       | 1,011                   |       | 430        |       | 43 | % |
| General  and administrative    |       | 1,668                  |       | 905                     |       | 763        |       | 84 | % |
| Advertising  costs             |       | 217                    |       | 630                     |       | (413       | )          | -66 | % |
| Depreciation  and amortization |       | 7,251                  |       | 6,112                   |       | 1,139      |       | 19 | % |
| Total  expenses                |       | $                      | 34,921     |                    | $          | 19,627     |       | $ | 15,294 |   | 78 | % |

 

*Revenues.* Our total revenues increased by $9.1 million to $24.5 million for thethree months ended June 30, 2009 as compared to $15.4 million for thethree months ended June 30, 2008. The increase in revenues is primarily due to:

 

·      rentalrevenue of $0.8 million from Crossroads Office Park which was acquired in June 2008;

 

·      rentalrevenue of $0.6 million for Alexan Voss which was not operational in 2008; and

 

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·      condominiumsales of $8.1 million as of June 30, 2009 as compared to no condominiumsales as of June 30, 2008.

 

Hotel revenues for thethree months ended June 30, 2009 totaled $0.7 million as compared to $1.2million for the three months ended June 30, 2008, and consisted ofrevenues generated by the operations of The Lodge & Spa at Cordillera.  The decrease is primarily due to a 30.7%decrease in occupancy and a softening of the average daily room rate at TheLodge & Spa at Cordillera as of June 30, 2009 as compared to June 30,2008.

 

Weclosed on the sale of 11 condominium units at The Private Residences at TheChase Park Plaza during the three months ended June 30, 2009.  Of the remaining 55 units, 16 units wereunder sales contracts with non-refundable deposits and five units were reservedwith refundable deposits as of June 30, 2009.

 

We expect rental revenueto be flat for the remainder of 2009 due to slowing lease-up of available spaceat our operating properties and moderating rental rates on rollover of existingleases in the current weak economy. Condominium sales are expected to increase as we complete constructionof units and close sales at The Private Residences at The Chase Park Plaza.

 

*PropertyOperating Expenses.* Property operating expenses for the three months ended June 30,2009 were $6.7 million as compared to $5.8 million for the three monthsended June 30, 2008, and were comprised of operating expenses from ourconsolidated properties.  The increase inproperty operating expenses was primarily due to the operating expensesincurred by Crossroads Office Park, acquired in June 2008 of $0.4million.  In addition, we recorded a $0.6million reserve against tenant fees for Becket House in the second quarter of2009.  These increases were partiallyoffset by a decrease in property operating expenses related to The Lodge andSpa at Cordillera of $0.6 million due to decreased occupancy levels.

 

*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 June 30,2009 were $8.2 million.  We did not haveany such sales and related costs for the three months ended June 30, 2008.

 

*InterestExpense.*  Interest expense for the three months ended June 30,2009 was approximately $4.1 million as compared to approximately $2.7 millionfor the three months ended June 30, 2008 and was primarily due to theincrease in notes payable balances related to our acquisition of real estateproperties and borrowings under our senior secured credit facility.  Our total notes payable at June 30, 2009was $433.2 million as compared to $342.3 million at June 30, 2008.

 

*ImpairmentCharge. *We recognized a $2.7 million in non-cash impairmentcharge for the three months ended June 30, 2009, related to our BecketHouse investment, as a result of the difficult economic conditions thatcontinued into the second quarter of 2009 including the general weakness inmarket rental rates.  We did notrecognize any impairment charges for the three months ended June 30, 2008.

 

*Equity inLosses of Unconsolidated Joint Ventures.*  Equity inlosses of unconsolidated joint ventures totaled $1.5 million for the threemonths ended June 30, 2009 as compared to $0.7 million for the threemonths ended June 30, 2008, and consisted of net losses of $0.1 millionfor each of our noncontrolling interests in Royal Island, GrandMarc atWestberry Place, GrandMarc at the Corner, and a net loss of $1.2 million fromour noncontrolling interest in the Central Europe Joint Venture.

 

*NoncontrollingInterest. *Noncontrolling interest for the threemonths ended June 30, 2009 and 2008 was $2.2 million and $1.5 million,respectively and reduced our net loss for each period.  Noncontrolling interest represents the netincome or loss that is not allocable to us from properties that we consolidate.

 

*PropertyManagement Fees. *Propertymanagement fees for the three months ended June 30, 2009 totaled $0.6million as compared to $0.7 million for the three months ended June 30,2008 and were comprised of fees incurred by our consolidated properties.  We expect increases in property managementfees in the future as available space at our operating properties is leased-up.

 

*AssetManagement Fees. *Assetmanagement fees for the three months ended June 30, 2009 totaled $1.4million as compared to $1 million for the three months ended June 30, 2008and were comprised of fees incurred by our consolidated properties.  The increase in asset management fees wasprimarily due to the acquisition of Crossroads Office Park in June 2008and the Central Europe Joint Venture in July 2008.  We expect asset management fees to stabilizein the future.

 

*Generaland Administrative Expenses.* General andadministrative expenses for the three months ended June 30, 2009 were$1.7 million as compared to $0.9 million for the three months ended June 30,2008 and were comprised of insurance premiums, auditing fees, transfer agentfees, legal fees, reimbursement for salaries and benefits of persons employedby Behringer Harvard Opportunity Advisors I that provide services to us, andother administrative expenses.  Theincrease is primarily due to a $0.3 million increase for expenses incurred byour advisor for services provided to us, a $0.1

 

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millionincrease in directors’ and officers’ insurance premiums and errors andomissions insurance premiums, and $0.2 million related to other variouscorporate general and administrative activities.

