Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934**

 

**Forthe quarterly period ended September 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 |       | (I.R.S. Employer     |
| Organization)                                    |       | 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 registrant wasrequired 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 October 30,2009, the Registrant had 55,518,417 shares of common stock outstanding.

 

 

 

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Table of Contents

 

**BEHRINGERHARVARD OPPORTUNITY REIT I, INC.**

**FORM 10-Q**

**QuarterEnded September 30, 2009**

 
| ** **                 | ** **                                                                                                                            | **Page** |
|----------------------------|---------------------------------------------------------------------------------------------------------------------------------------|----------|
|                       | ** **                                                                                                                            |     |
| **PART I**            |
| **FINANCIAL  INFORMATION** |
| ** **                 | ** **                                                                                                                            |     |
| **Item 1.**                | **Financial Statements (Unaudited)**                                                                                                  |     |
|                       |                                                                                                                                  |     |
|                       | Consolidated  Balance Sheets as of September 30, 2009 and December 31, 2008                                                 | 3        |
|                       |                                                                                                                                  |     |
|                       | Consolidated Statements of Operations and  Comprehensive Income for the Three and Nine Months Ended September 30,  2009 and 2008 | 4        |
|                       |                                                                                                                                  |     |
|                       | Consolidated  Statements of Equity for the Nine Months Ended September 30, 2009 and  2008                                        | 5        |
|                       |                                                                                                                                  |     |
|                       | Consolidated  Statements of Cash Flows for the Nine Months Ended September 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**                                                                       | 40       |
|                       |                                                                                                                                  |     |
| **Item 4T.**               | **Controls and  Procedures**                                                                                                          | 41       |
|                       |                                                                                                                                  |     |
| **PART II**           |
| **OTHER INFORMATION**      |
|                       |                                                                                                                                  |     |
| **Item 1.**                | **Legal Proceedings**                                                                                                                 | 42       |
|                       |                                                                                                                                  |     |
| **Item 1A.**               | **Risk Factors**                                                                                                                      | 42       |
|                       |                                                                                                                                  |     |
| **Item 2.**                | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                      | 45       |
|                       |                                                                                                                                  |     |
| **Item 3.**                | **Defaults Upon  Senior Securities**                                                                                                  | 47       |
|                       |                                                                                                                                  |     |
| **Item 4.**                | **Submission of  Matters to a Vote of Security Holders**                                                                              | 47       |
|                       |                                                                                                                                  |     |
| **Item 5.**                | **Other Information**                                                                                                                 | 47       |
|                       |                                                                                                                                  |     |
| **Item 6.**                | **Exhibits**                                                                                                                          | 48       |
|                       |                                                                                                                                  |     |
| **Signature**              |                                                                                                                                  | 49       |

 

2

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Table of Contents

 

**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)

 
| ** **                                                                                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                                                                              |       |                   |       |                  |       |
| Real estate                                                                                                                                                                                             |       |                   |       |                  |       |
| Land and improvements, net                                                                                                                                                                              |       | $                      | 131,277    |                  | $          | 131,028 |   |
| Buildings and improvements, net                                                                                                                                                                         |       | 414,247                |       | 416,821               |       |
| Real estate under development                                                                                                                                                                           |       | 18,704                 |       | 17,306                |       |
| Total real estate                                                                                                                                                                                       |       | 564,228                |       | 565,155               |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| Condominium inventory                                                                                                                                                                                   |       | 92,342                 |       | 94,723                |       |
| Cash and cash equivalents                                                                                                                                                                               |       | 19,141                 |       | 25,260                |       |
| Restricted cash                                                                                                                                                                                         |       | 6,869                  |       | 4,134                 |       |
| Accounts receivable, net                                                                                                                                                                                |       | 7,863                  |       | 14,946                |       |
| Prepaid expenses and other assets                                                                                                                                                                       |       | 1,782                  |       | 3,550                 |       |
| Leasehold interests, net                                                                                                                                                                                |       | 15,669                 |       | 23,160                |       |
| Investments in unconsolidated joint ventures                                                                                                                                                            |       | 63,007                 |       | 62,316                |       |
| Furniture, fixtures and equipment, net                                                                                                                                                                  |       | 12,446                 |       | 13,932                |       |
| Deferred financing fees, net                                                                                                                                                                            |       | 4,324                  |       | 6,407                 |       |
| Notes receivable                                                                                                                                                                                        |       | 43,039                 |       | 36,542                |       |
| Lease intangibles, net                                                                                                                                                                                  |       | 23,907                 |       | 28,303                |       |
| Other intangibles, net                                                                                                                                                                                  |       | 8,517                  |       | 9,025                 |       |
| Receivables from related parties                                                                                                                                                                        |       | 1,547                  |       | 3,413                 |       |
| Total assets                                                                                                                                                                                            |       | $                      | 864,681    |                  | $          | 890,866 |   |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Liabilities and Equity**                                                                                                                                                                              |       |                   |       |                  |       |
| Notes payable                                                                                                                                                                                           |       | $                      | 441,574    |                  | $          | 416,179 |   |
| Accounts payable                                                                                                                                                                                        |       | 3,047                  |       | 6,073                 |       |
| Payables to related parties                                                                                                                                                                             |       | 1,875                  |       | 1,643                 |       |
| Acquired below-market leases, net                                                                                                                                                                       |       | 13,743                 |       | 17,567                |       |
| Accrued and other liabilities                                                                                                                                                                           |       | 24,656                 |       | 26,037                |       |
| Total liabilities                                                                                                                                                                                       |       | 484,895                |       | 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, 55,518,417 and 54,836,985 shares issued and outstanding at  September 30, 2009, and December 31, 2008, respectively |       | 6                      |       | 5                     |       |
| Additional paid-in capital                                                                                                                                                                              |       | 495,143                |       | 489,139               |       |
| Accumulated distributions and net loss                                                                                                                                                                  |       | (109,170               | )          | (66,085               | )          |
| Accumulated other comprehensive loss                                                                                                                                                                    |       | (3,574                 | )          | (5,194                | )          |
| Total Behringer Harvard Opportunity REIT  I, Inc. Stockholders’ Equity                                                                                                                        |       | 382,405                |       | 417,865               |       |
| Noncontrolling interest                                                                                                                                                                                 |       | (2,619                 | )          | 5,502                 |       |
| Total equity                                                                                                                                                                                            |       | 379,786                |       | 423,367               |       |
| Total liabilities and equity                                                                                                                                                                            |       | $                      | 864,681    |                  | $          | 890,866 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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Table of Contents

 

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

**ConsolidatedStatements of Operations and Comprehensive Income**

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

(Unaudited)

 
| ** **                                                                          | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                          | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| **Revenues**                                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Rental revenue                                                                      |       | $                                         | 15,948     |                                     | $          | 15,192 |   | $ | 47,529 |   | $ | 41,577 |   |
| Hotel revenue                                                                       |       | 1,513                                     |       | 2,045                                    |       | 3,011 |   | 5,240 |   |
| Condominium sales                                                                   |       | 1,964                                     |       | 4,315                                    |       | 13,893 |   | 4,315 |   |
| Total revenues                                                                      |       | 19,425                                    |       | 21,552                                   |       | 64,433 |   | 51,132 |   |
|                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| **Expenses**                                                                        |       |                                      |       |                                     |       |   |   |   |   |
| Property operating expenses                                                         |       | 6,623                                     |       | 6,793                                    |       | 19,438 |   | 17,955 |   |
| Bad debt expense                                                                    |       | 10,277                                    |       | 87                                       |       | 10,620 |   | 274 |   |
| Cost of condominium sales                                                           |       | 1,983                                     |       | 4,331                                    |       | 14,003 |   | 4,331 |   |
| Interest expense                                                                    |       | 4,415                                     |       | 4,113                                    |       | 12,606 |   | 9,059 |   |
| Real estate taxes                                                                   |       | 1,686                                     |       | 1,980                                    |       | 6,121 |   | 5,311 |   |
| Impairment charge                                                                   |       | 7,109                                     |       | —                                   |       | 9,841 |   | — |   |
| Property management fees                                                            |       | 613                                       |       | 583                                      |       | 1,812 |   | 1,781 |   |
| Asset management fees                                                               |       | 1,387                                     |       | 1,456                                    |       | 4,166 |   | 3,399 |   |
| General and administrative                                                          |       | 1,404                                     |       | 1,209                                    |       | 4,388 |   | 3,032 |   |
| Advertising costs                                                                   |       | 233                                       |       | 708                                      |       | 632 |   | 1,853 |   |
| Depreciation and amortization                                                       |       | 6,863                                     |       | 6,783                                    |       | 21,877 |   | 18,550 |   |
| Total expenses                                                                      |       | 42,593                                    |       | 28,043                                   |       | 105,504 |   | 65,545 |   |
|                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| Interest income                                                                     |       | 41                                        |       | 706                                      |       | 120 |   | 2,241 |   |
|                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| Loss before income taxes and equity inlosses of unconsolidated  joint ventures      |       | (23,127                                   | )          | (5,785                                   | )          | (40,951 | ) | (12,172 | ) |
|                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| Provision for income taxes                                                          |       | (54                                       | )          | (47                                      | )          | (152 | ) | (146 | ) |
| Equity in losses of unconsolidated joint ventures                                   |       | (1,059                                    | )          | (1,987                                   | )          | (2,640 | ) | (3,518 | ) |
| Net loss                                                                            |       | (24,240                                   | )          | (7,819                                   | )          | (43,743 | ) | (15,836 | ) |
| Add: Net loss attributable to the noncontrolling  interest                          |       | 3,791                                     |       | 2,334                                    |       | 8,868 |   | 5,250 |   |
| Net loss attributable to Behringer Harvard  Opportunity REIT I, Inc.           |       | $                                         | (20,449    | )                                        | $          | (5,485 | ) | $ | (34,875 | ) | $ | (10,586 | ) |
|                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| Weighted average shares outstanding:                                                |       |                                      |       |                                     |       |   |   |   |   |
| Basic and diluted                                                                   |       | 55,431                                    |       | 54,611                                   |       | 55,226 |   | 54,433 |   |
|                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| Loss per share attributable to Behringer Harvard  Opportunity REIT I, Inc.     |       |                                      |       |                                     |       |   |   |   |   |
| Basic and diluted                                                                   |       | $                                         | (0.37      | )                                        | $          | (0.10 | ) | $ | (0.64 | ) | $ | (0.19 | ) |
|                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| **Comprehensive income:**                                                           |       |                                      |       |                                     |       |   |   |   |   |
| Net loss                                                                            |       | $                                         | (24,240    | )                                        | $          | (7,819 | ) | $ | (43,743 | ) | $ | (15,836 | ) |
| Other comprehensive income (loss):                                                  |       |                                      |       |                                     |       |   |   |   |   |
| Foreign currency translation gain (loss)                                            |       | (669                                      | )          | (164                                     | )          | 879 |   | 1,505 |   |
| Unrealized gain (loss) on interest rate derivatives                                 |       | 450                                       |       | 2,463                                    |       | 1,033 |   | (469 | ) |
| Reclassifications due to hedging activities                                         |       | 24                                        |       | —                                   |       | 240 |   | — |   |
| Total other comprehensive income                                                    |       | (195                                      | )          | 2,299                                    |       | 2,152 |   | 1,036 |   |
| Comprehensive loss                                                                  |       | (24,435                                   | )          | (5,520                                   | )          | (41,591 | ) | (14,800 | ) |
| Comprehensive loss attributable to the  noncontrolling interest                     |       | 2,234                                     |       | 1,383                                    |       | 8,336 |   | 4,976 |   |
| Comprehensive loss attributable to Behringer  Harvard Opportunity REIT I, Inc. |       | $                                         | (22,201    | )                                        | $          | (4,137 | ) | $ | (33,255 | ) | $ | (9,824 | ) |

 

*See Notes to Consolidated Financial Statements.*

 

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Table of Contents

 

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

**ConsolidatedStatements 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 nine months ended****September 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                                    |       |                   |       |              |       | (105,381       | )          |              |       | (992        | )          |            |       |               |       |               |       | (992       | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Distributions  declared on common stock                        |       |                   |       |              |       |           |       |              |       |        |       | (8,210          | )          |               |       |               |       | (8,210     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Contributions  from non-controlling interest                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | 215                |       | 215        |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Shares  issued pursuant to Distribution Reinvestment Plan, net |       |                   |       |              |       | 786,813        |       | 1                 |       | 6,996       |       |            |       |               |       |               |       | 6,997      |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Comprehensive  loss:                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Net  loss                                                      |       |                   |       |              |       |           |       |              |       |        |       | (34,875         | )          |               |       | (8,868             | )          | (43,743    | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Other  comprehensive income:                                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Foreign  currency translation gain                             |       |                   |       |              |       |           |       |              |       |        |       |            |       | 465                |       | 414                |       | 879        |       |
| Unrealized  gain on interest rate derivatives                  |       |                   |       |              |       |           |       |              |       |        |       |            |       | 915                |       | 118                |       | 1,033      |       |
| Reclassifications  due to hedging activities                   |       |                   |       |              |       |           |       |              |       |        |       |            |       | 240                |       | —             |       | 240        |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Total  comprehensive loss                                      |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | (8,336             | )          | (41,591    | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Balance  at September 30, 2009                            |       | 1,000                  |       | $                 | —     |           | 55,518,417 |              | $          | 6           |       | $               | 495,143    |               | $          | (109,170           | )          | $          | (3,574     | ) | $ | (2,619 | ) | $ | 379,786 |   |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| **For the nine months ended****September 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                                    |       |                   |       |              |       | (342,590       | )          |              |       | (3,130      | )          |            |       |               |       |               |       | (3,130     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Distributions  declared on common stock                        |       |                   |       |              |       |           |       |              |       |        |       | (12,260         | )          |               |       |               |       | (12,260    | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Contributions  from non-controlling interest                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | 1,041              |       | 1,041      |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Shares  issued pursuant to Distribution Reinvestment Plan, net |       |                   |       |              |       | 977,874        |       |              |       | 9,289       |       |            |       |               |       |               |       | 9,289      |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Comprehensive  loss:                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Net  loss                                                      |       |                   |       |              |       |           |       |              |       |        |       | (10,586         | )          |               |       | (5,250             | )          | (15,836    | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Other  comprehensive income:                                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Foreign  currency translation gain                             |       |                   |       |              |       |           |       |              |       |        |       |            |       | 1,177              |       | 328                |       | 1,505      |       |
| Unrealized  loss on interest rate derivatives                  |       |                   |       |              |       |           |       |              |       |        |       |            |       | (415               | )          | (54                | )          | (469       | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Total  comprehensive loss                                      |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | (4,976             | )          | (14,800    | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Balance  at September 30, 2008                            |       | 1,000                  |       | $                 | —     |           | 54,691,638 |              | $          | 5           |       | $               | 487,680    |               | $          | (37,828            | )          | $          | 289        |   | $ | 11,389 |   | $ | 461,535 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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Table of Contents

 