 

*Six months ended June 30, 2009 as compared tosix months ended June 30, 2008*

 
| ** **                     | ** ** | **Six Months Ended** | ** **   | ** **              | ** ** | ** **   | ** ** |
|--------------------------------|------------|----------------------|--------------|-------------------------|------------|--------------|------------|
| ** **                     | ** ** | **June 30,**    | ** **   | **Increase (Decrease)** | ** ** |
| ** **                     | ** ** | **2009**             | ** **   | **2008**                | ** ** | **Amount**   | ** ** | **Percent** | ** ** |
| ** **                     | ** ** | **(unaudited)**      | ** **   | ** **              | ** ** | ** **   | ** ** |
| Revenue:                       |       |                 |         |                    |       |         |       |   |   |
| Rental  revenue                |       | $                    |  31,581 |                    | $          |  26,385 |       | $ |  5,196 |   | 20 | % |
| Hotel  revenue                 |       | 1,498                |         | 3,195                   |       | (1,697       | )          | -53 | % |
| Condominium  sales             |       | 11,929               |         | —                  |       | 11,929       |       | n/a |   |
| Total  revenues                |       | $                    |  45,008 |                    | $          |  29,580 |       | $ |  15,428 |   | 52 | % |
|                           |       |                 |         |                    |       |         |       |   |   |
| Expenses:                      |       |                 |         |                    |       |         |       |   |   |
| Property  operating expenses   |       | $                    |  13,158 |                    | $          |  11,349 |       | $ |  1,809 |   | 16 | % |
| Cost  of condominium sales     |       | 12,020               |         | —                  |       | 12,020       |       | n/a |   |
| Interest  expense              |       | 8,191                |         | 4,947                   |       | 3,244        |       | 66 | % |
| Real  estate taxes             |       | 4,435                |         | 3,331                   |       | 1,104        |       | 33 | % |
| Impairment  charge             |       | 2,732                |         | —                  |       | 2,732        |       | n/a |   |
| Property  management fees      |       | 1,199                |         | 1,198                   |       | 1            |       | 0 | % |
| Asset  management fees         |       | 2,779                |         | 1,943                   |       | 836          |       | 43 | % |
| General  and administrative    |       | 2,984                |         | 1,822                   |       | 1,162        |       | 64 | % |
| Advertising  costs             |       | 399                  |         | 1,145                   |       | (746         | )          | -65 | % |
| Depreciation  and amortization |       | 15,014               |         | 11,767                  |       | 3,247        |       | 28 | % |
| Total  expenses                |       | $                    |  62,911 |                    | $          |  37,502 |       | $ |  25,409 |   | 68 | % |

 

*Revenues.* Our total revenues increased by $15.4 million to $45 million for the sixmonths ended June 30, 2009 as compared to $29.6 million for the six monthsended June 30, 2008.  The increasein revenues is primarily due to:

 

·                  rental revenue of $1.7 million from Crossroads Office Park which wasacquired in June 2008;

 

·                  an increase of $2 million related to Alexan Black Mountain and AlexanVoss.  Alexan Black Mountain was fullyoperational for only four of the six months ended June 30, 2008 whileAlexan Voss was not yet operational during the six months ended June 30,2008;

 

·                  an increase in rental revenue of $0.9 million from Northborough Tower,which was acquired on February 26, 2008 and therefore contributed onlyfour months of revenue to the six months ended June 30, 2008; and

 

·                  condominium sales of $11.9 million as of June 30, 2009 as comparedto no condominium sales as of June 30, 2008.

 

Hotel revenues for thesix months ended June 30, 2009 totaled $1.5 million as compared to $3.2million for the six months ended June 30, 2008, and consisted of revenuesgenerated by the operations of The Lodge & Spa at Cordillera.  The decrease is primarily due to a 30.7%decrease in occupancy and a softening of the average daily room rate at TheLodge & Spa at Cordillera as of June 30, 2009 as compared to June 30,2008.

 

Weclosed on the sale of 16 condominium units at The Private Residences at TheChase Park Plaza during the six months ended June 30, 2009.  Of the remaining 55 units, 16 units wereunder sales contracts with non-refundable deposits and five units were reservedwith refundable deposits as of June 30, 2009.

 

We expect rental revenueto be flat for the remainder of 2009 due to slowing lease-up of available spaceat our operating properties and moderating rental rates on rollover of existingleases in the current weak economy. Condominium sales are expected to increase as we complete constructionof units and close sales at The Private Residences at The Chase Park Plaza.

 

*PropertyOperating Expenses.* Property operating expenses for the six months ended June 30, 2009were $13.2 million as compared to $11.3 million for the six months ended June 30,2008, and were comprised of operating expenses from our consolidatedproperties.  The increase in propertyoperating expenses was primarily due to the operating expenses incurred by bothCrossroads Office Park, acquired in June 2008, and by Northborough Tower,acquired in late February 2008, totaling $1 million.  In addition, property operating expenses forAlexan Voss increased by $0.7 million as this property was still underconstruction and therefore not operational during the first six months of2008.  These increases

 

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were partially offset by a decrease in propertyoperating expenses related to The Lodge and Spa at Cordillera of $1.2 milliondue to decreased occupancy levels.

 

*Cost ofCondominium Sales. *Costof condominium sales, relating to the sale of condominium units at The PrivateResidences at The Chase Park Plaza, for the six months ended June 30, 2009were $12 million.  We did not have anysuch sales and related costs for the six months ended June 30, 2008.

 

*InterestExpense.*  Interest expense for the six months ended June 30,2009 was approximately $8.2 million as compared to approximately $4.9 millionfor the six months ended June 30, 2008 and was primarily due to theincrease in notes payable balances related to our acquisition of real estateproperties and borrowings under our senior secured credit facility.  Our total notes payable at June 30, 2009was $433.2 million as compared to $342.3 million at June 30, 2008.

 

*ImpairmentCharge. *We recognized a $2.7 million in non-cash impairmentcharge for the six months ended June 30, 2009, related to our Becket Houseinvestment, as a result of the difficult economic conditions that continuedinto the second quarter of 2009 including the general weakness in market rentalrates.  We did not recognize anyimpairment charges for the six months ended June 30, 2008.

 

*Equity inLosses of Unconsolidated Joint Ventures.*  Equity inlosses of unconsolidated joint ventures totaled $1.6 million for the six months ended June 30, 2009 ascompared to $1.5 million for the six months ended  June 30, 2008 and consisted of netlosses of $0.2 million for each of our noncontrolling interests in GrandMarc atWestberry Place and GrandMarc at the Corner, a loss of $0.1 million for ournoncontrolling interest in Royal Island, and a loss of $1.1 million for ournoncontrolling interest in the Central Europe Joint Venture.

 

*NoncontrollingInterest. *Noncontrolling interest for the sixmonths ended June 30, 2009 and 2008 was $4.5 million and $2.9 million,respectively, and reduced our net loss for each period.  Noncontrolling interest represents the netincome or loss that is not allocable to us from properties that we consolidate.

 

*PropertyManagement Fees. *Propertymanagement fees for the six months ended June 30, 2009 and 2008 totaled$1.2 million and were comprised of fees incurred by our consolidatedproperties.  We expect increases inproperty management fees in the future as available space at our operating propertiesis leased-up.

 

*AssetManagement Fees. *Assetmanagement fees for the six months ended June 30, 2009 totaled $2.8million as compared to $1.9 million for the six months ended June 30, 2008and were comprised of fees incurred by our consolidated properties.  The increase in asset management fees wasprimarily due to the acquisition of Crossroads Office Park in June 2008and the Central Europe Joint Venture in July 2008.  We expect asset management fees to stabilizein the future.

 

*Generaland Administrative Expenses.* General andadministrative expenses for the six months ended June 30, 2009 were$3 million as compared to $1.8 million for the six months ended June 30,2008 and were comprised of insurance premiums, auditing fees, transfer agentfees, legal fees, reimbursement for salaries and benefits of persons employedby Behringer Harvard Opportunity Advisors I that provide services to us, andother administrative expenses.  Theincrease is primarily due to a $0.7 million increase for expenses incurred byour advisor for services provided to us, a $0.2 million increase in directors’and officers’ insurance premiums, and $0.2 million related to other variouscorporate general and administrative activities.

 

**Cash Flow Analysis**

 

Cash flows provided byoperating activities for the six months ended June 30, 2009 were $5.3million and were comprised primarily of the net loss of $19.5 million offset bydepreciation and amortization expense of $12.7 million, change in condominiuminventory of $6 million, and a non-cash impairment charge of $2.7 million.  During the six months ended June 30,2008, cash flows used by operating activities were $14.9 million and werecomprised primarily of an increase in condominium inventory of $16.4 million, anet loss of $8 million, adjusted for depreciation and amortization expense of$9.4 million, and an increase in accrued liabilities of $2.6 million. Operatingcash flows are expected to be flat due to rental revenue stabilizing on ouroperating properties combined with lower hotel revenues at The Lodge and Spa atCordillera offset by higher condominium sales at The Private Residences at TheChase Park Plaza.

 

Cash flows used ininvesting activities for the six months ended June 30, 2009 were $23.8million and primarily represent capital expenditures for real estate underdevelopment, including capital expenditures of consolidated borrowers totaling$9.4 million, investment in notes receivable of $5.1 million and additions ofproperty and equipment of $5 million. During the six months ended June 30, 2008, cash flows used ininvesting activities were $110.2 million and primarily represented acquisitionsof real estate totaling $45.7 million, capital expenditures for real estateunder development, including capital expenditures of consolidated borrowerstotaling $42.2 million, and investment in notes receivable of $11.7 million.

 

Cash flows provided byfinancing activities for the six months ended June 30, 2009 were $13.5million and were comprised primarily of net borrowings on our senior securedrevolving credit facility of $8.6 million and proceeds from notes

 

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payable of $16.4 million,offset by payments on notes payable of $11.7 million.  Cash flows provided by financing activitiesfor the six months ended June 30, 2008 were $71.3 million and werecomprised primarily of proceeds from notes payable of $57.8 million related todevelopment activities at our Chase Park and Frisco Square properties andproceeds from mortgages of our consolidated borrowers of $18.4 million.

 

**Funds from Operations andModified Funds from Operations**

 

Funds fromoperations (“FFO”) is a non-GAAP financial measure that is widely recognized asa measure of REIT operating performance. We use FFO, defined by the National Association of Real EstateInvestment Trusts as net income (loss), computed in accordance with GAAP,excluding extraordinary items, as defined by GAAP, and gains (or losses) fromsales of property, plus depreciation and amortization on real estate assets,and after adjustments for unconsolidated partnerships, joint ventures andsubsidiaries, as one measure to evaluate our operating performance.  In addition to FFO, we use modified fundsfrom operations (“Modified Funds from Operations” or “MFFO”), which excludesfrom FFO acquisition-related costs, impairment charges and adjustments to fairvalue for derivatives not qualifying for hedge accounting, to further evaluateour operating performance.

 

Historical costaccounting for real estate assets in accordance with GAAP implicitly assumesthat the value of real estate diminishes predictably over time.  Since real estate values have historicallyrisen or fallen with market conditions, many industry investors and analystshave considered the presentation of operating results for real estate companiesthat use historical cost accounting alone to be insufficient.  As a result, our management believes that theuse of FFO and MFFO, together with the required GAAP presentations, provide amore complete understanding of our performance.

 

We believe that FFO ishelpful to investors and our management as a measure of operating performancebecause it excludes depreciation and amortization, gains and losses fromproperty dispositions, and extraordinary items, and as a result, when comparedyear over year, reflects the impact on operations from trends in occupancyrates, rental rates, operating costs, general and administrative expenses, andinterest costs, which is not immediately apparent from net income.  We believe that MFFO is helpful to ourinvestors and our management as a measure of operating performance because itexcludes costs that management considers more reflective of investingactivities and other non-operating items included in FFO.  By providing FFO and MFFO, we presentinformation which assists investors in aligning their analysis with management’sanalysis of long-term, core operating activities.  We believe fluctuations in MFFO areindicative of changes in operating activities and provide comparability inevaluating our performance over time and as compared to other real estatecompanies that may not have acquisition activities or derivatives or beaffected by impairments.

 

As explained below,management’s evaluation of our operating performance excludes the itemsconsidered in the calculation of MFFO based on the following economicconsiderations:

 

·      Impairmentcharges.  An impairment charge representsa downward adjustment to the carrying amount of a long-lived asset to reflectthe current valuation of the asset even when the asset is intended to be heldlong-term.  Such adjustment, whenproperly recognized under GAAP, may lag the underlying consequences related torental rates, occupancy and other operating performance trends.  The valuation is also based, in part, on theimpact of current market fluctuations and estimates of future capitalrequirements and long-term operating performance that may not be directlyattributable to current operating performance. Because MFFO excludes impairment charges, management believes MFFOprovides useful supplemental information by focusing on the changes in ouroperating fundamentals rather than on one-time market valuations.