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

**Consolidated Statements of Cash Flows**

**(in thousands)**

(Unaudited)

 
| ** **                                                                                        | ** ** | **Nine months ended September 30,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                        | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| **Cash flows from operating activities:**                                                         |       |                                     |       |   |   |
| Net  loss                                                                                         |       | $                                        | (43,743    | ) | $ | (15,836 | ) |
| Adjustments  to reconcile net loss to net cash flows provided by (used in) operating  activities: |       |                                     |       |   |   |
| Depreciation  and amortization                                                                    |       | 18,452                                   |       | 15,079 |   |
| Amortization  of deferred financing fees                                                          |       | 2,365                                    |       | 1,480 |   |
| Impairment  charge                                                                                |       | 9,841                                    |       | — |   |
| Bad debt expense                                                                                  |       | 10,620                                   |       | 274 |   |
| Equity  in losses of unconsolidated joint ventures                                                |       | 2,640                                    |       | 3,518 |   |
| Gain  on derivatives                                                                              |       | (567                                     | )          | — |   |
| Unrealized  loss on derivatives                                                                   |       | —                                   |       | 1,110 |   |
| Change  in accounts receivable                                                                    |       | (3,462                                   | )          | (4,353 | ) |
| Change  in condominium inventory                                                                  |       | 1,993                                    |       | (20,601 | ) |
| Change  in prepaid expenses and other assets                                                      |       | 1,806                                    |       | (3,115 | ) |
| Change  in accounts payable                                                                       |       | (834                                     | )          | (976 | ) |
| Change  in accrued and other liabilities                                                          |       | 3,700                                    |       | 4,619 |   |
| Change  in payables to related parties                                                            |       | 2,098                                    |       | (1,074 | ) |
| Addition  of lease intangibles                                                                    |       | (1,402                                   | )          | (1,771 | ) |
| Cash  provided by (used in) operating activities                                                  |       | 3,507                                    |       | (21,646 | ) |
|                                                                                              |       |                                     |       |   |   |
| **Cash flows from investing activities:**                                                         |       |                                     |       |   |   |
| Purchases  of real estate properties                                                              |       | —                                   |       | (47,473 | ) |
| Investment  in unconsolidated joint ventures                                                      |       | (3,331                                   | )          | (31,553 | ) |
| Capital  expenditures for real estate under development                                           |       | (9,874                                   | )          | (28,316 | ) |
| Capital  expenditures for real estate under development of consolidated borrowers                 |       | (583                                     | )          | (24,823 | ) |
| Additions  of property and equipment                                                              |       | (7,139                                   | )          | (4,796 | ) |
| Change  in restricted cash                                                                        |       | (2,735                                   | )          | (925 | ) |
| Investment  in notes receivable                                                                   |       | (6,495                                   | )          | (26,983 | ) |
| Distributions  from unconsolidated joint venture                                                  |       | —                                   |       | 696 |   |
| Fees  paid to related party for mezzanine loan arrangements                                       |       | —                                   |       | (2,405 | ) |
| Cash  used in investing activities                                                                |       | (30,157                                  | )          | (166,578 | ) |
|                                                                                              |       |                                     |       |   |   |
| **Cash flows from financing activities:**                                                         |       |                                     |       |   |   |
| Financing  costs                                                                                  |       | (480                                     | )          | (3,011 | ) |
| Proceeds  from notes payable                                                                      |       | 18,823                                   |       | 117,014 |   |
| Proceeds  from mortgages of consolidated borrowers                                                |       | 1,700                                    |       | 23,285 |   |
| Net  borrowings on senior secured revolving credit facility                                       |       | 15,400                                   |       | 58,000 |   |
| Payments  on notes payable                                                                        |       | (12,226                                  | )          | (37,673 | ) |
| Redemptions  of common stock                                                                      |       | (992                                     | )          | (3,130 | ) |
| Distributions                                                                                     |       | (2,611                                   | )          | (2,994 | ) |
| Contributions  from noncontrolling interest holders                                               |       | 2,525                                    |       | 1,870 |   |
| Distributions  to noncontrolling interest holders                                                 |       | (254                                     | )          | (829 | ) |
| Change  in payables to related parties                                                            |       | —                                   |       | (328 | ) |
| Cash  provided by financing activities                                                            |       | 21,885                                   |       | 152,204 |   |
|                                                                                              |       |                                     |       |   |   |
| Effect  of exchange rate changes on cash and cash equivalents                                     |       | (1,354                                   | )          | 1,111 |   |
|                                                                                              |       |                                     |       |   |   |
| Net  change in cash and cash equivalents                                                          |       | (6,119                                   | )          | (34,909 | ) |
| Cash  and cash equivalents at beginning of the period                                             |       | 25,260                                   |       | 78,498 |   |
|                                                                                              |       |                                     |       |   |   |
| Cash  and cash equivalents at end of the period                                                   |       | $                                        | 19,141     |   | $ | 43,589 |   |

 

*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 operate commercialreal estate or real estate-related assets located in and outside the UnitedStates on an opportunistic basis.  Inparticular, we have focused on acquiring properties with significantpossibilities for short-term capital appreciation, such as those requiringdevelopment, redevelopment, or repositioning, or those located in markets andsubmarkets with 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, includingmultifamily properties.  We have alsooriginated two mezzanine loans.  Wecompleted our first property acquisition in March 2006, and, as of September 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 September 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 partnership interest by BHOBusiness Trust, a Maryland business trust, which is our wholly-ownedsubsidiary.

 

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.         InterimUnaudited 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 September 30,2009, the consolidated statements of operations and comprehensive income forthe three and nine months ended September 30, 2009 and 2008, andconsolidated statements of equity and cash flows for the nine months ended September 30,2009 and 2008 have not been audited by our independent registered publicaccounting firm.  In the opinion ofmanagement, the accompanying unaudited consolidated financial statements includeall adjustments necessary to fairly present our consolidated financial positionas of September 30, 2009 and December 31, 2008 and our consolidatedresults of operations and cash flows for the periods ended September 30,2009 and 2008.  Such adjustments are of anormal recurring nature.   To conform tothe current-year presentation, which presents bad debt expense separately onour consolidated statements of operations and comprehensive income, wereclassified to bad debt expense, $87 thousand and $274 thousand for the three-and nine-month periods ended September 30, 2008, which was previouslyreported within property operating expenses on our consolidated statements ofoperations.

 

Wehave evaluated subsequent events after the balance sheet date of September 30,2009 through November 13, 2009, which is the date the financial statementswere issued.

 

7

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Table ofContents

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**3.         Summaryof Significant Accounting Policies**

 

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

 

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

 

Our consolidatedfinancial statements include our accounts and the accounts of othersubsidiaries over which we have control. All inter-company transactions, balances and profits have beeneliminated in consolidation.  Interestsin entities acquired will be evaluated based on applicable GAAP, which includesthe requirement to consolidate entities deemed to be variable interest entities(“VIE”) in which we are the primary beneficiary.  If the interest in the entity is determinednot to be a VIE, then the entities will be evaluated for consolidation based onlegal form, economic substance, and the extent to which we have control and/orsubstantive participating rights under the respective ownership agreement.  In the Notes to Consolidated FinancialStatements, all dollar and share amounts in tabulation are in thousands ofdollars and shares, respectively, unless otherwise 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 variouspossibilities of the results of future operations of the entity, assigning aprobability to each possibility, and using a discount rate to determine the netpresent value of those future losses.  Achange in the judgments, assumptions, and estimates outlined above could resultin consolidating an entity that should not be consolidated or accounting for aninvestment using the equity method that should in fact be consolidated, theeffects of which could be material to our financial statements.

 

***RealEstate***

 

Upon theacquisition of real estate properties, we recognize the assets acquired, theliabilities assumed, and any noncontrolling interest as of the acquisitiondate, measured at their fair values.  Theacquisition date is the date on which we obtain control of the real 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,building improvements, tenant improvements, and furniture, fixtures andequipment, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to the tangible assets. Land values are derived from appraisals and building values arecalculated as replacement cost less depreciation or management’s estimates ofthe relative fair value of these assets using discounted cash flow analyses orsimilar methods.  Furniture, fixtures,and equipment values are determined based on current reproduction orreplacement cost less depreciation and other estimated allowances based onphysical, functional, or economic factors. The values of the buildings are depreciated over their respectiveestimated useful lives ranging from 25 years for commercial office property to39 years for hotel/mixed-use property using the straight-line method.  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 

 

8

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Table of Contents

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

estimated useful life of15 years, and furniture, fixtures, and equipment are depreciated over estimateduseful lives ranging from five to seven years using the straight-linemethod.  Our leasehold interest isdepreciated over its remaining contractual life, or approximately 100 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) 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 non-cancelable leaseterm for above-market leases, or (b) the remaining non-cancelable leaseterm plus 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 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 September 30, 2009, the estimated remaining useful lives foracquired lease intangibles range from less than one year to approximately 11years.

 

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 September 30, 2009 is as follows:

 
| ** **                                    | ** ** | **Lease / Other  Intangibles** | ** ** |
|-----------------------------------------------|------------|--------------------------------|------------|
| October 1, 2009 - December 31, 2009 |       | $                              | 459        |   |
| 2010                                          |       | 1,806                          |       |
| 2011                                          |       | 1,282                          |       |
| 2012                                          |       | 1,039                          |       |
| 2013                                          |       | 890                            |       |
|                                               |            |                                |            |  |

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

Accumulated depreciationand amortization related to our consolidated investments in real estate assetsand intangibles were as follows:

 
| ** **                                      | ** ** | ** **             | ** ** | ** **        | ** ** | ** **      | ** ** | **Acquired**     | ** ** | ** **    | ** ** | ** **      | ** ** |
|-------------------------------------------------|------------|------------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|---------------|------------|-----------------|------------|
| ** **                                      | ** ** | **Buildings and**      | ** ** | **Land and**      | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** | **Leasehold** | ** ** | **Other**       | ** ** |
| **As of September 30, 2009**               | ** ** | **Improvements**       | ** ** | **Improvements**  | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** | **Interest**  | ** ** | **Intangibles** | ** ** |
| Cost                                            |       | $                      | 449,017    |              | $          | 131,744         |       | $                | 39,102     |          | $          | (25,505         | )          | $ | 16,205 |   | $ | 10,439 |   |
| Less:  depreciation and amortization            |       | (34,770                | )          | (467              | )          | (15,195         | )          | 11,762           |       | (536          | )          | (1,922          | )          |
| Net                                             |       | $                      | 414,247    |              | $          | 131,277         |       | $                | 23,907     |          | $          | (13,743         | )          | $ | 15,669 |   | $ | 8,517 |   |
|                                            |       |                   |       |              |       |            |       |             |       |          |       |            |       |
| ** **                                      | ** ** | ** **             | ** ** | ** **        | ** ** | ** **      | ** ** | **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 |   |

 

***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 September 30,2009, condominium inventory consisted of $16.3 million of finished units and$76 million 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 andanticipated market conditions.  Thisevaluation takes into consideration estimated future selling prices, costsincurred to date, estimated additional future costs, and management’s plans forthe property.  There were no inventoryvaluation adjustments related to our condominium inventory for the three ornine months ended September 30, 2009 or 2008.  However, we may experience valuationadjustments to our condominium inventory in the future.

 

***Cashand 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 $10 millionand $8.6 million as of September 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 $10.4 million and $0.2 million as of  September 30, 2009 and December 31,2008, respectively.  In September 2009,we recorded a $10.1 million charge (includes $5.2 million for straight-linerent) to the allowance for doubtful accounts related to our lease of the ChasePark Hotel and its operations to Kingsdell, L.P., our 5% unaffiliated partnerin Chase Park Plaza and its hotel operator (see Note 12).

 

***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.

 

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Table of Contents

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

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

 

Furniture,fixtures, and equipment are recorded at cost and are depreciated using thestraight-line method over their estimated useful lives of five to sevenyears.  Maintenance and repairs arecharged to operations as incurred while renewals or improvements to such assetsare capitalized.  Accumulateddepreciation associated with our furniture, fixtures, and equipment was $5.4million and $3.5 million as of September 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 working capital or bridge loans, we willrecord 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 a significantamount of uncertainty.  Given this, anyfuture adverse development in market conditions would cause us to re-evaluateour conclusions, and could result in material impairment charges with respectto our working capital or bridge loans.

 

In evaluating ourinvestments for impairment, management may use appraisals and make 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 thecontinued adverse economic conditions including the general weakness in marketrental rates and tenant renewals, we evaluated certain of our real estateinvestments for potential impairment as of September 30, 2009.  Based on our analyses, we recorded a non-cashimpairment charge of $7.1 million related to our leasehold interest in anoffice building in London, England during the third quarter of 2009.

 

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 our assumptionsregarding expected future cash flows from the use and eventual disposition ofour assets decrease or our expected hold periods decrease, 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 $6.8 million and $4.9 million as of September 30,2009 and December 31, 2008, respectively.

 

11

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Table of Contents

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

***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.

 

As of September 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.

 

***ForeignCurrency Translation***

 

For our internationalinvestments where the functional currency is other than the U.S. dollar, assetsand liabilities are translated using period-end exchange rates, while thestatement of operations amounts are translated using the average exchange ratesfor the respective period.  Differencesarising from the translation of assets and liabilities in comparison with thetranslation of the previous periods or from initial recognition during theperiod are included as a separate component of accumulated other comprehensiveincome (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 gain of$0.9 million and $2.2 million as of September 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 recognize rental income generated from leases onreal estate assets on a straight-line basis over the terms of the respectiveleases, including the effect of rent holidays, if any.  Straight-line rental revenue of $1.6 millionand $3 million was recognized in rental revenues for the nine months ended September 30,2009 and 2008, respectively.  Hotelrevenue is derived from the operations of The Lodge & Spa atCordillera and consists of guest room, food and beverage, and other revenue andis 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 

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

with the newcondominium.  Amounts received prior toclosing on sales of condominiums are recorded as deposits in our financialstatements.

 

***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 a requirementthat 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 the periods ended September 30, 2009and 2008, we recognized a current and deferred tax provision of $0.2 millionand $0.1 million, respectively, related to the Texas margin tax.

 

***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 nine months ended September 30,2009 and 2008, we had no significant compensation cost related to our incentiveaward plan.

 

***Concentrationof Credit Risk***

 

At September 30,2009 and December 31, 2008, we had cash and cash equivalents deposited incertain financial institutions in excess of federally insured levels.  We have diversified our cash and cash equivalentsbetween several banking institutions in an attempt to minimize exposure to anyone of these entities.  We regularlymonitor the financial stability of these financial institutions and believethat we are not exposed to any significant credit risk in cash and cashequivalents or restricted cash.  TheFederal Deposit Insurance Corporation, or “FDIC,” generally only insureslimited amounts per depositor per insured bank.  Beginning October 3,2008 through December 31, 2009, the FDIC will insure up to $250,000 perdepositor per insured bank; on January 1, 2010, the standard coveragelimit will return to $100,000 for most deposit categories.  Unlimited deposit insurance coverage will beavailable to our non-interest bearing transaction accounts held at thoseinstitutions participating in FDIC’s Temporary Liquidity Guarantee Programthrough December 31, 2009.

 

***NoncontrollingInterest***

 

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%,15%, 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 

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

the nine months ended September 30,2009 and 2008.  Our chief operatingdecision maker evaluates operating performance on an individual property level.  Therefore, our properties are aggregated intoone reportable segment.