 

·      Adjustmentsto fair value for derivatives not qualifying for hedge accounting.  Management uses derivatives in the managementof our debt and interest rate exposure. We do not intend to speculate in these interest rate derivatives andaccordingly period-to-period changes in derivative valuations are not primaryfactors in management’s decision-making process.  We believe by excluding the gains or lossesfrom these derivatives, MFFO provides useful supplemental information on therealized economic impact of the hedges independent of short-term marketfluctuations.

 

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

 

FFO or MFFO should not beconsidered an alternative to net income (loss) or an indication of ourliquidity.  Neither is indicative offunds available to fund our cash needs, including our ability to makedistributions, and each should be reviewed in connection with other GAAPmeasurements.  Our FFO and MFFO may notbe comparable to presentations by other REITs.

 

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The followingsection presents our calculation of FFO and MFFO and provides additionalinformation related to our FFO and MFFO (in thousands, expect per shareamounts):

 
| ** **                                                        | ** ** | **Three Months Ended June 30,** | ** **    | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------|---------------|------------------------------------|------------|
| ** **                                                        | ** ** | **2009**                             | ** **    | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  loss                                                         |       | $                                    |  (11,850 | )                                  | $          |  (4,390 | ) | $ |  (19,503 | ) | $ |  (8,017 | ) |
| Net  loss attributable to noncontrolling interest                 |       | 2,756                                |          | 1,466                              |       | 5,077 |   | 2,916 |   |
| Adjustments  for:                                                 |       |                                 |          |                               |       |   |   |   |   |
| Real  estate depreciation (1)                                     |       | 6,483                                |          | 4,384                              |       | 12,797 |   | 8,384 |   |
| Real  estate amortization (1)                                     |       | 1,998                                |          | 2,244                              |       | 4,637 |   | 4,408 |   |
| Noncontrolling  interest depreciation & amortization(2)       |       | (1,022                               | )             | (494                               | )          | (2,022 | ) | (1,052 | ) |
| Funds  from operations (FFO)                                      |       | $                                    |  (1,635  | )                                  | $          |  3,210 |   | $ |  986 |   | $ |  6,639 |   |
|                                                              |       |                                 |          |                               |       |   |   |   |   |
| Other  Adjustments:                                               |       |                                 |          |                               |       |   |   |   |   |
| Impairment  charge                                                |       | 2,732                                |          | —                             |       | 2,732 |   | — |   |
| (Gain)  loss on derivatives not designated as hedging instruments |       | (575                                 | )             | —                             |       | (754 | ) | — |   |
| MFFO                                                              |       | $                                    |  522     |                               | $          |  3,210 |   | $ |  2,964 |   | $ |  6,639 |   |
|                                                              |       |                                 |          |                               |       |   |   |   |   |
| GAAP  weighted average shares:                                    |       |                                 |          |                               |       |   |   |   |   |
| Basic  and diluted                                                |       | 55,211                               |          | 54,474                             |       | 55,122 |   | 54,344 |   |
|                                                              |       |                                 |          |                               |       |   |   |   |   |
| MFFO  per share                                                   |       | $                                    |  0.01    |                               | $          |  0.06 |   | $ |  0.05 |   | $ |  0.12 |   |

 

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(1)  This represents the depreciation andamortization expense of the properties we consolidate and our share ofdepreciation and amortization expense of the properties which we account forunder the equity method of accounting.

 

(2)  This reflects the noncontrolling interestadjustment for the third-party partners’ proportionate share of the real estatedepreciation and amortization.

 

Providedbelow is additional information related to selected non-cash items included innet loss above, which may be helpful in assessing our operating results.

 

·                  Straight-line rental revenue of $0.6million and $1.1 million was recognized for the three and six months ended    June 30, 2009, respectively, and $0.9 millionand $2.3 million was recognized for the three and six months ended June 30,2008, respectively;

 

·                  Amortization of intangible leaseassets and liabilities was recognized as a net increase to rental revenuesof    $1.2 million and $2.4 million for thethree and six months ended June 30, 2009, respectively, and $1.2 millionand $2.4 million was recognized for the three and six months ended June 30,2008, respectively;

 

·                  Amortization of intangible propertytax abatement assets was recognized as an increase to real estate tax expenseof $0.1 million and $0.2 million for the three and six months ended June 30,2009, respectively.  Amortization ofintangible property tax abatement assets was recognized as an increase to realestate tax expense of $0.1 million and $0.2 million for the three and sixmonths ended June 30, 2008;

 

·                  Bad debt expense of $0.1 million and$0.3 million was recognized for the three and six months ended June 30,2009, respectively.  Bad debt expense of$0.1 million and $0.2 million was recognized for the three and six months endedJune 30, 2008, respectively; and

 

·                  Amortization of deferred financingcosts of $0.8 million and $1.6 million was recognized as interest expense formortgages and notes payable for the three and six months ended June 30,2009, respectively, and $0.2 million and $0.4 million was recognized as areduction of interest income for notes receivable for the three and six monthsended June 30, 2009.  Amortizationof deferred financing costs of $0.5 million and $0.8 million was recognized asinterest expense for mortgages and notes payable for the three and six monthsended June 30, 2008, respectively, and $0.1 million and $0.2 million wasrecognized as a reduction of interest income for notes receivable for the threeand six months ended June 30, 2008.

 

In addition, cash flows generated from MFFO may beused to fund all or a portion of certain capitalizable items that are excludedfrom MFFO, such as capital expenditures and payments of principal on debt,each of which may impact the amount of cash available for distribution to ourstockholders.

 

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As noted above, we believe FFO and MFFO are helpful toinvestors and our management as a measure of operating performance.  FFO and MFFO are not indicative of our cashavailable to fund distributions since other uses of cash, such as capitalexpenditures at our properties and principal payments of debt, are not deductedwhen calculating FFO and MFFO.

 

**Distributions**

 

Distributions areauthorized at the discretion of our board of directors based on its analysis ofour performance over the previous period, expectations of performance forfuture periods, including actual and anticipated operating cash flow, changesin market capitalization rates for investments suitable for our portfolio,capital expenditure needs, general financial condition, and other factors thatour board deems relevant.  The board’sdecision will be influenced, in substantial part, by its obligation to ensurethat we maintain our status as a REIT. In light of the pervasive and fundamental disruptions in the globalfinancial and real estate markets, we cannot provide assurance that we will beable to achieve expected cash flows necessary to continue to pay distributionsat any particular level, or at all.  Ifthe current economic conditions continue, our board could determine to reduceour current distribution rate or cease paying distributions in order toconserve cash.