 

***Earningsper Share***

 

Earnings (loss) per shareis calculated based on the weighted average number of shares outstanding duringeach period.  As of September 30,2009 and 2008, we had options to purchase 69,583 and 54,583 shares of commonstock outstanding at a weighted average exercise price of $8.99 and $9.21,respectively.  These options are excludedfrom the calculation of earnings per share for the three and nine months ended September 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 November 2008,the Financial Accounting Standards Board (“FASB”) issued a standard whichclarifies that an entity shall continue to use the cost accumulation model forits equity method investments.  It alsoconfirms past accounting practices related to the treatment of contingentconsideration and the use of the impairment model for equity method accounting.Additionally, it requires an equity method investor to account for a shareissuance by an investee as if the investor had sold a proportionate share ofthe investment.  This standard waseffective January 1, 2009, and applies prospectively.  The implementation of this guidance did nothave a material impact on our consolidated financial statements.

 

In April 2009, theFASB issued a staff position providing additional guidance for estimating fairvalue when there has been a significant decrease in market activity for afinancial asset.  This staff positionre-emphasizes that regardless of market conditions the fair value measurementis an exit price concept.  It clarifies and includes additionalfactors to consider in determining whether there has been a significantdecrease in market activity for an asset or liability and provides additionalclarification on estimating fair value when the market activity for an asset orliability has declined significantly.  This guidance is appliedprospectively to all fair value measurements where appropriate and is effectivefor interim and annual periods ending after June 15, 2009.  Theimplementation of this guidance on June 30, 2009 did not have a materialimpact on our consolidated financial statements.

 

In June 2009, theFASB issued an amendment to the accounting and disclosure requirements for theconsolidation of variable interest entities. The guidance eliminates exceptions to consolidating qualifyingspecial-purpose entities, contains new criteria for determining the primarybeneficiary, and increases the frequency of required reassessments to determinewhether a company is the primary beneficiary of a variable interestentity.  It also contains a newrequirement that any term, transaction, or arrangement that does not have asubstantive effect on an entity’s status as a variable interest entity, acompany’s power over a variable interest entity, or a company’s obligation toabsorb losses or its rights to receive benefits of an entity must bedisregarded.  The guidance is applicablefor annual periods after November 15, 2009 and interim periodsthereafter.  We are currently assessingthe impact, if any, that this new guidance will have on our consolidatedfinancial statements.

 

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

 

Fair value measurementsare determined based on the assumptions that market participants would use inpricing the asset or liability.  As abasis for considering market participant assumptions in fair valuemeasurements, a fair value hierarchy that distinguishes between marketparticipant assumptions based on market data obtained from sources independentof the reporting entity (observable inputs that are classified within Levels 1and 2 of the hierarchy) and the 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, 

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

foreign exchange rates,and yield curves that are observable at commonly quoted intervals.  Level 3 inputs are unobservable inputs forthe asset or liability that are typically based on an entity’s own assumptions,as there is little, if any, related market activity.  In instances where the determination of thefair value measurement is based on inputs from different levels of the fairvalue hierarchy, the level in the fair value hierarchy within which the fairvalue measurement falls is based on the lowest level input that is significantto the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fairvalue measurement in its entirety requires judgment, and considers factorsspecific to the asset or liability.

 

*Derivative financial instruments*

 

Currently, we 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 byitself and its counterparties.  However,as of September 30, 2009, we have assessed the significance of the impactof the credit valuation adjustments on the overall valuation of our derivativepositions and have determined that the credit valuation adjustments are notsignificant to the overall valuation of our derivatives.  As a result, we have determined that ourderivative valuations in their entirety are classified in Level 2 of the fairvalue hierarchy.

 

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

 
| ** **                        | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** |
|-----------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| **Assets**                        | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Derivative  financial instruments |       | $           | —     |        | $          | 217         |       | $          | —     |   | $ | 217 |   |
|                              |       |        |       |        |       |        |       |       |       |
| **Liabilities**                   |       |        |       |        |       |        |       |       |       |
| Derivative  financial instruments |       | $           | —     |        | $          | 3,925       |       | $          | —     |   | $ | 3,925 |   |

 

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.

 

*Impairment of Real Estate Asset*

 

As a result of thecontinued adverse economic conditions including the general weakness in market rentalrates and tenant renewals, we evaluated certain of our real estate investmentsfor potential impairment as of September 30, 2009.  Based on our analyses, we recorded non-cashimpairment charges totaling $9.8 million related to our leasehold interest inan office building in London, England for the nine months ended September 30,2009.  The inputs used to calculate thefair value of this asset included projected cash flows and a risk-adjusted rateof return that we estimated would be used by a market participant in valuingthis asset.  This fair value estimate isconsidered Level 3 of the fair value hierarchy.

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

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

 
| ** **               | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** | **Gain**   | ** ** |
|--------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|------------|------------|
| ** **               | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** | **(Loss)** | ** ** |
| **Asset**                |       |        |       |        |       |        |       |       |       |       |       |
| Leasehold  interest, net |       | $           | —     |        | $          | —      |       | $          | 15,669     |       | $          | 15,669 |   | $ | (9,841 | ) |
|                          |            |             |            |             |            |             |            |            |            |            |            |  |  |  |  |  |

 

**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.

 

As of September 30,2009 and December 31, 2008, management estimated that the carrying valueof cash 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 payabletotaling $441.6 million and $416.2 million as of September 30, 2009 and December 31,2008, respectively, have a fair value of approximately $446.5 million and $418.4million, respectively, based upon interest rates for mortgages with similarterms and remaining maturities that management believes we could obtain.  Interest rate swaps and caps along with ourforeign currency exchange forward contract are recorded at their respectivefair values in prepaid expenses and other assets for those derivativeinstruments that have an asset balance and in other liabilities for thosederivative instruments that are liabilities (See Note 5).

 

The fair valueestimates presented herein are based on information available to our managementas of September 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 September 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 September 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 September 30,2009 and December 31, 2008:

 
| ** **                    | ** ** | ** **              | ** ** | **Carrying Value of Investment** | ** ** |
|-------------------------------|------------|-------------------------|------------|----------------------------------|------------|
| **Property Name**             | ** ** | **Ownership  Interest** | ** ** | **September 30,  2009**     | ** ** | **December 31,  2008** | ** ** |
| Royal  Island                 |       | 30                      | %          | $                                | 22,430     |   | $ | 22,060 |   |
| GrandMarc  at Westberry Place |       | 50                      | %          | 7,130                            |       | 7,324 |   |
| GrandMarc  at the Corner      |       | 50                      | %          | 6,663                            |       | 5,527 |   |
| Central  Europe Joint Venture |       | 47                      | %          | 26,784                           |       | 27,405 |   |
| Total                         |       |                    |       | $                                | 63,007     |   | $ | 62,316 |   |

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

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

 
| ** **                    | ** ** | **September 30,  2009** | ** ** | **December 31,   2008** | ** ** |
|-------------------------------|------------|------------------------------|------------|------------------------------|------------|
| Real  estate assets, net      |       | $                            | 382,760    |                         | $          | 371,223 |   |
| Cash  and cash equivalents    |       | 15,272                       |       | 24,636                       |       |
| Other  assets                 |       | 3,267                        |       | 2,791                        |       |
| Total  assets                 |       | $                            | 401,299    |                         | $          | 398,650 |   |
|                          |       |                         |       |                         |       |
| Notes  payable                |       | $                            | 233,239    |                         | $          | 245,203 |   |
| Other  liabilities            |       | 18,620                       |       | 25,442                       |       |
| Total  liabilities            |       | 251,859                      |       | 270,645                      |       |
|                          |       |                         |       |                         |       |
| Equity                        |       | 149,440                      |       | 128,005                      |       |
| Total  liabilities and equity |       | $                            | 401,299    |                         | $          | 398,650 |   |

 

Forthe three and nine months ended September 30, 2009, we recognized $1.1million and $2.6 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 nine months ended September 30, 2009 and 2008as follows:

 
| ** **                        | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                        | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenue                           |       | $                                         | 6,208      |                                     | $          | 4,662 |   | $ | 17,580 |   | $ | 8,977 |   |
|                              |       |                                      |       |                                     |       |   |   |   |   |
| Operating  expenses:              |       |                                      |       |                                     |       |   |   |   |   |
| Operating  expenses               |       | 1,816                                     |       | 2,031                                    |       | 4,888 |   | 4,358 |   |
| Property  taxes                   |       | 205                                       |       | 216                                      |       | 612 |   | 659 |   |
| Total  operating expenses         |       | 2,021                                     |       | 2,247                                    |       | 5,500 |   | 5,017 |   |
|                              |       |                                      |       |                                     |       |   |   |   |   |
| Operating  income                 |       | 4,187                                     |       | 2,415                                    |       | 12,080 |   | 3,960 |   |
|                              |       |                                      |       |                                     |       |   |   |   |   |
| Non-operating  expenses:          |       |                                      |       |                                     |       |   |   |   |   |
| Depreciation  and amortization    |       | 2,508                                     |       | 2,111                                    |       | 7,413 |   | 4,245 |   |
| Interest  and other, net          |       | 3,913                                     |       | 4,582                                    |       | 10,157 |   | 7,504 |   |
| Total  non-operating expenses     |       | 6,421                                     |       | 6,693                                    |       | 17,570 |   | 11,749 |   |
|                              |       |                                      |       |                                     |       |   |   |   |   |
| Net  loss                         |       | $                                         | (2,234     | )                                        | $          | (4,278 | ) | $ | (5,490 | ) | $ | (7,789 | ) |
| Company’s  share of net loss |       | $                                         | (1,059     | )                                        | $          | (1,987 | ) | $ | (2,640 | ) | $ | (3,518 | ) |

 

**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 topurchase the ownership interests in Alexan Voss and Alexan Black Mountain aftereach project’s substantial completion and upon notification of completion fromthe developer.  As of September 30,2009, the option agreement allowing us to purchase Alexan Black Mountain hasexpired.

 

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 upon the deliveryof a written notice.  In September 2009,we agreed to an extension of the put option agreement that extends the datethrough which the general partner and mezzanine borrower may elect to exercisethe put option through 

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

January 23,2010.  As of November 13, 2009, thegeneral partner and mezzanine borrower have not elected to provide us with theput 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 haveconsolidated the entities, including the related real estate assets andthird-party construction financing.  Asof September 30, 2009, there was $87.7 million of related real estateassets related to Alexan Voss and Alexan Black Mountain, which collateralizesthe outstanding principal balance of the construction loans.  The third-party construction lenders have norecourse to the general credit of us as the primary beneficiary, but theirloans are guaranteed by the owners of the variable interest entities.  As of September 30, 2009, theoutstanding principal balance under our mezzanine loans was $22.7 million,which is eliminated, along with accrued interest and loan origination fees,upon consolidation.  We, as the mezzaninelender, are in discussion with the mezzanine borrower and the seniorconstruction lender to refinance the Alexan Black Mountain note payable.  In the third quarter of 2009, the originalmaturity date of the Alexan Black Mountain note payable was extended to December 29,2009 pending continuing discussions to refinance or renew the note payable fora longer term.

 

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 resort hotel,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 September 30, 2009, including accrued interest andfees, was $42.5 million (See Note 9). Based on our evaluation, we have determined that the entity meets thecriteria of a variable 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 September 30, 2009,there was approximately $142 million of real estate assets under developmentrelated to Royal Island.

 

**9.         Notes Receivable**

 

*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 September 30, 2009, thenote receivable 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 debt.  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.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

In April 2009, wecollected $2.1 million in unpaid interest and fees from the borrower.  At September 30, 2009, the loan balanceowed to us for both tranches was $42.5 million, which includes $1.5 million ofaccrued interest and fees included in receivables from related parties at September 30,2009.  Of the $42.5 million balance owedto us, $3.1 million represents the recently acquired A-1 tranche.  We have not recorded an allowance against therecorded balance as our estimate of the fair value of the Royal Island propertysecuring the bridge loan exceeds the current carrying value of the loan, andaccordingly, we believe it is probable that all of the outstanding balance iscollectible.

 

While we believe it is currentlyprobable we will collect all outstanding balances with respect to our notesreceivable, current market conditions with respect to credit availability andto fundamentals within the real estate markets instill significant levels ofuncertainty.  Accordingly, future adversedevelopments in market conditions would cause us to re-evaluate our conclusionsand could result in material impairment charges.

 

**10.      Capitalized Costs**

 

We capitalize interest,property taxes, insurance, and construction costs to real estate underdevelopment.  During the nine monthsended September 30, 2009 we capitalized $7.1 million of such costsassociated with real estate under development and certain investments accountedfor by the equity method, including $1.3 million in interest costs.  During the year ended December 31, 2008,we capitalized $53.9 million of costs associated with real estate underdevelopment and certain investments accounted for by the equity method,including $9 million in interest costs. Capitalized interest costs include interest expense and amortization ofdeferred financing costs.

 

Certain redevelopmentcosts including interest, property taxes, insurance, and construction costsassociated with Chase Park Plaza have been capitalized to condominium inventoryon our consolidated balance sheet at September 30, 2009.  During the nine months ended September 30,2009, we capitalized a total of $11.3 million of such costs associated with thecondominium redevelopment at Chase Park Plaza. For the year ended December 31, 2008, we capitalized a total of$28.7 million of costs associated with the condominium redevelopment at ChasePark Plaza and The Lodge & Spa at Cordillera, including $4.8 millionof interest and deferred financing costs.

 

During the first nine monthsof 2009, $0.5 million in costs were transferred from real estate underdevelopment to land on our balance sheet. Also, during the first nine months of 2009, $4.9 million and $0.2million of real estate under development costs were transferred to building andimprovements and to furniture, fixtures, and equipment, respectively, on ourbalance sheet.  For the year ended December 31,2008, $15.4 million in costs were transferred from real estate underdevelopment to land on our balance sheet. Also, during the year ended December 31, 2008, $89.7 million and$7.2 million of real estate under development costs were transferred tobuilding and improvements and to furniture, fixtures, and equipment,respectively, on our balance sheet.

 

# **11.      Notes Payable**

# ** **

Our notes payable balancewas $441.6 million at September 30, 2009, as compared to $416.2 million atDecember 31, 2008, and consists of borrowings and assumptions of debtrelated to our property acquisitions as well as the notes payable of ourmezzanine borrowers we consolidate as variable interest entities under GAAP andour borrowings under our $75 million senior secured credit facility.  Eachof our notes payable is collateralized by one or more of our properties. At September 30, 2009, our notes payable interest rates ranged from 2% to6.3%, with a weighted average interest rate of approximately 3.2%.  Of our$441.6 million in notes payable at September 30, 2009, $402 millionrepresented debt subject to variable interest rates.  At September 30,2009, our notes payable have maturity dates that range from October 2009to January 2016.  In July 2009, we extended the maturity date ofthe Frisco Square I, LLC (Land) loan with the lender to October 28, 2009,pending ongoing discussions to extend this loan for one year as permitted underthe terms of the loan agreement or as otherwise negotiated.  As of October 28, 2009, we had not cometo an agreement with the lender to extend the loan.  Failure to agree to terms for a loanextension constitutes a default of the extended loan agreement.  The loan bears interest at a floating rate ofLIBOR + .25%, or 2.75% as of September 30, 2009.  We continue to make monthly payments ofinterest only under the loan agreement. We believe that we are in compliance with all covenants under this loanagreement and we are currently in negotiations to extend or renegotiate thisloan.  This loan is secured by realproperty and is unconditionally guaranteed by us.

 

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 September 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, Bent Tree Green, and Crossroads OfficePark.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

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.  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 September 30, 2009, the maximumavailability under the revolving credit facility was $64.7 million.  The outstanding balance under the revolvingcredit facility was $63.4 million.

 

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

 
| **Principal Payments Due:**          | ** ** | ** ** | ** ** |
|--------------------------------------|------------|------------|------------|
| Oct 1, 2009 - December 31, 2009 |       | $          | 54,909     |   |
| 2010                                 |       | 202,904    |       |
| 2011                                 |       | 138,761    |       |
| 2012                                 |       | 8,070      |       |
| 2013                                 |       | 16,664     |       |
| Thereafter                           |       | 19,244     |       |
| Unamortized premium                  |       | 1,022      |       |
|                                 |       |       |       |
|                                 |       | $          | 441,574    |   |

 

**12.          LeasingActivity**

 

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

 
| ** **                                    | ** ** | **Future  Minimum  Lease  Payments** | ** ** |
|-----------------------------------------------|------------|--------------------------------------|------------|
| October 1, 2009 - December 31, 2009 |       | $                                    | 10,223     |   |
| 2010                                          |       | 36,393                               |       |
| 2011                                          |       | 34,535                               |       |
| 2012                                          |       | 33,428                               |       |
| 2013                                          |       | 19,896                               |       |
| Thereafter                                    |       | 51,315                               |       |
|                                          |       |                                 |       |
| Total                                         |       | $                                    | 185,790    |   |

 

As of September 30,2009, one of our tenants accounted for 10% or more of our aggregate annualrental revenues from our consolidated properties.  Kingsdell, L.P., our 5% unaffiliated partnerin Chase Park Plaza and its hotel operator, leased the hotel and accounted forrental revenue of approximately $6.1 million, or approximately 12.8%, of ouraggregate rental revenues for the nine months ended September 30, 2009.

 

Hotel occupancy rates andADR have declined sharply nationwide in 2009, and as a result, the Chase ParkPlaza lessee, Kingsdell, L.P., has been unable to pay the full amount of itslease payment.  Accordingly, in the thirdquarter 2009, we recorded a $10.1 million charge (includes $5.2 million forstraight-line rent) to bad debt expense related to the unpaid balance.  We continue to work with the lessee tocomplete a satisfactory workout plan.

 

Approximately $0.1million and $0.3 million of contingent rent was included in rental revenue forthe three and nine months ended September 30, 2009, respectively.  Approximately $0.2 million and $0.4 millionof contingent rent was included in rental revenue for the three and nine monthsended September 30, 2008, respectively.

 

**13.      DerivativeInstruments and Hedging Activities**

 

We may be exposed to therisk associated with variability of interest rates that might impact our cashflows and the results of operations.  The hedging strategy ofentering into interest rate caps and swaps, therefore, is to eliminate orreduce, to the extent possible, the volatility of cash flows.  Inaddition, we may be exposed to foreign currency exchange risk related to ournet investments in the Becket House leasehold interest and the Central EuropeJoint Venture.  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.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

Derivative instrumentsclassified as assets were reported at their combined fair values of $0.2million and $1.3 million in prepaid expenses and other assets at September 30,2009 and December 31, 2008, respectively. Derivative instruments classified as liabilities were reported at theircombined fair values of $3.9 million and $5.5 million in accrued and otherliabilities at September 30, 2009 and December 31, 2008,respectively.  During the nine monthsended September 30, 2009, we recorded unrealized losses of $0.9 million toAOCI in our statement of equity to adjust the carrying amount of the interestrate swaps and caps qualifying as hedges at September 30, 2009.  Unrealized losses on interest ratederivatives for the nine months ended September 30, 2009 reflect areclassification of unrealized losses from accumulated other comprehensive lossto interest expense of $0.2 million.

 

The following tablesummarizes the notional values of our derivative financial instruments as of September 30,2009.  The notional values provide anindication of the extent of our involvement in these instruments at September 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 |                                 | $          | 1 |   |
| Interest  rate swap - Becket House                   |       | £              | 12,700     |                            | 5.50       | %            | November 21,  2009 |                                 | $          | (151 | ) |
| Interest  rate swap - Crossroads                     |       | $                   | 25,000     |                            | 3.10       | %            | November 1,  2010  |                                 | $          | (743 | ) |
|                                                 |       |                |       |                            |       |         |                    |                                 |       |
| Net  Investment Hedges                               |       |                |       |                            |       |         |                    |                                 |       |
| Foreign  currency put - Becket House                 |       | £              | 6,120      |                            | £     | 1.30         |                    | November 23,  2011              |       | $ | 208 |   |
| Foreign  currency put - Central Europe Joint Venture |       | €              | 17,000     |                            | €     | 1.10         |                    | July 28,  2010                  |       | $ | 8 |   |
| Other                                                |       |                |       |                            |       |         |                    |                                 |       |
| Interest  rate swap - Chase Park Plaza Hotel         |       | $                   | 80,594     |                            | 3.82       | %            | November 15,  2010 |                                 | $          | (3,031 | ) |

 

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

 
| ** **                                             | ** ** | ** **                         | ** ** | **Asset Derivatives**                       | ** ** | **Liability Derivatives**                  | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                             | ** ** | **Balance  Sheet  Location**       | ** ** | **Fair Value at  September 30,  2009** | ** ** | **Fair Value at  December 31,  2008** | ** ** | **Fair Value at  September 30,  2009** | ** ** | **Fair Value at  December 31,  2008** | ** ** |
| ** **                                             |       |                               |       |                                        |       |                                       |       |   |   |   |   |
| **Derivatives designated as hedging instruments:**     |       |                               |       |                                        |       |                                       |       |   |   |   |   |
|                                                   |       |                               |       |                                        |       |                                       |       |   |   |   |   |
| Interest  rate derivative contracts                    |       | Prepaid  expenses and other assets |       | $                                           | 1          |                                       | $          | 6 |   | $ | — |   | $ | — |   |
| Interest  rate derivative contracts                    |       | Accrued  and other liabilities     |       | —                                      |       | —                                     |       | (894 | ) | (1,468 | ) |
| Foreign  exchange contracts                            |       | Prepaid  expenses and other assets |       | 216                                         |       | 1,267                                      |       | — |   | — |   |
|                                                   |       |                               |       |                                        |       |                                       |       |   |   |   |   |
| Total  derivatives designated as hedging instruments   |       |                               |       | $                                           | 217        |                                       | $          | 1,273 |   | $ | (894 | ) | $ | (1,468 | ) |
|                                                   |       |                               |       |                                        |       |                                       |       |   |   |   |   |
| **Derivatives not designated as hedging instruments:** |       |                               |       |                                        |       |                                       |       |   |   |   |   |
|                                                   |       |                               |       |                                        |       |                                       |       |   |   |   |   |
| Interest  rate derivative contract                     |       | Accrued  and other liabilities     |       | $                                           | —     |                                       | $          | — |   | $ | (3,031 | ) | $ | (4,050 | ) |
|                                                   |       |                               |       |                                        |       |                                       |       |   |   |   |   |
| Total  derivatives                                     |       |                               |       | $                                           | 217        |                                       | $          | 1,273 |   | $ | (3,925 | ) | $ | (5,518 | ) |

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

The tables below presentthe effect of our derivative financial instruments on the consolidatedstatements of operations for the periods ended September 30, 2009 and2008.

 

**Derivativesin 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 September 30,**                                           | ** ** | **Three  months ended September 30,**                                                     | ** ** | **Nine  months ended September 30,**                                                 | ** ** | **Nine  months ended September 30,**                                                      | ** ** |
| ** **                          | ** ** | **2009**                                                                             | ** ** | **2008**                                                                                       | ** ** | **2009**                                                                                  | ** ** | **2008**                                                                                       | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  rate derivative contracts |       | $                                                                                    | 256        |                                                                                           | $          | (671                                                                                      | )          | $                                                                                              | 24         |   | $ | — |   | $ | 663 |   | $ | (590 | ) | $ | 55 |   | $ | — |   |
|                                     |            |                                                                                      |            |                                                                                                |            |                                                                                           |            |                                                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(1)          Amounts related to interest rate derivative contractsare included in interest expense.

 

**Derivativesin 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 September 30,**                                                | ** ** | **Three  months ended September 30,**                                                     | ** ** | **Nine  months ended September 30,**                                                 | ** ** | **Nine  months ended September 30,**                                                      | ** ** |
| ** **                  | ** ** | **2009**                                                                                  | ** ** | **2008**                                                                                       | ** ** | **2009**                                                                                  | ** ** | **2008**                                                                                       | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| Foreign  exchange contracts |       | $                                                                                         | (127       | )                                                                                              | $          | 771                                                                                       |       | $                                                                                              | —     |   | $ | — |   | $ | (1,052 | ) | $ | 617 |   | $ | — |   | $ | — |   |
|                             |            |                                                                                           |            |                                                                                                |            |                                                                                           |            |                                                                                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(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**

 
| ** **                         | ** ** | ** **                      | ** ** | **Amount  of Gain or (Loss)**              | ** ** | **Amount  of Gain or (Loss)**             | ** ** |
|------------------------------------|------------|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | ** **                      | ** ** | **Recognized in Income on**                | ** ** | **Recognized in Income on**               | ** ** |
| ** **                         | ** ** | **Location  of Gain or (Loss)** | ** ** | **Derivative**                             | ** ** | **Derivative**                            | ** ** |
| ** **                         | ** ** | **Recognized  in Income on**    | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** |
| ** **                         | ** ** | **Derivative**                  | ** ** | **2009**                                   | ** ** | **2008**                                  | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  rate derivative contract |       | Interest expense                |       | $                                          | 293        |                                      | $          | — |   | $ | 1,047 |   | $ | — |   |
|                                    |            |                                 |            |                                            |            |                                           |            |  |  |  |  |  |  |  |  |

 

*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 will periodically reviewcounterparties based on credit ratings and limit our exposure to any singlecounterparty.  Under our agreements withthe counterparty related to our interest rate caps of Santa Clara Tech Centerand Chase — The Private Residences, cash deposits may be required to be postedby the counterparty whenever their credit rating falls below certainlevels.  Based on our agreement with thecounterparty related to our interest rate swap of Crossroads Office Park, wemay be required to post cash collateral of up to $0.6 million if the lender’sobligation to lend under our senior secured credit facility is terminated orthe lender ceases to be a party to the senior secured credit facility and thevalue of the derivative is a liability on our consolidated balance sheet.  At September 30, 2009, no collateral hasbeen posted with our counterparties nor have our counterparties postedcollateral 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.

 

On July 14, 2009, our board of directors authorizeda quarterly distribution in the amount of $0.075 per share of common stock,which is equivalent to an annual distribution of 3% assuming a $10 price pershare.  The distribution was payable tothe common stockholders of record at the close of business on June 30,2009 and the distribution was paid on July 29, 2009.

 

On October 26, 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 is 

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

payable to the common stockholders of record at theclose of business on September 30, 2009, the record date previouslyestablished by the board on August 10, 2009.  The distribution was paid on November 3,2009.

 

The followingare the distributions declared by quarter for the nine months ended September 30,2009 and 2008:

 
| **2009**    | ** ** | **Cash** | ** ** | **DRP** | ** ** | **Total** | ** ** | **Per Share**      | ** ** |
|-------------|------------|----------|------------|---------|------------|-----------|------------|--------------------|------------|
| 3rd Quarter |       | $        | 1,192      |    | $          | 2,948     |       | $                  | 4,140      |   | $ | 0.08 |   |
| 2nd Quarter |       | —   |       | —  |       | —    |       | —             |       |
| 1st Quarter |       | 1,063    |       | 3,007   |       | 4,070     |       | 0.07               |       |
| Total       |       | $        | 2,255      |    | $          | 5,955     |       | $                  | 8,210      |   | $ | 0.15 |   |
|        |       |     |       |    |       |      |       |               |       |
| **2008**    | ** ** | **Cash** | ** ** | **DRP** | ** ** | **Total** | ** ** | **Per Share** | ** ** |
| 3rd Quarter |       | $        | 999        |    | $          | 3,130     |       | $                  | 4,129      |   | $ | 0.08 |   |
| 2nd Quarter |       | 978      |       | 3,098   |       | 4,076     |       | 0.07               |       |
| 1st Quarter |       | 969      |       | 3,086   |       | 4,055     |       | 0.07               |       |
| Total       |       | $        | 2,946      |    | $          | 9,314     |       | $                  | 12,260     |   | $ | 0.22 |   |

 

**15.      RelatedParty 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 nine monthsended September 30, 2009.  In thenine months ended September 30, 2008, we incurred $4.7 million inacquisition and advisory fees and $0.9 million in acquisition expensereimbursements.

 

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 $2.4 million in debt financing fees for thenine months ended September 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 be subcontracted tounaffiliated third parties.  Such feesare equal to 4.5% of gross revenues plus leasing commissions based upon thecustomary leasing commission applicable to the same geographic location of therespective property.  In the event thatwe contract directly with a non-affiliated third-party property manager inrespect of a property, we will pay BH Property Management an oversight feeequal to 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 $1.5 million and$1.3 million in the nine months ended September 30, 2009 and 2008,respectively.  For the nine months ended September 30,2009, we incurred less than $0.1 million of construction management feespayable to BH Property Management.  Wedid not incur any construction management fees to BH Property Management forthe nine months ended September 30, 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 nine months ended September 30,2009, we expensed $4.1 million of asset management fees and capitalized lessthan $0.1 million of asset management fees to real estate.  For the nine months ended September 30,2008, we expensed $3.3 million of asset management fees and capitalized $0.2million of 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 

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

employed by thoseentities and performing services for us, subject to the limitation that we willnot reimburse for any amount by which our advisor’s operating expenses(including the asset management fee) at the end of the four fiscal 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 nine months ended September 30,2009 and 2008, we incurred and expensed costs for administrative servicestotaling $1.3 million and $0.3 million, respectively.

 

At September 30,2009, we had a payable to our advisor and its affiliates of $1.9 million.  This balance consists primarily of assetmanagement fees and expenses and administrative service expenses payable toBehringer Opportunity Advisors I, management fees payable to BH PropertyManagement, and other miscellaneous payables. This payable is offset by a receivable from our advisor and itsaffiliates of $0.1 million, which is included in receivables from relatedparties at September 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, asset management, property management and leasing services, andother general administrative responsibilities. In the event that these companies were unable to provide us with therespective services, we would be required to obtain such services from othersources.