 

Cash amounts distributedto stockholders during the six months ended June 30, 2009 was $1.4million.  For the six months ended June 30,2009, cash flows provided by operating activities was $5.3 million.  Accordingly, for the six months ended June 30,2009, cash flow from operations exceeded cash amounts distributed tostockholders by $3.9 million.  Cashamounts distributed to stockholders during the six months ended June 30,2008 was $2 million.  For the six monthsended June 30, 2008, cash flows used in operating activities was $14.9million.  Accordingly, for the six monthsended June 30, 2008, none of the cash flows from operating activitiesexceeded cash amounts distributed to stockholders.  The shortfall was funded principally fromproceeds from our offering.

 

The following are thedistributions paid and declared for the three and six months ended June 30,2009 and 2008.

 
| ** **     | ** ** | ** **             | ** **  | ** **        | ** ** | ** **       | ** ** | **Total**    | ** **  | **Declared**  | ** ** |
|----------------|------------|------------------------|-------------|-------------------|------------|------------------|------------|--------------|-------------|---------------|------------|
| ** **     | ** ** | **Distributions Paid** | ** **  | **Distributions** | ** ** | **Distribution** | ** ** |
| **2009**       | ** ** | **Cash**               | ** **  | **Reinvested**    | ** ** | **Total**        | ** ** | **Declared** | ** **  | **Per Share** | ** ** |
| Second Quarter |       | $                      |  371   |              | $          |  1,034      |       | $            |  1,405 |          | $          |  — |   | $ |  — |   |
| First Quarter  |       | 1,048                  |        | 3,015             |       | 4,063            |       | 4,070        |        | 0.07          |       |
| Total          |       | $                      |  1,419 |              | $          |  4,049      |       | $            |  5,468 |          | $          |  4,070 |   | $ |  0.07 |   |

 
| ** **     | ** ** | ** **             | ** **  | ** **        | ** ** | ** **       | ** ** | **Total**    | ** **  | **Declared**  | ** ** |
|----------------|------------|------------------------|-------------|-------------------|------------|------------------|------------|--------------|-------------|---------------|------------|
| ** **     | ** ** | **Distributions Paid** | ** **  | **Distributions** | ** ** | **Distribution** | ** ** |
| **2008**       | ** ** | **Cash**               | ** **  | **Reinvested**    | ** ** | **Total**        | ** ** | **Declared** | ** **  | **Per Share** | ** ** |
| Second Quarter |       | $                      |  986   |              | $          |  3,129      |       | $            |  4,115 |          | $          |  4,076 |   | $ |  0.07 |   |
| First Quarter  |       | 964                    |        | 3,079             |       | 4,043            |       | 4,055        |        | 0.07          |       |
| Total          |       | $                      |  1,950 |              | $          |  6,208      |       | $            |  8,158 |          | $          |  8,131 |   | $ |  0.14 |   |

 

On April 2, 2009, our Board of Directors voted todeclare dividends on a quarterly basis rather than a monthly basis, thusgenerating significant administrative cost savings to the REIT’sshareholders.  In addition, futuredistributions will be determined and paid in arrears rather than in advance ofthe period to which they apply.  On July 14,2009, our Board of Directors authorized a quarterly distribution in the amountof $0.075 per share of common stock, which is equivalent to an annualdistribution of 3% assuming a $10 price per share.  The distribution is payable to the commonstockholders of record at the close of business on June 30, 2009, therecord date previously established by the board on June 22, 2009.  The distribution was paid on July 29,2009.

 

Over the long term, weexpect that more of our distributions will be paid from cash flow from operations(except with respect to distributions related to sales of our assets).  However, operating performance cannot beaccurately predicted due to numerous factors, including the financialperformance of our investments in the current real estate environment, the typesand mix of investments in our portfolio and the accounting treatment of ourinvestments in accordance with our accounting policies.  As a result, future distributions declaredand paid may continue to exceed cash flow from operating activities.

 

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**ShareRedemption Plan**

 

Our board of directorshas authorized a share redemption program for stockholders who have held theirshares for more than one year.  On March 30,2009, our board of directors suspended, until further notice, redemptions otherthan those submitted in respect of a stockholder’s death, disability or needfor long-term care.  On May 11,2009, our board of directors approved certain amendments to the program relatedto the per share redemption price, and as of June 22, 2009, in accordancewith the amended and restated share redemption program, the per shareredemption price will be as described in Part II, Item 2 of this quarterlyreport.  In the second quarter ended June 30,2009, we redeemed 31,850 shares of common stock.

 

**CriticalAccounting Policies and Estimates**

 

Management’s discussionand analysis of financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith GAAP.  The preparation of thesefinancial statements requires our management to make estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosure of contingent assets and liabilities.  We evaluate these estimates, includinginvestment impairment, on a regular basis. These estimates will be based on management’s historical industryexperience and on various other assumptions that are believed to be reasonableunder the circumstances.  Actual resultsmay differ from these estimates.

 

Belowis a discussion of the accounting policies that we consider will be critical inthat they may require complex judgment in their application or require estimatesabout matters that are inherently uncertain.

 

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

 

Our consolidatedfinancial statements include our accounts, the accounts of VIEs in which we arethe primary beneficiary, and the accounts of other subsidiaries over which wehave control.  All inter-companytransactions, balances and profits have been eliminated in consolidation.

 

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

 

***RealEstate***

 

Upon the acquisition ofreal estate properties, we recognize the assets acquired, the liabilitiesassumed, and any noncontrolling interest as of the acquisition date, measuredat their fair values.  The acquisition dateis the date on which we obtain control of the real estate property.  These assets acquired and liabilities assumedmay consist of buildings, any assumed debt, identified intangible assets andasset retirement obligations.  Identifiedintangible assets generally consist of the above-market and below-marketleases, in-place leases, in-place tenant improvements and tenantrelationships.  Goodwill is recognized asof the acquisition date and measured as the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree overthe fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain isrecognized in current earnings when the aggregate fair value of the considerationtransferred and any noncontrolling interests in the acquiree is less than thefair value of the identifiable net assets acquired.  Acquisition-related costs are expensed in theperiod incurred.

 

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

 

The fair value of anytangible assets acquired, expected to consist of land, land improvements,buildings, building improvements, and furniture, fixtures and equipment, isdetermined 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 and landimprovements values are calculated as replacement cost less depreciation ormanagement’s estimates of the relative fair value of these assets usingdiscounted cash flow analyses or similar methods.  Furniture, fixtures, and equipment values aredetermined based on current reproduction or replacement cost less depreciationand other estimated allowances based on

 

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physical, functional, oreconomic factors.  The value of buildingsis depreciated over the estimated useful lives ranging from 25 years forcommercial office property to 39 years for hotel/mixed-use property using thestraight-line method.  Land improvementsare depreciated over the estimated useful life of 15 years, and furniture,fixtures, and equipment are depreciated over estimated useful lives rangingfrom five to seven years using the straight-line method.

 

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

 

The total value ofidentified real estate intangible assets that we may acquire in the future isfurther allocated to in-place lease values and tenant relationships based onour evaluation of the specific characteristics of each tenant’s lease and ouroverall relationship with that respective tenant.  The aggregate value of in-place leases acquiredand tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-placeleases include an estimate of carrying costs during the expected lease-upperiods for the respective spaces considering current market conditions.  In estimating fair value of in-place leases,we consider items such as real estate taxes, insurance and other operatingexpenses as well as lost rental revenue during the expected lease-up period andcarrying costs that would have otherwise been incurred had the leases not beenin place, including tenant improvements and commissions.  The estimates of the fair value of tenantrelationships also include costs to execute similar leases including leasingcommissions, legal costs and tenant improvements as well as an estimate of thelikelihood of renewal as determined by management on a tenant-by-tenant basis.

 

We amortize the value ofin-place leases acquired in the future to expense over the term of therespective leases.  The value of tenantrelationship intangibles is amortized to expense over the initial term and anyanticipated renewal periods, but in no event does the amortization period forintangible assets exceed the remaining depreciable life of the building.  Should a tenant terminate their lease, theunamortized portion of the in-place lease value and tenant relationshipintangibles would be charged to expense.

 

Other intangible assetsinclude the value of identified hotel trade names and in-place property taxabatements.  These fair values are basedon management’s estimates of the relative fair value of these assets usingdiscounted cash flow analyses or similar methods.  The value of the trade names is amortizedover its respective estimated useful life of 20 years using the straight-line methodand the value of the in-place property tax abatement is amortized over itsestimated term of 10 years using the straight-line method.

 

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

 

***InvestmentImpairments***

 

For real estate we whollyown, we monitor events and changes in circumstances indicating that thecarrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstancesare present, we assess potential impairment by comparing estimated futureundiscounted operating cash flows expected to be generated over the life of theasset and from its eventual disposition to the carrying amount of the asset.  In the event that the carrying amount exceedsthe estimated future undiscounted operating cash flows, we recognize animpairment loss to adjust the carrying amount of the asset to estimated fairvalue.  We consider projected future undiscountedcash flows, trends, strategic decisions regarding future development plans, andother factors in our assessment of whether impairment conditions exist.  While we believe our estimates of future cashflows are reasonable, different assumptions regarding such factors as marketrents, economies, and occupancies could significantly affect these estimates.

 

In addition, we evaluateour investments in unconsolidated joint ventures and our investments in theChase Park working capital loan and Royal Island bridge loans at each reportingdate and if we believe there is an other than temporary decline in marketvalue, or if it is probable we will not collect all principal and interest inaccordance with the terms of the working capital or bridge loan, we will recordan impairment charge based on these evaluations.

 

As discussed in Note 8 tothe Consolidated Financial Statements, we have determined that Alexan BlackMountain meets the criteria of a VIE and that we are the primary beneficiary ofthis entity.  Therefore, we have consolidatedthis entity, including the related real estate assets and third partyconstruction financing.  As of June 30,2009, the outstanding principal balance under our mezzanine loan with AlexanBlack Mountain was $9.7 million plus accrued interest, which is eliminated uponconsolidation.  As of June 30, 2009,we believe that all of the amounts due under our mezzanine loan may not be

 

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collectible and to theextent that we would, in the future, deconsolidate the assets of Alexan BlackMountain, we would recognize an impairment for our mezzanine loan.

 

Though we believe it iscurrently probable that we will collect scheduled principal and interest withrespect to our Chase Park working capital loan and our Royal Island bridgeloans, current market conditions with respect to credit availability and withrespect to real estate market fundamentals create a significant amount ofuncertainty.  Given this, any futureadverse development in market conditions would cause us to re-evaluate ourconclusions, and could result in material impairment charges with respect toour working capital or bridge loans.

 

In evaluating ourinvestments for impairment, management may use appraisals and makes 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.  The value of our properties held fordevelopment depends on market conditions, including estimates of the projectstart date as well as estimates of future demand for the property type underdevelopment.  We have analyzed trends andother information related to each potential development and incorporated thisinformation as well as our current outlook into the assumptions we use in ourimpairment analyses.  Due to the judgmentand assumptions applied in the estimation process with respect to impairments,including the fact that limited market information regarding the value ofcomparable land exists at this time, it is possible actual results could differsubstantially from those estimated.

 

As a result of thedifficult economic conditions that continued into the second quarter of 2009including the general weakness in market rental rates, we evaluated certain ofour real estate investments for potential impairment as of June 30,2009.  Based on our analyses, we recordeda non-cash impairment charge of $2.7 million related to our leasehold interestin an office building in London, England.

 

Other than the impairmentcharge discussed above, we believe the carrying value of our operating realestate assets, properties under development, investments in unconsolidatedjoint ventures, and working capital and bridge loans is currentlyrecoverable.  However, if marketconditions worsen beyond our current expectations, or if changes in ourdevelopment strategy significantly affect any key assumptions used in our fairvalue calculations, we may need to take additional charges in future periodsfor impairments related to existing assets. Any such non-cash charges would have an adverse effect on ourconsolidated financial position and results of operations.