 

**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 September 30, 2009, options topurchase 69,583 shares of stock were outstanding, of which 15,000 are fullyvested, at a weighted average exercise price per share of $8.99.  The remaining contractual life of theoutstanding options is 4.1 years. Compensation expense associated with our Incentive Award Plan was notmaterial for the nine months ended September 30, 2009 or 2008.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**17.      Supplemental Cash Flow Information**

 

Supplemental cash flow informationis summarized below.

 
| ** **                                                                                                                     | ** ** | **Nine months ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                                                     | ** ** | **2009**                                 | ** ** | **2008** | ** ** |
| **Supplemental disclosure:**                                                                                                   |       |                                     |       |   |   |
| Interest  paid, net of amounts capitalized                                                                                     |       | $                                        | 10,522     |   | $ | 7,902 |   |
| Income  taxes paid                                                                                                             |       | $                                        | —     |   | $ | 76 |   |
|                                                                                                                           |       |                                     |       |   |   |
| **Non-cash investing activities:**                                                                                             |       |                                     |       |   |   |
| Property  and equipment additions and purchases of real estate in accrued liabilities                                          |       | $                                        | 140        |   | $ | 256 |   |
| Capital  expenditures for real estate under development in accounts payable and accrued  liabilities                           |       | $                                        | 1,123      |   | $ | 3,259 |   |
| Capital  expenditures for real estate under development of consolidated borrowers in accounts  payable and accrued liabilities |       | $                                        | —     |   | $ | 2,468 |   |
| Amortization  of deferred financing fees in properties under development                                                       |       | $                                        | 218        |   | $ | 378 |   |
| Amortization  of deferred financing fees in properties under development of consolidated  borrowers                            |       | $                                        | —     |   | $ | 43 |   |
|                                                                                                                           |       |                                     |       |   |   |
| **Non-cash financing activities:**                                                                                             |       |                                     |       |   |   |
| Assumed  debt on acquisition of real estate investment                                                                         |       | $                                        | —     |   | $ | 22,229 |   |

** **

*********

 

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**Item2.                    Management’sDiscussion and Analysis 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-LookingStatements**

### ** **

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 orrevise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events or changes to future operating results.  Factors that could cause actual results todiffer materially from any forward-looking statements made in the Form 10-Qinclude changes in general economic conditions, changes in real estateconditions, construction costs that may exceed estimates, construction delays,increases in interest rates, lease-up risks, inability to obtain new tenantsupon the expiration of existing leases, and the potential need to fund tenantimprovements or other capital expenditures out of operating cash flow.  The forward-looking statements should be readin light of the risk factors identified in Part II, Item 1A of this reporton Form 10-Q, 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 Reports on Form 10-Q for the quarters ended March 31,2009 and June 30, 2009, each 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 in 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 September 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 inArizona, California, Colorado, Massachusetts, Minnesota, Missouri, Nevada,Texas, Virginia, the Commonwealth of The Bahamas, London, England, the CzechRepublic, Poland, Hungary, and Slovakia.

 

*Market Outlook*

 

During 2008 andcontinuing into 2009, the U.S. and global economy experienced a significantdownturn.  This downturn includeddisruptions in the broader financial and credit markets, declining consumerconfidence, and an increase in unemployment rates.  These conditions have contributed to weakenedmarket conditions.  Due to the strugglingU.S. and 

 

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global economies, webelieve that overall demand for office space will continue to decline due tolosses in the financial and professional services industries and thatcorresponding rental rates will remain weak at least through the remainder ofthe current year.  We also believe thattenant defaults across the nation are likely to increase in theshort-term.  To date, we have notexperienced any significant 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 64.8% in the second quarter of 2008 to 57.8% in the secondquarter of 2009.  The national overallAverage Daily Rate (“ADR”) has also declined, from $107.80 in the secondquarter of 2008 to $97.37 in the second quarter of 2009.  This weakening of the hospitality industry isexpected to continue throughout the remainder of 2009.

 

Within themulti-family industry, weak U.S. labor markets and high unemployment ratesacross the nation have been key factors contributing to high vacancyrates.  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 andTexas in general have historically been more resistant to recessionary trendsthan much of the nation.  According toPPR, office vacancy rates in the Dallas-Fort Worth market continued to risethrough the first half of 2009.  This wasdue in large part to office employment declines in the financial activities,professional, and business services industries. However, despite these declines, leasing activity continues and supplyis not as oversaturated in this market as in many.  Through the remainder of the year and into2010, Dallas-Fort Worth and Houston are expected to react similarly to thenation as a whole.  However, the Dallas-FortWorth and Houston markets are well-positioned to grow in the long-term.

 

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 expect conditionsto improve significantly in the near future. Management expects that the current volatility in the capital marketswill continue, at least in the short-term. This volatility has significantly impacted the availability of creditfor borrowers.  This tightening of creditmay hinder our ability to take advantage of current opportunities in themarketplace.  We have placed a highpriority on maintaining strong relationships with banks and other lenders.  We believe, though the opportunities forobtaining new credit have diminished, that our strong relationships with ourlenders will ensure that opportunities for securing credit will continue to beavailable 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 capitalimprovements) and ongoing costs at our development properties are expected tobe met from operations 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 be flat due to rental revenue stabilizingon our operating properties combined with lower hotel revenues at The Lodge andSpa at Cordillera offset by anticipated higher condominium sales at The PrivateResidences at The Chase Park Plaza.  Forboth our short-term and long-term liquidity requirements, other potentialfuture sources of capital may include proceeds from secured or unsecuredfinancings from banks or other lenders, proceeds from the sale of ourinvestments, 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 $441.6 million at September 30, 2009 from$416.2 million 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 September 30,2009, our notes payable interest rates ranged from 2% to 6.3%, with a weightedaverage interest rate of 3.2%. 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 September 30, 2009, our notes payablehad maturity dates that range from October 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 September 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 have experienced increasing rates of delinquency,foreclosure and loss.  Although we havenot directly or indirectly invested in sub-prime mortgage loans, these andother related events continue to have a significant impact on the capitalmarkets associated not only with sub-prime mortgage-backed securities,asset-backed securities and collateralized debt obligations, but also with theU.S. housing, credit and financial markets as a whole.

 

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 lendersincreasing the 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 to finance future acquisitions or refinanceexisting debt obligations could be adversely affected by our inability tosecure permanent financing on reasonable terms, if at all.

 

In addition,capitalization rates (or cap rates) for real estate properties haveincreased.  Cap rates and property pricesmove inversely so that an increase in cap rates should, without an increase inproperty net operating income, result in a decrease in property value.  Although 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.

 

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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 September 30, 2009.  The table does not represent any extensionoptions.

 
| ** **                                                                                        | ** ** | **Payments Due by Period** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                                        | ** ** | **2009**                   | ** ** | **2010-2011** | ** ** | **2012-2013** | ** ** | **After 2013** | ** ** | **Total** | ** ** |
| Principal  payments - fixed rate debt                                                             |       | $                          | 70         |   | $ | 927 |   | $ | 18,324 |   | $ | 19,244 |   | $ | 38,565 |   |
| Interest  payments - fixed rate debt                                                              |       | 582                        |       | 4,633 |   | 4,118 |   | 2,263 |   | 11,596 |   |
| Principal  payments - variable rate debt                                                          |       | 54,839                     |       | 340,738 |   | 6,410 |   | — |   | 401,987 |   |
| Interest  payments - variable rate debt (based on rates in effect as of  September 30, 2009) |       | 3,028                      |       | 8,628 |   | 207 |   | — |   | 11,863 |   |
| Total                                                                                             |       | $                          | 58,519     |   | $ | 354,926 |   | $ | 29,059 |   | $ | 21,507 |   | $ | 464,011 |   |

 

Included within the tableabove are amounts due related to the Alexan Black Mountain and Alexan Vossnotes payable.  The notes payable relatedto Alexan Black Mountain and Alexan Voss are not our obligations but are theobligations of our mezzanine borrowers. 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 torefinance the Alexan Black Mountain note payable.  In September 2009, the maturity date ofthe Alexan Black Mountain note payable was extended to December 29, 2009pending continuing discussions to refinance or renew the note payable for alonger term.  In addition, $25.8 millionof the principal payments under variable rate debt due in 2009 is related tothe Frisco Square I, LLC (Land) loan which originally matured July 29,2009.  We have extended the maturity dateof the loan thru October 28, 2009 pending ongoing discussions to extendthis loan with the lender as permitted under the terms of the loan agreement oras otherwise negotiated.  As of October 28,2009, we had not come to an agreement with the lender to extend the loan.  Failure to agree to terms for a loanextension constitutes a default of the extended loan agreement.  The loan bears interest at a floating rate ofLIBOR + .25%, or 2.75% as of September 30, 2009.  We continue to make monthly payments ofinterest only under the loan agreement. We believe that we are in compliance with all covenants under this loanagreement and we are currently in negotiations to extend or renegotiate thisloan.  This loan is secured by realproperty and is unconditionally guaranteed by us.  Of the $340.7 million variable rate debtprincipal payments due in 2010-2011, $39.5 million is related to the AlexanVoss loan, which matures in April 2010. We, as the mezzanine lender, are in discussions 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 September 30, 2009, the maximumavailability under the senior secured credit facility was $64.7 million and theoutstanding balance was $63.4 million. The cash and cash equivalents on the consolidated balance sheet of $19.1million as of September 30, 2009 and additional amounts available underour senior secured credit facility are expected to fund our short-termliquidity requirements.  The proceeds ofthe senior secured credit facility have been used to fund ongoing costs at ourdevelopment properties, to fund a portion of our acquisition of the CentralEurope Joint Venture, and for general corporate purposes.

 

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*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 30% 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 September 30, 2009, the aggregate debt held by unrelatedparties, including both ours and our partners’ share, incurred by theseventures was approximately $153.2 million.

 

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

 
| ** **                    | ** ** | **Venture**   | ** ** | **Interest Rate**            | ** ** | ** **   | ** ** | ** **                | ** **                 |
|-------------------------------|------------|---------------|------------|------------------------------|------------|--------------|------------|---------------------------|----------------------------|
| ** **                    | ** ** | **Ownership** | ** ** | **(as of**                   | ** ** | **Carrying** | ** ** | **Maturity**              | ** **                 |
| **Properties**                | ** ** | **%**         | ** ** | **September 30, 2009)** | ** ** | **Amount**   | ** ** | **Date**                  | ** **                 |
|                          |       |          |       |                         |       |         |       |                      |                       |
| GrandMarc  at the Corner      |       | 50            | %          | 5.50                         | %(1)       | $            | 26,919     |                      | December 31,  2009(1) |   |
| GrandMarc  at Westberry Place |       | 50            | %          | 2.25                         | %          | 37,586       |       | January 25,  2010(2) |                       |
| Central  Europe Joint Venture |       | 47            | %          | 2.50                         | %(3)       | 88,740       |       | March 1,  2012(4)    |                       |
| Total                         |       |          |       |                         |       | $            | 153,245    |                      |                       |   |

 

----

| (1) | The GrandMarc at the  Corner loan has been extended through December 31, 2009 pending the  completion of refinancing with another lender. The interest rate during the  extension period is subject to a floor of 5.5%. We expect to close on the  refinancing of this loan in the late fourth quarter of 2009. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) | We expect to refinance  or extend the GrandMarc at Westberry Place loan.                                                                                                                                                                                                                                             |
| (3) | Represents the weighted  average interest rate of the various notes payable secured by the 22  properties in the Central Europe Joint Venture.                                                                                                                                                                       |
| (4) | Represents the weighted  average maturity date of the various notes payable secured by the 22  properties in the Central Europe Joint Venture.                                                                                                                                                                       |

 

**Results of Operations**

 

As of September 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.

 

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*Three months ended September 30, 2009 ascompared to three months ended September 30, 2008*

 
| ** **                     | ** ** | **Three Months Ended** | ** ** | ** **              | ** ** |
|--------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                     | ** ** | **2009**               | ** ** | **2008**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Revenue:                       |       |                   |       |                    |       |   |   |   |   |
| Rental  revenue                |       | $                      | 15,948     |                    | $          | 15,192 |   | $ | 756 |   | 5 | % |
| Hotel  revenue                 |       | 1,513                  |       | 2,045                   |       | (532 | ) | -26 | % |
| Condominium  sales             |       | 1,964                  |       | 4,315                   |       | (2,351 | ) | -54 | % |
| Total  revenues                |       | $                      | 19,425     |                    | $          | 21,552 |   | $ | (2,127 | ) | -10 | % |
|                           |       |                   |       |                    |       |   |   |   |   |
| Expenses:                      |       |                   |       |                    |       |   |   |   |   |
| Property  operating expenses   |       | $                      | 6,623      |                    | $          | 6,793 |   | $ | (170 | ) | -3 | % |
| Bad  debt expense              |       | 10,277                 |       | 87                      |       | 10,190 |   | 11713 | % |
| Cost  of condominium sales     |       | 1,983                  |       | 4,331                   |       | (2,348 | ) | -54 | % |
| Interest  expense              |       | 4,415                  |       | 4,113                   |       | 302 |   | 7 | % |
| Real  estate taxes             |       | 1,686                  |       | 1,980                   |       | (294 | ) | -15 | % |
| Impairment  charge             |       | 7,109                  |       | —                  |       | 7,109 |   | n/a |   |
| Property  management fees      |       | 613                    |       | 583                     |       | 30 |   | 5 | % |
| Asset  management fees         |       | 1,387                  |       | 1,456                   |       | (69 | ) | -5 | % |
| General  and administrative    |       | 1,404                  |       | 1,209                   |       | 195 |   | 16 | % |
| Advertising  costs             |       | 233                    |       | 708                     |       | (475 | ) | -67 | % |
| Depreciation  and amortization |       | 6,863                  |       | 6,783                   |       | 80 |   | 1 | % |
| Total  expenses                |       | $                      | 42,593     |                    | $          | 28,043 |   | $ | 14,550 |   | 52 | % |

 

*Revenues.* Our total revenues decreased by $2.1 million to $19.4 million for thethree months ended September 30, 2009 as compared to $21.5 million for thethree months ended September 30, 2008. The decrease in revenues is primarily due to:

 

·                  Decreased hotel revenue of $0.5 million, largely due to the negativeeffect of the poor global economy on the hospitality industry; and

 

·                  a decrease in condominium sales of $2.4 million for September 30,2009 as compared to September 30, 2008.

 

Weclosed on the sale of three condominium units at The Private Residences at TheChase Park Plaza during the three months ended September 30, 2009.  Of the remaining 52 units, 15 units wereunder sales contracts with non-refundable deposits and three units were reservedwith refundable deposits as of September 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 on units under contract and reserved at The PrivateResidences at The Chase Park Plaza.

 

*PropertyOperating Expenses**.*  Property operating expenses for the three months endedSeptember 30, 2009 were $6.6 million as compared to $6.8 million forthe three months ended September 30, 2008, and were comprised of operatingexpenses from our consolidated properties.

 

*Bad debtexpense.** *Bad debt expense for the three months ended September 30,2009 was $10.3 million as compared to $0.1 million for the three months ended September 30,2008.  The increase in bad debt expensewas primarily due to a reserve for bad debt established at the end of the thirdquarter of 2009 for Chase Park Plaza. Hotel occupancy rates and ADR have declined sharply nationwide in2009.  As a result, the Chase Park Plazalessee, Kingsdell, L.P., has been unable to pay the full amount of its leasepayment.  We are currently working withKingsdell to complete a satisfactory workout plan.  The $10.1 million reserve includes $5.2million for straight-line rent.

 

*Cost ofCondominium Sales. *Costof condominium sales, relating to the sale of condominium units at The PrivateResidences at The Chase Park Plaza, for the three months ended September 30,2009 were $2 million as compared to $4.3 million for the three months ended September 30,2008.

 

*InterestExpense.*  Interest expense for the three months ended September 30,2009 was approximately $4.4 million as compared to approximately $4.1 millionfor the three months ended September 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 

 

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credit facility.  Our total notes payable at September 30,2009 was $441.6 million as compared to $424.4 million at September 30,2008.

 

*ImpairmentCharge. *We recognized a $7.1 million non-cash impairmentcharge for the three months ended September 30, 2009, related to ourBecket House investment, as a result of the continued adverse economic conditionsincluding the general weakness in market rental rates and tenant renewals.  We did not recognize any impairment chargesfor the three months ended September 30, 2008.

 

*Equity inLosses of Unconsolidated Joint Ventures.*  Equity inlosses of unconsolidated joint ventures totaled $1.1 million for the threemonths ended September 30, 2009 as compared to $2 million for the threemonths ended September 30, 2008, and consisted of net losses of $0.3million for each of our noncontrolling interests in GrandMarc at WestberryPlace and GrandMarc at the Corner, and a net loss of $0.5 million from ournoncontrolling interest in the Central Europe Joint Venture.

 

*NoncontrollingInterest. *Noncontrolling interest for the threemonths ended September 30, 2009 and 2008 was $3.8 million and $2.3million, 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 both the three months ended September 30, 2009 and September 30,2008 totaled $0.6 million and were comprised of fees incurred by ourconsolidated properties.  We expectincreases in property management fees in the future as available space at ouroperating properties is leased-up.

 

*AssetManagement Fees. *Assetmanagement fees for the three months ended September 30, 2009 totaled $1.4million as compared to $1.5 million for the three months ended September 30,2008 and were comprised of fees incurred by our consolidated properties.

 

*Generaland Administrative Expenses.* General andadministrative expenses for the three months ended September 30, 2009were $1.4 million as compared to $1.2 million for the three months ended September 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.

 

*Nine months ended September 30, 2009 ascompared to nine months ended September 30, 2008*

 
| ** **                     | ** ** | **Nine Months Ended**  | ** ** | ** **              | ** ** |
|--------------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                     | ** ** | **September 30,** | ** ** | **Increase (Decrease)** | ** ** |
| ** **                     | ** ** | **2009**               | ** ** | **2008**                | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Revenue:                       |       |                   |       |                    |       |   |   |   |   |
| Rental  revenue                |       | $                      | 47,529     |                    | $          | 41,577 |   | $ | 5,952 |   | 14 | % |
| Hotel  revenue                 |       | 3,011                  |       | 5,240                   |       | (2,229 | ) | -43 | % |
| Condominium  sales             |       | 13,893                 |       | 4,315                   |       | 9,578 |   | 222 | % |
| Total  revenues                |       | $                      | 64,433     |                    | $          | 51,132 |   | $ | 13,301 |   | 26 | % |
|                           |       |                   |       |                    |       |   |   |   |   |
| Expenses:                      |       |                   |       |                    |       |   |   |   |   |
| Property  operating expenses   |       | $                      | 19,438     |                    | $          | 17,955 |   | $ | 1,483 |   | 8 | % |
| Bad  debt expense              |       | 10,620                 |       | 274                     |       | 10,346 |   | 3776 | % |
| Cost  of condominium sales     |       | 14,003                 |       | 4,331                   |       | 9,672 |   | 223 | % |
| Interest  expense              |       | 12,606                 |       | 9,059                   |       | 3,547 |   | 39 | % |
| Real  estate taxes             |       | 6,121                  |       | 5,311                   |       | 810 |   | 15 | % |
| Impairment  charge             |       | 9,841                  |       | —                  |       | 9,841 |   | n/a |   |
| Property  management fees      |       | 1,812                  |       | 1,781                   |       | 31 |   | 2 | % |
| Asset  management fees         |       | 4,166                  |       | 3,399                   |       | 767 |   | 23 | % |
| General  and administrative    |       | 4,388                  |       | 3,032                   |       | 1,356 |   | 45 | % |
| Advertising  costs             |       | 632                    |       | 1,853                   |       | (1,221 | ) | -66 | % |
| Depreciation  and amortization |       | 21,877                 |       | 18,550                  |       | 3,327 |   | 18 | % |
| Total  expenses                |       | $                      | 105,504    |                    | $          | 65,545 |   | $ | 39,959 |   | 61 | % |

 

*Revenues.* Our total revenues increased by $13.3 million to $64.4 million for thenine months ended September 30, 2009 as compared to $51.1 million for thenine months ended September 30, 2008. The increase in revenues is primarily due to:

 

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

 

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·      anincrease of $3.1 million related to Alexan Black Mountain and Alexan Voss.  Alexan Black Mountain was fully operationalfor only seven of the nine months ended June 30, 2008 while Alexan Vosswas not yet operational during the nine months ended September 30, 2008;

 

·      anincrease in rental revenue of $0.7 million from Northborough Tower, which wasacquired on February 26, 2008 and therefore contributed only seven monthsof revenue to the nine months ended September 30, 2008; and

 

·      condominiumsales of $13.9 million as of September 30, 2009 as compared condominiumsales of $4.3 million as of September 30, 2008.

 

Hotel revenues for thenine months ended September 30, 2009 totaled $3 million as compared to$5.2 million for the nine months ended September 30, 2008, and consistedof revenues generated by the operations of The Lodge & Spa atCordillera.  The hospitality industrycontinues to be negatively affected by the poor global economy.  Both occupancy rates and average daily ratesfor hospitality properties in the United States have declined compared to thesame periods in 2008.

 

Weclosed on the sale of 19 condominium units at The Private Residences at TheChase Park Plaza during the nine months ended September 30, 2009.  Of the remaining 52 units, 15 units wereunder contract with non-refundable deposits and three units were reserved withrefundable deposits as of September 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 nine months ended September 30,2009 were $19.4 million as compared to $18 million for the nine months endedSeptember 30, 2008, and were comprised of operating expenses from ourconsolidated properties.

 

*Bad debtexpense.** *Bad debt expense for the nine months ended September 30,2009 was $10.6 million as compared to $0.3 million for the nine months ended September 30,2008.  The increase in bad debt expensewas primarily due to a reserve for bad debt established at the end of the thirdquarter of 2009 for Chase Park Plaza. Hotel occupancy rates and ADR have declined sharply nationwide in2009.  As a result, the Chase Park Plazalessee, Kingsdell, L.P., has been unable to pay the full amount of its leasepayment.  We are currently working withKingsdell to complete a satisfactory workout plan.  The $10.1 million reserve includes $5.2million for straight-line rent.

 

*Cost ofCondominium Sales. *Costof condominium sales, relating to the sale of condominium units at The PrivateResidences at The Chase Park Plaza, for the nine months ended September 30,2009 were $14 million as compared to $4.3 million for the nine months ended September 30,2008.  The increase is due to theincreased number of condominiums sold for the nine months ended September 30,2009 as compared to the nine months ended September 30, 2008.

 

*InterestExpense.*  Interest expense for the nine months ended September 30,2009 was approximately $12.6 million as compared to approximately $9.1 millionfor the nine months ended September 30, 2008 and was primarily due to theincrease in notes payable balances related to our acquisition of real estate propertiesand borrowings under our senior secured credit facility.  Our total notes payable at September 30,2009 was $441.6 million as compared to $424.4 million at September 30,2008.

 

*ImpairmentCharge. *We recognized $9.8 million in non-cash impairmentcharges for the nine months ended September 30, 2009, related to ourBecket House investment, as a result of the continued adverse economicconditions including the general weakness in market rental rates and tenantrenewals.  We did not recognize any impairmentcharges for the nine months ended September 30, 2008.

 

*Equity inLosses of Unconsolidated Joint Ventures.*  Equity inlosses of unconsolidated joint ventures totaled $2.6 million for the nine months ended September 30, 2009 ascompared to $3.5 million for the nine months ended  September 30, 2008 and consisted of netlosses of $0.4 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 $1.7 million for ournoncontrolling interest in the Central Europe Joint Venture.

 

*NoncontrollingInterest. *Noncontrolling interest for the ninemonths ended September 30, 2009 and 2008 was $8.9 million and $5.3million, 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.

 

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*PropertyManagement Fees. *Propertymanagement fees for the nine months ended September 30, 2009 and 2008totaled $1.8 million and were comprised of fees incurred by our consolidatedproperties.  We expect increases inproperty management fees in the future as available space at our operatingproperties is leased-up.

 

*AssetManagement Fees. *Assetmanagement fees for the nine months ended September 30, 2009 totaled $4.2million as compared to $3.4 million for the nine months ended September 30,2008 and 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 nine months ended September 30, 2009were $4.4 million as compared to $3 million for the nine months ended September 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 $0.3 million increase in directors’and officers’ insurance premiums, and $0.4 million related to other variouscorporate general and administrative activities.

 

**Cash Flow Analysis**

 

Cashflows provided by operating activities for the nine months ended September 30,2009 were $3.5 million and were comprised primarily of the net loss of $43.7million and a change in accounts receivable of $3.5 million, offset bydepreciation and amortization expense of $18.5 million, change in condominiuminventory of $2 million, amortization of deferred financing fees of $2.4million, equity in losses of unconsolidated joint ventures of $2.6 million,changes in accrued and other liabilities of $3.7 million, changes in payablesto related parties of $2.1 million, bad debt expense of $10.6 million relatedto Chase Park Plaza, and a non-cash impairment charge of $9.8 million.  During the nine months ended September 30,2008, cash flows used by operating activities were $21.6 million and werecomprised primarily of the net loss of $15.8 million, an increase in condominiuminventory of $20.6 million, changes in prepaid expenses and other assets of$3.1 million, and changes in accounts receivable of $4.4 million, offset bydepreciation and amortization expense of $15.1 million, equity in losses ofunconsolidated joint ventures of $3.5 million, and an increase in accruedliabilities of $4.6 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 nine months ended September 30, 2009 were$30.2 million and primarily represent capital expenditures for real estateunder development, including capital expenditures of consolidated borrowerstotaling $10.5 million, investment in notes receivable of $6.5 million andadditions of property and equipment of $7.1 million.  During the nine months ended September 30,2008, cash flows used in investing activities were $166.6 million and primarilyrepresented acquisitions of real estate totaling $47.5 million, investments inunconsolidated joint ventures of $31.6 million, capital expenditures for realestate under development, including capital expenditures of consolidatedborrowers totaling $53.1 million, and investment in notes receivable of $27million.

 

Cash flows provided byfinancing activities for the nine months ended September 30, 2009 were$21.9 million and were comprised primarily of net borrowings on our seniorsecured revolving credit facility of $15.4 million and proceeds from notespayable of $18.8 million, offset by payments on notes payable of $12.2million.  Cash flows provided byfinancing activities for the nine months ended September 30, 2008 were $152.2million and were comprised primarily of proceeds from notes payable of $117million related to development activities at our Chase Park and Frisco Squareproperties, net borrowings on our senior secured revolving credit facility of$58 million, and proceeds from mortgages of our consolidated borrowers of $23.3million, offset by payments on notes payable of $37.7 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 

 

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historical costaccounting alone to be insufficient.  Asa result, our management believes that the use of FFO and MFFO, together withthe required GAAP presentations, provide a more complete understanding of ourperformance.

 

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 present informationwhich assists investors in aligning their analysis with management’s analysisof long-term, core operating activities. We believe fluctuations in MFFO are indicative of changes in operatingactivities and provide comparability in evaluating our performance over timeand as compared to other real estate companies that may not have acquisitionactivities or derivatives or be affected 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:

 

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

 

·      Adjustments to fair value for derivatives notqualifying for hedge accounting. Management uses derivatives in the management of our debt and interestrate exposure.  We do not intend tospeculate in these interest rate derivatives and accordingly period-to-periodchanges in derivative valuations are not primary factors in management’sdecision-making process.  We believe byexcluding the gains or losses from these derivatives, MFFO provides usefulsupplemental information on the realized economic impact of the hedgesindependent of short-term market fluctuations.

 

·      Acquisition-related costs.  In evaluating investments in real estate,including both business combinations and investments accounted for under theequity method of accounting, management’s investment models and analysisdifferentiates costs to acquire the investment from the operations derived fromthe investment.  Prior to 2009,acquisition costs for these types of investments were capitalized; howeverbeginning in 2009 acquisition costs related to business combinations areexpensed.  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 September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                          | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| Net  loss                                                                                           |       | $                                         | (24,240    | )                                        | $          | (7,819 | ) | $ | (43,743 | ) | $ | (15,836 | ) |
| Net  loss attributable to noncontrolling interest                                                   |       | 3,791                                     |       | 2,334                                    |       | 8,868 |   | 5,250 |   |
| Adjustments  for:                                                                                   |       |                                      |       |                                     |       |   |   |   |   |
| Real  estate depreciation and amortization per income statement                                     |       | 6,863                                     |       | 6,783                                    |       | 21,877 |   | 18,550 |   |
| Pro  rata share of unconsolidated JV depreciation and amortization (1)                              |       | 1,182                                     |       | 1,075                                    |       | 3,603 |   | 2,078 |   |
| Noncontrolling  interest depreciation & amortization(2)                                    |       | (987                                      | )          | (893                                     | )          | (3,009 | ) | (1,891 | ) |
|                                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| Funds  from operations (FFO)                                                                        |       | $                                         | (13,391    | )                                        | $          | 1,480 |   | $ | (12,404 | ) | $ | 8,151 |   |
|                                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| Other  Adjustments:                                                                                 |       |                                      |       |                                     |       |   |   |   |   |
| Acquisition  expenses                                                                               |       |                                      |       |                                     |       |   |   |   |   |
| Impairment  charge                                                                                  |       | 7,109                                     |       | —                                   |       | 9,841 |   | — |   |
| Noncontrolling  interest share of impairment charge                                                 |       | (1,422                                    | )          |                                     |       | (1,968 | ) |   |   |
| (Gain)  loss on derivatives not designated as hedging instruments                                   |       | (293                                      | )          | —                                   |       | (1,047 | ) | — |   |
| Noncontrolling  interest share of (gain) loss on derivatives not designated as hedging  instruments |       | 15                                        |       |                                     |       | 52 |   |   |   |
|                                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| MFFO                                                                                                |       | $                                         | (7,982     | )                                        | $          | 1,480 |   | $ | (5,526 | ) | $ | 8,151 |   |
|                                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| GAAP  weighted average shares:                                                                      |       |                                      |       |                                     |       |   |   |   |   |
| Basic  and diluted                                                                                  |       | 55,431                                    |       | 54,611                                   |       | 55,226 |   | 54,433 |   |
|                                                                                                |       |                                      |       |                                     |       |   |   |   |   |
| MFFO  per share                                                                                     |       | $                                         | (0.14      | )                                        | $          | 0.03 |   | $ | (0.10 | ) | $ | 0.15 |   |

 

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

 

(2) Thisreflects the noncontrolling interest adjustment for the third-party partners’proportionate share of the real estate depreciation 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 $0.5 million and$1.6 million was recognized for the three and nine months ended September 30,2009, respectively, and $0.7 million and $3 million was recognized for thethree and nine months ended September 30, 2008, respectively;

 

·      Amortization of intangible lease assets andliabilities was recognized as a net increase to rental revenues of    $1.2 million and $3.6 million for the threeand nine months ended September 30, 2009, respectively, and $1.2 millionand $3.6 million was recognized for the three and nine months ended September 30,2008, respectively;

 

·      Amortization of intangible property tax abatementassets was recognized as an increase to real estate tax expense of $0.1 millionand $0.3 million for the three and nine months ended September 30, 2009,respectively.  Amortization of intangibleproperty tax abatement assets was recognized as an increase to real estate taxexpense of $0.1 million and $0.2 million for the three and nine months ended September 30,2008;

 

·      Bad debt expense of $10.3 million and $10.6million was recognized for the three and nine months ended September 30,2009, respectively (see Note 3 to the unaudited consolidated financialstatements).  Bad debt expense of $0.1million and $0.3 million was recognized for the three and nine months ended September 30,2008, respectively; and

 

·      Amortization of deferred financing costs of $0.8million and $2.4 million was recognized as interest expense for mortgages andnotes payable for the three and nine months ended September 30, 2009,respectively, and $0.2 million and $0.6 million was recognized as a reductionof interest income for notes receivable for the three and nine months ended September 30,2009.  Amortization of deferred financingcosts of $0.7 million and $1.5 million was recognized as interest expense formortgages and notes payable for the three and nine months ended September 30,2008, respectively, and $0.2 million and $0.4 million was recognized as areduction of interest income for notes receivable for the three and nine monthsended September 30, 2008.