 

**Item 3.                    Quantitativeand Qualitative Disclosures About Market Risk.**

** **

*ForeignCurrency Exchange Risk*

 

For our net investmentsin foreign real estate properties, we use British pound and Euro foreigncurrency forward exchange contracts and foreign currency put/call options toeliminate the impact of foreign currency movements on our financialposition.  At June 30, 2009, ourforeign currency derivative contracts were reported at their fair value of$0.3 million within prepaid expenses and other assets in our consolidatedbalance sheet.  A 10% increase in therespective forward foreign currency - US dollar exchange rate would result in a$0.1 million decrease in fair value. A 10% decrease in the respective forward foreign currency - US dollarexchange rate would result in a $0.3 million increase in fair value.

 

We maintain approximately$0.3 million in Euro-denominated accounts at European financialinstitutions.  Accordingly, we are notmaterially exposed to any significant foreign currency fluctuations related tothese accounts.  We 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 $433.2million in notes payable at June 30, 2009, $393.6 million represented debtsubject to variable interest rates, which included the mortgages payable ofborrowers we consolidated.  If ourvariable interest rates increased 100 basis points, we estimate that totalannual interest cost, including interest expensed, interest capitalized, andthe effects of the interest rate caps and swaps, would increase by $2.5million.

 

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At June 30, 2009,interest rate caps used to mitigate our interest rate risk classified as assetswere reported at their combined fair value of less than $0.1 million withinprepaid expenses and other assets. Interest rate swaps classified as liabilities were reported at theircombined fair values of $4.5 million in other liabilities at June 30,2009.  A 100 basis point decrease ininterest rates would result in a $1.3 million net decrease in the fair value ofour interest rate caps and swaps.  A 100basis point increase in interest rates would result in a $1.6 million netincrease in the fair value of our interest rate caps and swaps.

 

### **Item 4T.                 Controlsand Procedures.**

** **

*Evaluation of Disclosure Controls and Procedures*

 

As required by Rule 13a-15(b) andRule 15d-15(b) under the Exchange Act, our management, including ourChief Executive Officer and Chief Financial Officer, evaluated, as of June 30,2009, the effectiveness of our disclosure controls and procedures as defined inExchange Act Rule 13a-15(e) and Rule 15d-15(e). Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of June 30,2009, to provide reasonable assurance that information required to be disclosedby us in this report is recorded, processed, summarized and reported within thetime periods specified by the rules and forms of the Exchange Act and isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures.

 

We believe, however, thata controls system, no matter how well designed and operated, cannot provideabsolute assurance that the objectives of the controls systems are met, and noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud or error, if any, within a company have been detected.

 

*Changes in Internal Control over Financial Reporting*

 

There has been no changein internal control over financial reporting that occurred during the quarterended June 30, 2009 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

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** **

**PART II**

** **

**OTHER INFORMATION**

** **

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

### ** **

We arenot party to, and our properties are not subject to, any material pending legalproceedings.

 

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

### ** **

The following risk factorupdates and should be read in conjunction with the risk factors contained inthe “Risk Factors” section set forth in our Annual Report on Form 10-K for theyear ended December 31, 2008 and our Quarterly Report on Form 10-Q for thequarter ended March 31, 2009.

 

*The current offering price of shares under our distributionreinvestment plan may exceed the price at which we offer shares under thedistribution reinvestment plan following our next estimation of value of ourshares of common stock.*

* *

On June 22,2009 our board of directors established an estimated per share value of ourcommon stock of $8.17 per share pursuant to our valuation policy.  Inconnection with that valuation our board of directors further determined thatdistributions may be reinvested in shares of our common stock at a price of$8.17 per share, which is the estimated per share value.  Due to thecontinuing impact of the disruptions in the financial and real estate marketson the values of our investments, no assurances can be given that the estimatedvalue per share of our common stock at our next valuation will not be less than$8.17 per share.

 

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

 

Our share redemption programcontains certain restrictions and limitations, including a funding limitationwhich provides that the funds used for redemption during any period may notexceed the amount of gross proceeds generated from the sale of shares throughthe DRP during that period.  In addition, our board may, from time totime, in its sole discretion, further limit the funds that we use to redeemshares.  We cannot predict with anycertainty how much, if any, DRP proceeds will be available to fund redemptionsunder our share redemption program.  Ifparticipation in the DRP decreases and fewer proceeds are generated from DRPsales, then our ability to redeem shares under our share redemption programwill be limited and you may not be able to sell any of your shares back to us.

 

### **Item 2.                    Unregistered Sales of EquitySecurities**

### ** **

**PublicOffering of Common Stock**

 

Duringthe period covered by this quarterly report, we did not sell any equitysecurities that were not registered under the Securities Act of 1933.

 

**Share Redemption Program**

 

Our board ofdirectors has authorized a share redemption program for stockholders who haveheld their shares for more than one year. On March 30, 2009, our board of directors voted to accept allredemption requests submitted during the first quarter of 2009 fromstockholders whose requests were made on circumstances of death, disability, orneed for long-term care (referred to herein as “exceptional redemptions”).  However, the board determined to not acceptand to suspend until further notice redemptions other than exceptionalredemptions.

 

On May 11,2009, our board approved certain amendments to the program.  Under theamended and restated share redemption program, the per share redemption pricewill equal:

 

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

 

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

 

“Original shareprice” means the average price per share the original purchaser or purchasersof shares paid to us for all of his or her shares (as adjusted for any stockdividends, combinations, splits, recapitalizations and the like with respect toour common stock).

 

Notwithstandingthe redemption prices set forth above, our board of directors may determine,whether pursuant to formulae or processes approved or set by our board, theredemption price of the shares, which may differ between exceptional and otherredemptions; provided, however, that we must provide at least 30 days’ noticeto stockholders before applying this new price determined by the board.

 

On June 22,2009, our board of directors established an estimated per share value of $8.17pursuant to our Amended and Restated Policy for Estimation of Common StockValue (the “Amended Estimated Valuation Policy”).  Thus, in accordance with the amended andrestated share redemption program, as of June 22, 2009, the per shareredemption price for exceptional redemptions will be the lesser of (a) $8.17,which is the estimated per share value, and (b) the average price pershare that investor paid for his shares.  For all redemptions other thanexceptional, the per share redemption price will be the lesser of (1) $7.35,which is 90% of the estimated per share value, and (2) 90% of the averageprice per share that the investor paid for his shares.