 

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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.

 

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 nine months ended September 30, 2009 was $2.6million.  For the nine months ended September 30,2009, cash flows provided by operating activities was $3.5 million.  Accordingly, for the nine months ended September 30,2009, cash flow from operations exceeded cash amounts distributed tostockholders by $0.9 million.  Cashamounts distributed to stockholders during the nine months ended September 30,2008 was $3 million.  For the nine monthsended September 30, 2008, cash flows used in operating activities was$21.6 million.  Accordingly, for the ninemonths ended September 30, 2008, none of the cash flows from operatingactivities exceeded cash amounts distributed to stockholders.  The shortfall was funded principally fromproceeds from our offering.

 

The following are thedistributions paid and declared as of September 30, 2009 and 2008.

 
| ** **     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **       | ** ** | **Total**    | ** ** | **Declared**  | ** ** |
|----------------|------------|------------------------|------------|-------------------|------------|------------------|------------|--------------|------------|---------------|------------|
| ** **     | ** ** | **Distributions Paid** | ** ** | **Distributions** | ** ** | **Distribution** | ** ** |
| **2009**       | ** ** | **Cash**               | ** ** | **Reinvested**    | ** ** | **Total**        | ** ** | **Declared** | ** ** | **Per Share** | ** ** |
| Third Quarter  |       | $                      | 1,192      |              | $          | 2,947            |       | $            | 4,139      |          | $          | 4,140 |   | $ | 0.08 |   |
| Second Quarter |       | 372                    |       | 1,033             |       | 1,405            |       | —       |       | —        |       |
| First Quarter  |       | 1,047                  |       | 3,017             |       | 4,064            |       | 4,070        |       | 0.07          |       |
| Total          |       | $                      | 2,611      |              | $          | 6,997            |       | $            | 9,608      |          | $          | 8,210 |   | $ | 0.15 |   |

 
| ** **     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **       | ** ** | **Total**    | ** ** | **Declared**  | ** ** |
|----------------|------------|------------------------|------------|-------------------|------------|------------------|------------|--------------|------------|---------------|------------|
| ** **     | ** ** | **Distributions Paid** | ** ** | **Distributions** | ** ** | **Distribution** | ** ** |
| **2008**       | ** ** | **Cash**               | ** ** | **Reinvested**    | ** ** | **Total**        | ** ** | **Declared** | ** ** | **Per Share** | ** ** |
| Third Quarter  |       | $                      | 1,039      |              | $          | 3,085            |       | $            | 4,124      |          | $          | 4,129 |   | $ | 0.08 |   |
| Second Quarter |       | 990                    |       | 3,127             |       | 4,117            |       | 4,076        |       | 0.07          |       |
| First Quarter  |       | 965                    |       | 3,077             |       | 4,042            |       | 4,055        |       | 0.07          |       |
| Total          |       | $                      | 2,994      |              | $          | 9,289            |       | $            | 12,283     |          | $          | 12,260 |   | $ | 0.22 |   |

 

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 our shareholders.  In addition, future distributions will bedetermined and paid in arrears rather than in advance of the period to whichthey apply.  On July 14, 2009, ourboard of directors authorized a quarterly distribution in the amount of $0.075per share of common stock, which is equivalent to an annual distribution of 3%assuming a $10 price per share.  Thedistribution was payable to the common stockholders of record at the close ofbusiness on June 30, 2009 and the distribution was paid on July 29,2009.  On October 26, 2009, ourBoard of Directors authorized a quarterly distribution in the amount of $0.075per share of common stock, which is equivalent to an annual distribution of 3%assuming a $10 price per share.  Thedistribution is payable to the common stockholders of record at the close ofbusiness on September 30, 2009, the record date previously established bythe board on August 10, 2009.  Thedistribution was paid on November 3, 2009.

 

Overthe long term, we expect that more of our distributions will be paid from cashflow 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, thetypes and mix of investments in our portfolio and the accounting treatment ofour investments in accordance with our 

 

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accounting policies.  As aresult, future distributions declared and paid may continue to exceed cash flowfrom operating activities.

 

**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 orconfinement to a long-term care facility. On May 11, 2009 and November 9, 2009, our board of directorsapproved certain amendments to the program related to the per share redemptionprice.  In accordance with the shareredemption program as amended and restated, the per share redemption price willbe as described in Part II, Item 2 of this quarterly report.  In the third quarter ended September 30,2009, we redeemed 32,845 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 these financialstatements requires our management to make estimates and assumptions thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated 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 requireestimates about 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-company transactions,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 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.

 

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 physical, functional, or economicfactors.  The value of buildings isdepreciated over the estimated useful lives ranging from 

 

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25 years for commercialoffice 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 the determined leaseterm.

 

The total value ofidentified real estate intangible assets that we may acquire in the future isfurther allocated to in-place lease values and tenant relationships based onour evaluation of the specific characteristics of each tenant’s lease and ouroverall relationship with that respective tenant.  The aggregate value of in-place leasesacquired and tenant relationships is determined by applying a fair 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 relationship intangibleswould 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-linemethod and the value of the in-place property tax abatement is amortized overits estimated 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 theasset.  In the event that the carryingamount exceeds the estimated future undiscounted operating cash flows, we recognizean impairment loss to adjust the carrying amount of the asset to estimated fairvalue.  We consider projected futureundiscounted cash flows, trends, strategic decisions regarding futuredevelopment plans, and other factors in our assessment of whether impairmentconditions exist.  While we believe ourestimates of future cash flows are reasonable, different assumptions regardingsuch factors as market rents, economies, and occupancies could significantlyaffect 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 haveconsolidated this entity, including the related real estate assets and thirdparty construction financing.  As of September 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 September 30,2009, we believe that all of the amounts due under our mezzanine loan 

 

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may not be collectibleand to the extent that we would, in the future, deconsolidate the assets ofAlexan Black Mountain, 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 thecontinued adverse economic conditions including the general weakness in marketrental rates and tenant renewals, we evaluated certain of our real estateinvestments for potential impairment as of September 30, 2009.  Based on our analyses, we recorded a non-cashimpairment charge of $7.1 million related to our leasehold interest in anoffice building in London, England during the third quarter of 2009.  The total non-cash impairment charge recordedfor the nine months ended September 30, 2009 was $9.8 million, all ofwhich is related to our leasehold interest 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 our developmentstrategy significantly affect any key assumptions used in our fair valuecalculations, we may need to take additional charges in future periods forimpairments related to existing assets. Any such non-cash charges would have an adverse effect on ourconsolidated financial position and results of operations.

 

**Item 3.**                    Quantitative and QualitativeDisclosures 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 September 30, 2009,our foreign currency derivative contracts were reported at their fair value of$0.2 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 less than$0.1 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 may adverselyimpact expected future cash flows and by evaluating hedging opportunities.  We may enter into derivative financialinstruments such as options, forwards, interest rate swaps, caps, or floors tomitigate our interest rate risk on a related financial instrument or toeffectively lock the interest rate portion of our variable rate debt.  Of our $441.6 million in notes payable at September 30,2009, $402 million represented debt subject to variable interest rates, whichincluded the mortgages payable of borrowers we consolidated.  If our variable interest rates increased 100basis points, we estimate that total annual interest cost, including interestexpensed, interest capitalized, and the effects of the interest rate caps andswaps, would increase by $2.8 million.

 

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At September 30,2009, interest rate caps used to mitigate our interest rate risk classified asassets were reported at their combined fair value of less than $0.1 millionwithin prepaid expenses and other assets. Interest rate swaps classified as liabilities were reported at theircombined fair values of $3.9 million in other liabilities at September 30,2009.  A 100 basis point decrease in interestrates would result in a $0.6 million net decrease in the fair value of ourinterest rate caps and swaps.  A 100basis point increase in interest rates would result in a $1.3 million netincrease in the fair value of our interest rate caps and swaps.

 

**Item 4T.**Controls and 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 September 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 September 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 September 30, 2009 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

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** **

**PART II**

** **

**OTHER INFORMATION**

** **

### **Item 1.**                    LegalProceedings.

### ** **

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

 

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

### ** **

Thefollowing risk factors update and should be read in conjunction with the riskfactors contained in the “Risk Factors” section set forth in our Annual Reporton Form 10-K for the year ended December 31, 2008, and the risksidentified in Part II, Item 1A of our Quarterly Reports on Form 10-Qfor the quarters ended March 31, 2009 and June 30, 2009.

 

*Until wegenerate sufficient cash flow from operating activities to cover distributionsto our stockholders, we may make distributions from other sources, which maynegatively impact our ability to sustain or pay distributions.*

 

Distributions areauthorized at the discretion of our board of directors based on its analysis ofour earnings, cash flow, anticipated cash flow, capital expenditurerequirements, general financial condition, and other factors that our boarddeems relevant.  Actual cash availablefor distribution may vary substantially from estimates.  In addition, to the extent we havesignificant capital requirements for our properties, our ability to makedistributions may be negatively impacted. If cash flow from operating activities is not sufficient to fully fundthe payment of distributions, the level of our distributions may not besustainable and some or all of our distributions will be paid from othersources.  For example, we may generatecash to pay distributions from financing activities, components of which mayinclude borrowings (including borrowings secured by our assets) in anticipationof future operating cash flow. Historically, the amount of our declared distributions has exceeded ourcash flow from operating activities. Because of the participation level in our DRP, which results in areinvestment of distributions in shares of our common stock, the net cash thatwe have been required to pay in distributions has been less than cash flow fromoperating activities.  However, if thelevel of participation in our DRP changes, the net cash required to funddistributions may exceed cash flow from operating activities.  In addition, from time to time, our advisorand its affiliates may agree, but are not required, to waive or defer all, or aportion, of the acquisition, asset management or other fees or other incentivesdue to them, enter into lease agreements for unleased space, pay generaladministrative expenses or otherwise supplement investor returns in order toincrease the amount of cash available to make distributions to ourstockholders.  To the extentdistributions are paid from financing activities, we will have less moneyavailable for other uses, such as cash needed to refinance existing indebtedness,which may negatively impact our ability to achieve our investment objectives.

 

*Adverseeconomic and geopolitical conditions and dislocations in the credit marketscould have a material adverse effect on our results of operations, financialcondition, and ability to pay distributions to you.*

 

The global financialmarkets have undergone pervasive and fundamental disruptions.  This volatility has had and may continue tohave an adverse impact on the availability of credit to businesses, generally,and has resulted in the weakening of the U.S. and global economies.  Our business has been and may continue to beaffected by market and economic challenges experienced by the U.S. economy orreal estate industry as a whole or by the local economic conditions in themarkets in which our properties are located, including the current dislocationsin the credit markets.  These conditions,or similar conditions existing in the future, may have the followingconsequences:

 

·      the financial condition of our tenants, many of whichare financial, legal and other professional firms, has been and may continue tobe adversely affected, which may result in us having to increase tenantconcessions, reduce rental rates or make capital improvements in order tomaintain occupancy levels, or which may result in tenant defaults under leasesdue to bankruptcy, lack of liquidity, operational failures or for otherreasons;

 

·      significant job losses in the financial andprofessional services industries may continue to occur, which may decreasedemand for our office space, causing market rental rates and property values tobe negatively impacted;

 

·      our ability to borrow on terms and conditions that wefind acceptable, or at all, may be limited, which could reduce our ability torefinance existing debt, reduce our returns from our acquisition anddevelopment activities and increase our future interest expense;

 

·      reduced values of our properties may limit our abilityto dispose of assets at attractive prices or to obtain debt financing securedby our properties and may reduce the availability of unsecured loans;

 

·      the value and liquidity of our short-term investmentsand cash deposits could be reduced as a result of a deterioration of thefinancial condition of the institutions that hold our cash deposits or theinstitutions or assets in which we have made short-term investments, thedislocation of the markets for our short-term investments, increased volatilityin market rates for such investments or other factors; and

 

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

 

Further, in light of thecurrent economic conditions, we cannot provide assurance that we will be ableto sustain the current level of our distributions or that the amount ofdistributions will increase over time. If the conditions continue, our board may determine to reduce ourcurrent distribution rate or suspend distributions altogether in order toconserve cash.

 

*Disruptionsin the financial markets and adverse economic conditions could adversely affectour ability to secure debt financing on attractive terms and have affected thevalue of our investments.*

 

The commercial realestate debt markets continue to experience volatility as a result of certainfactors, including the tightening of underwriting standards by lenders andcredit rating agencies and the significant inventory of unsold collateralizedmortgage backed securities in the market. Credit spreads for major sources of capital have widened significantlyas investors have demanded a higher risk premium.  This is resulting in lenders increasing thecost for debt financing.  An increase inthe overall cost of borrowings, either by increases in the index rates or byincreases in lender spreads, may result in our investment operations generatinglower overall economic returns and a reduced level of cash flow, which couldpotentially impact our ability to make distributions to our stockholders atcurrent levels.  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.  If the current debt marketenvironment persists, it may be difficult for us to refinance our debt comingdue in 2010 and 2011 related to several of our portfolio assets and our creditfacility.

 

Further, the recentmarket volatility will likely make the valuation of our investment propertiesmore difficult.  There may be significantuncertainty in the valuation, or in the stability of the value, of ourproperties that could result in a substantial decrease in the value of ourproperties.  As a result, we may not beable to recover the carrying amount of our properties, and we may be requiredto recognize impairment charges, which will reduce our reported earnings.  Specifically, for the quarters ended June 30,2009 and September 30, 2009, we have taken approximately $2.7 million and$7.1 million, respectively, in impairment charges against our Becket Houseinvestment due to the uncertainty of valuations in the current volatilemarketplace today.

 

The pervasive and fundamentaldisruptions that the global financial markets have undergone have led toextensive and unprecedented governmental intervention.  Such intervention has in certain cases beenimplemented on an “emergency” basis, suddenly and substantially eliminatingmarket participants’ ability to continue to implement certain strategies ormanage the risk of their outstanding positions. In addition, these interventions have typically been unclear in scopeand application, resulting in confusion and uncertainty, which in itself hasbeen materially detrimental to the efficient functioning of the markets as wellas previously successful investment strategies. Among measures proposed by legislators have been moratoriums on loanpayments, limits on the ability of lenders to enforce loan provisions,including the collection of interest at rates agreed in the loan documents, andinvoluntary modification of loan agreements. It is impossible to predict what, if any, additional interim orpermanent governmental restrictions may be imposed or the effect of suchrestrictions on us and our results of operations.  There is likely to be increased regulation ofthe financial markets.