 

We will notredeem, during any twelve-month period, more than 5% of the weighted averagenumber of shares outstanding during the twelve-month period immediately priorto the date of redemption. Further, our board may, from time to time, in itssole discretion, limit the funds that we use to redeem shares; provided, thatin no event may the funds used for redemption during any period exceed theamount of gross proceeds generated from the sale of shares through the DRIPduring that period.  Our board reserves the right in its sole discretionat any time and from time to time to (1) waive the one-

 

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year holding periodapplicable to requests for exceptional redemptions or other exigentcircumstances such as bankruptcy, a mandatory distribution requirement under astockholder’s IRA or with respect to shares purchased under or through theDRIP, (2) reject any request for redemption, (3) change the purchaseprice for redemptions, (4) limit the funds to be used for redemptions orotherwise change the limitations on redemption or (5) amend, suspend (inwhole or in part) or terminate the program.

 

During the quarter ended June 30,2009, we redeemed shares as follows:

 
| ** ** | ** ** | ** **                           | ** ** | ** **                        | ** **   | ** **                                                                                     | ** ** | ** **                                                                               | ** ** |
|------------|------------|--------------------------------------|------------|-----------------------------------|--------------|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| **2009**   | ** ** | **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** | ** ** |
| April      |       | —                               |       | $                                 |  — |                                                                                           | —     |                                                                                     |       |   |
| May        |       | 31,850                               |       | $                                 |  9.98   |                                                                                           | 31,850     |                                                                                     | (1)        |   |
| June       |       | —                               |       | $                                 |  — |                                                                                           | —     |                                                                                     |       |   |
|       |       | 31,850                               |       | $                                 |  9.98   |                                                                                           | 31,850     |                                                                                     | (1)        |   |

 

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(1) Themaximum number of shares that may be purchased under the program is limited to5% of the weighted average number of shares outstanding during the twelve-monthperiod immediately prior to the date of redemption.  Further, our boardmay, from time to time, in its sole discretion, limit the funds that we use toredeem shares; provided, that in no event may the funds used for redemptionduring any period exceed the amount of gross proceeds generated from the DRIPduring that period.

 

**Item 3.                    Defaults Upon SeniorSecurities.**

 

None.

 

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### **Item 4.                    Submission of Matters to aVote of Security Holders.**

### ** **

TheAnnual Meeting of our stockholders was held on June 22, 2009.  All nominees standing for election as directorswere elected.  The following directorswere elected to hold office for a term expiring at the 2010 Annual Meeting oruntil their successors are elected and qualified, with the vote for eachdirector being reflected below:

 
| ** **           | ** ** | ** **    | ** ** | ** **          | ** ** | ** **    | ** ** | **Votes**           | ** ** |
|----------------------|------------|---------------|------------|---------------------|------------|---------------|------------|---------------------|------------|
| ** **           | ** ** | ** **    | ** ** | **Votes For as**    | ** ** | ** **    | ** ** | **Withheld as**     | ** ** |
| ** **           | ** ** | **Number of** | ** ** | **a Percentage**    | ** ** | **Number of** | ** ** | **a Percentage**    | ** ** |
| ** **           | ** ** | **Votes**     | ** ** | **of Votes**        | ** ** | **Votes**     | ** ** | **of Votes**        | ** ** |
| **Director Nominee** | ** ** | **For**       | ** ** | **Eligible****(1)** | ** ** | **Withheld**  | ** ** | **Eligible****(2)** | ** ** |
| Robert  M. Behringer |       | 26,898,571    |       | 96.60%              |       | 947,746       |       | 3.40%               |       |
| Robert  S. Aisner    |       | 26,900,286    |       | 96.60%              |       | 946,031       |       | 3.40%               |       |
| Barbara  C. Bufkin   |       | 26,880,923    |       | 96.53%              |       | 965,394       |       | 3.47%               |       |
| Terry  L. Gage       |       | 26,904,842    |       | 96.62%              |       | 941,475       |       | 3.38%               |       |
| Steven  J. Kaplan    |       | 26,904,788    |       | 96.62%              |       | 941,529       |       | 3.38%               |       |

 

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(1) Votes for as a percentage of allvotes present in person or by proxy.

(2) Votes withheld as a percentage ofall votes present in person or by proxy.

 

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

 

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

### ** **

**PerShare Value**

 

On June 22,2009, our board of directors adopted the Amended Estimated Valuation Policy toclarify certain technical aspects of our valuation policy initially adopted on May 11,2009.  Pursuant to the Amended EstimatedValuation Policy, our board of directors established an estimated per sharevalue of our common stock of $8.17 per share.  This estimate is beingprovided to assist broker-dealers in connection with their obligations underapplicable FINRA Rules with respect to customer account statements and toassist fiduciaries in discharging their obligations under ERISA reportingrequirements.

 

As noted in theAmended Estimated Valuation Policy, the estimated value may not reflect theamount an investor would obtain if he tried to sell his shares or if theCompany liquidated its assets.  For a full description of the limitationsand qualifications of the estimate, please refer to the Amended EstimatedValuation Policy, a copy of which is filed as Exhibit 99.1 to our CurrentReport on Form 8-K filed on June 22, 2009.

 

**SharePurchase Price for Second Amended and Restated Distribution Reinvestment Plan**

 

In accordance withthe DRP, on June 22, 2009, our board of directors determined thatdistributions may be reinvested in shares of our common stock at a price of$8.17 per share, which is the estimated per share value, beginning withreinvestments made after July 26, 2009.  Previously, the DRP pricewas $9.50 per share.

 

### **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:  August 14, 2009 | 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 Registrant’s  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                     |       | 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) |
|                    |       |                                                                                                                                                                                                                                                                         |
| 4.2                     |       | First Amendment to the  Second Amended and Restated Distribution Reinvestment Plan (previously filed  in and incorporated by reference to Form 10-Q filed on May 15,  2009)                                                                                        |
|                    |       |                                                                                                                                                                                                                                                                         |
| 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*(1)                |       | Section 1350  Certifications (furnished herewith)                                                                                                                                                                                                                       |

 

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*filed herewith

 

(1)   In accordance with Item 601(b)(32) ofRegulation S-K, this Exhibit is not deemed “filed” for purposes of Section 18of the Exchange Act or otherwise subject to the liabilities of thatsection.  Such certifications will not bedeemed incorporated by reference into any filing under the Securities Act orthe Exchange Act, except to the extent that the registrant specificallyincorporates it by reference.

 

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