 

*Oursubstantial indebtedness adversely affects our financial health and operatingflexibility.*

 

At September 30,2009, we had notes payable of approximately $441.6 million in principal amountconsisting of $378.2 million of loans secured by mortgages on our propertiesand $63.4 million of borrowings under the revolving loans outstanding under ourcredit facility.  As a result of thissubstantial indebtedness, we are required to use a material portion of our cashflow to service principal and interest on our debt, which will limit the cashflow available to operate our properties. In addition, we may not generate sufficient cash flow after debt serviceto continue paying distributions in the near term or at all.

 

Our level of debt and thelimitations imposed on us by our debt agreements could have significant adverseconsequences to us and the value of our common stock, regardless of our abilityto refinance or extend our debt, including:

 

·      limiting our ability to borrow additional amounts forworking capital, capital expenditures, debt service requirements, execution ofour business plan or other purposes;

 

·      limiting our ability to use operating cash flow inother areas of our business or to pay distributions because we must dedicate asubstantial portion of these funds to service our debt;

 

·      increasing our vulnerability to general adverseeconomic and industry conditions;

 

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·      limiting our ability to capitalize on businessopportunities and to react to competitive pressures and adverse changes ingovernment regulation;

 

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

 

·      limiting our ability or increasing the costs torefinance our indebtedness.

 

*We maynot be able to refinance or repay our substantial indebtedness.*

 

We have a substantialamount of debt that we may not be able to refinance or repay.  At September 30, 2009, our notes payablehad maturity dates that range from October 2009 to January 2016.  During the remainder of 2009, we haveapproximately $54.8 million, or approximately 12.4%, of our debt maturing,including $25.8 million of principal payments related to our Frisco Square I,LLC (land) loan that matured on October 28, 2009.  In 2010 we have approximately $202.6 million,or approximately 45.9%, of our debt maturing. In 2011, we have approximately $138.1 million, or approximately 31.3%,of our debt maturing, $63.4 million of which represents the revolving loansunder our credit facility which matures in February 2011.  Due to (1) potentially reduced values ofour investments, (2) our substantial debt level, (3) limited accessto commercial real estate mortgages in the current market and (4) materialchanges in lending parameters, including loan-to-value standards, we will facesignificant challenges refinancing our current debt on acceptable terms or atall.  Our substantial indebtedness alsorequires us to use a material portion of our cash flow to service principal andinterest on our debt, which limits the cash flow available for other businessexpenses or opportunities.

 

We may not have the cashnecessary to repay our debt as it matures. Therefore, failure to refinance or extend our debt as it comes due, or afailure to satisfy the conditions and requirements of that debt, could resultin an event of default that could potentially allow lenders to accelerate thatdebt.  If our debt is accelerated, ourassets may not be sufficient to repay the debt in full, and our available cashflow may not be adequate to maintain our current operations.  If we are unable to refinance or repay ourdebt as it comes due and maintain sufficient cash flow, our business, financialcondition, and results of operations will be materially and adverselyaffected.  Furthermore, even if we areable to obtain extensions on our existing debt, those extensions may includeoperational and financial covenants significantly more restrictive than ourcurrent debt covenants.  Any extensionswill also require us to pay certain fees to, and expenses of, our lenders.  Any fees and cash flow restrictions willaffect our ability of fund our ongoing operations from our operating cashflows.

 

*You maynot be able to sell your shares under the share redemption program and, if youare able to sell your shares under the program, you may not be able to recoverthe amount of your investment in our shares.*

 

Ourboard of directors may amend, suspend or terminate our share redemption programat any time.  Our board of directors mayreject any request for redemption of shares. Further, there are many limitations on your ability to sell your sharespursuant to the share redemption program. Any stockholder requesting repurchase of their shares pursuant to ourshare redemption program will be required to certify to us that suchstockholder either (1) acquired the shares requested to be repurchaseddirectly from us or (2) acquired the shares from the original investor byway of a bona fide gift not for value to, or for the benefit of, a member ofthe stockholder’s immediate or extended family, or through a transfer to acustodian, trustee or other fiduciary for the account of the stockholder or hisor her immediate or extended family in connection with an estate planningtransaction, including by bequest or inheritance upon death or operation oflaw.

 

Inaddition, our share redemption program contains other restrictions andlimitations.  We cannot guarantee that wewill accommodate all redemption requests made in any particular redemptionperiod.  If we do not redeem all sharespresented for redemption during any period in which we are redeeming shares,then all shares will be redeemed on a pro rata basis during the relevantperiod.  You must hold your shares for atleast one year prior to seeking redemption under the share redemption program,except that our board of directors will waive this one-year holding requirementwith respect to redemptions sought upon the death or qualifying disability of astockholder or redemptions sought upon a stockholder’s confinement to along-term care facility.  Our board ofdirectors may also waive this one-year holding requirement for other exigentcircumstances affecting a stockholder such as bankruptcy or a mandatorydistribution requirement under a stockholder’s IRA, or with respect to sharespurchased through the DRP. We will not redeem, during any twelve-month period,more than 5% of the weighted average number of shares outstanding during thetwelve-month period immediately prior to the date of redemption.  In addition, the cash available forredemption on any particular date will be limited to the proceeds from the DRPduring the period consisting of the preceding four fiscal quarters for whichfinancial statements are available, less any cash already used for redemptionsduring the same period.

 

On March 30,2009, our board suspended, until further notice, redemptions other than thosesubmitted in respect of a stockholder’s death, disability or confinement to along-term care facility, thereby reducing the potential liquidity of astockholder’s investment.  Therefore, youshould not assume that you will be able to sell any of your shares back to uspursuant to our share redemption program.

 

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*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.*

 

Ourshare redemption program contains certain restrictions and limitations,including a funding limitation that provides that the funds used for redemptionon any particular date will be limited to the proceeds from the DRP during theperiod consisting of the preceding four fiscal quarters for which financialstatements are available, less any cash already used for redemptions during thesame period.  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.

 

*If youare able to resell your shares to us pursuant to our share redemption program,you will likely receive substantially less than the amount paid to acquire theshares from us or the fair market value of your shares, depending upon how longyou owned the shares.*

 

Exceptfor redemptions sought upon a stockholder’s death or qualifying disability orredemptions sought upon a stockholder’s confinement to a long-term carefacility, the purchase price per share redeemed under our share redemptionprogram will equal 90% of (i) the most recently disclosed estimated valueper share as determined in accordance with our valuation policy, less (ii) theaggregate distributions per share of any net sale proceeds from the sale of oneor more of our assets, or other special distributions so designated by ourboard of directors, distributed to stockholders after the valuation wasdetermined; provided, however, that the purchase price per share shall notexceed: (1) prior to the first valuation conducted by our board ofdirectors, or a committee thereof (the “Initial Board Valuation”), under thevaluation policy, 90% of (i) the average price per share the originalpurchaser or purchasers of shares paid to us for all of his or her shares (asadjusted for any stock dividends, combinations, splits, recapitalizations andthe like with respect to our common stock) less (ii) the aggregatedistributions per share of any net sale proceeds from the sale of one or moreof our assets, or other special distributions so designated by our board ofdirectors, distributed to stockholders prior to the redemption date (the “SpecialDistributions”); or (2) on or after the Initial Board Valuation, theaverage price per share the original purchaser or purchasers of shares paid tous for all of his or her shares (as adjusted for any stock dividends,combinations, splits, recapitalizations and the like with respect to our commonstock) less any Special Distributions. Accordingly, you may receive less by selling your shares back to us thanyou would receive if our investments were sold for their estimated values andsuch proceeds were distributed in our liquidation.

 

*Theestimated per share value of our common stock determined pursuant to ourvaluation policy is subject to certain limitations and qualifications and maynot reflect the amount an investor would obtain if he tried to sell his sharesor if we liquidated our assets.*

 

Toassist fiduciaries in discharging their obligations under the EmployeeRetirement Income Security Act of 1974, as amended, and to assist broker-dealersin connection with their obligations under applicable Financial IndustryRegulatory Authority rules, we adopted a valuation policy in respect ofestimating the per share value of our common stock effective May 11, 2009and amended on June 22, 2009.  On June 22,2009, pursuant to our valuation policy, our board of directors established anestimated per share value of our common stock that is not based solely on theinitial offering price of securities of $8.17 per share.  This estimate was determined by our board ofdirectors, or a committee thereof, after consultation with BehringerOpportunity Advisors I, subject to the restrictions and limitations set forthin our valuation policy.  The estimatedvalue is not intended to be related to any analysis of individual asset valueperformed for financial statement purposes nor values at which individualassets may be carried on financial statements under applicable accountingstandards.  In addition, the per sharevaluation method is not designed to arrive at a valuation that is related toany individual or aggregated value estimates or appraisals of the value of ourassets.  This estimated value may notreflect the amount an investor would obtain if he tried to sell his shares orif we liquidated our assets.  For a fulldescription of the limitations and qualifications of the estimate, please referto our valuation policy.

 

### **Item 2.**                    UnregisteredSales of Equity Securities

### ** **

**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, orconfinement to a  

 

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long-term care facility(referred to herein as “Exceptional Redemptions”).  However, the board determined to not acceptand to suspend until further notice redemptions other than ExceptionalRedemptions.

 

On November 9,2009, our board approved certain amendments to the program which clarified thedetermination of the per share redemption price as adopted under the May 11,2009 amendments to the program.  Under the third amended and restatedshare redemption program, the per share redemption price will equal:

 

·      in the case of redemptions other thanExceptional Redemptions, 90% of (i) the most recently disclosed estimatedvalue per share (the “Valuation”) as determined in accordance with ourvaluation policy (the “Valuation Policy”), as such Valuation Policy is amendedfrom time to time, less (ii) the aggregate distributions per share of anynet sale proceeds from the sale of one or more of our assets, or other specialdistributions so designated by our board of directors, distributed tostockholders after the Valuation was determined (the “Valuation Adjustment”);provided, however, that the purchase price per share shall not exceed: (1) priorto the first Valuation conducted by our board of directors, or a committeethereof (the “Initial Board Valuation”), under the Valuation Policy, 90% of (i) theOriginal Share Price (as defined herein) less (ii) the aggregatedistributions per share of any net sale proceeds from the sale of one or moreof our assets, or other special distributions so designated by our board ofdirectors, distributed to stockholders prior to the redemption date (the “SpecialDistributions”); or (2) on or after the Initial Board Valuation, theOriginal Share Price less any Special Distributions; and

 

·      in the case of Exceptional Redemptions, (1) priorto the Initial Board Valuation, the Original Share Price less any SpecialDistributions; or (2) on or after the Initial Board Valuation, the mostrecently disclosed Valuation less any Valuation Adjustment, provided, however,that the purchase price per share shall not exceed the Original Share Priceless any Special Distributions.

 

“Originalshare price” means the average price per share the original purchaser orpurchasers of shares paid to us for all of his or her shares (as adjusted forany stock dividends, combinations, splits, recapitalizations and the like withrespect to our 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.

 

Under the third amendedand restated share redemption program, the cash available for redemption on anyparticular date will generally be limited to the proceeds from the DRP duringthe period consisting of the preceding four fiscal quarters for which financialstatements are available, less any cash already used for redemptions during thesame period.

 

In all other materialrespects, the terms of our share redemption program remain unchanged.  The information set forth herein with respectto the amendments does not purport to be complete in scope and is qualified inits entirety by the full text of the Third Amended and Restated ShareRedemption Program, which is being filed as Exhibit 99.1 and isincorporated into this report by reference.

 

On June 22,2009, our board of directors established an estimated per share value of $8.17pursuant to the Valuation Policy.  Thus,in accordance with the share redemption program as amended and restated, as of June 22,2009, the per share redemption price for exceptional redemptions will be thelesser of (a) $8.17, which is the estimated per share value, and (b) theaverage price per share that investor paid for his shares.  For allredemptions other than exceptional, the per share redemption price will be thelesser of (1) $7.35, which is 90% of the estimated per share value, and (2) 90%of the average price per share that the investor paid for his shares.

 

Our board reservesthe right in its sole discretion at any time and from time to time to (1) waivethe one-year holding period applicable to requests for other exigentcircumstances such as bankruptcy, a mandatory distribution requirement under astockholder’s IRA or with respect to shares purchased under or through the DRP,(2) reject any request for redemption, (3) change the purchase pricefor 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.

 

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During the quarter ended September 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** | ** ** |
|-----------|------------|--------------------------------------|------------|-----------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| July      |       | —                               |       | $                                 | —     |                                                                                                | —     |                                                                                         |       |   |
| August    |       | 32,845                               |       | $                                 | 8.17       |                                                                                                | 32,845     |                                                                                         | (1)        |   |
| September |       | —                               |       | $                                 | —     |                                                                                                | —     |                                                                                         |       |   |
|      |       |                                 |       |                              |       |                                                                                                |       |                                                                                         |       |
|      |       | 32,845                               |       | $                                 | 8.17       |                                                                                                | 32,845     |                                                                                         | (1)        |   |

 

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(1) Themaximum number of shares that may be purchased under the program in affect asof September 30, 2009 is limited to 5% of the weighted average number ofshares outstanding during the twelve-month period immediately prior to the dateof redemption.  Further, our board may, from time to time, in its solediscretion, limit the funds that we use to redeem shares; provided, that in noevent may the funds used for redemption during any period exceed the amount ofgross proceeds generated from the DRP during that period.

 

**Item 3.****                    Defaults UponSenior Securities.**

 

None.

 

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

### ** **

None.

 

### **Item 5.**                    OtherInformation.

### ** **

**Renewal of Amended and RestatedAdvisory Management Agreement**

 

On November 9, 2009,we renewed the Amended and Restated Advisory Management Agreement, as amended(the “Advisory Agreement”), between us and Behringer OpportunityAdvisors I.  The renewed AdvisoryAgreement is effective through December 29, 2010; however, either partymay terminate the Advisory Agreement without cause or penalty upon providing 60days’ written notice.  The terms of the Advisory Agreement remainunchanged.

 

**Adoptionof Third Amended and Restated Distribution Reinvestment Plan**

 

On November 9,2009, our board of directors adopted the Third Amended and RestatedDistribution Reinvestment Plan (the “Third Amended and Restated DRP”).  The Third Amended and Restated DRP will beeffective 30 days from the date participants in the DRP are notified of theamendments to the DRP, which effectiveness we expect to be no later than December 31,2009.

 

The Third Amendedand Restated DRP clarifies the prices at which participants may invest inadditional shares of our common stock. Pursuant to the Third Amended and Restated DRP, prior to the terminationof the DRP, participants may invest their distributions in shares of our commonstock at a price equal to the following, regardless of the price per share paidby the participant in respect of which the distributions are paid: (1) priorto the first valuation of the shares conducted by our board of directors or acommittee thereof (as opposed to a valuation that is based solely on theoffering price of securities in the most recent offering) (the “Initial BoardValuation”) under our valuation policy, as such valuation policy is amendedfrom time to time (the “Valuation Policy”), 95% of (i) the most recently disclosed estimated value per share(the “Valuation”) as determined in accordance with the Valuation Policy less (ii) theaggregate distributions per share of any net sale proceeds from the sale of oneor more of our assets, or other special distributions so designated by ourboard of directors, distributed to stockholders after the Valuation wasdetermined (the “Valuation Adjustment”); or (2) on or after the InitialBoard Valuation, 100% of (i) the most recently disclosed Valuation asdetermined in accordance with the Valuation Policy less (ii) any ValuationAdjustment.

 

After terminationof the DRP, participants may invest their distributions in shares that may (butare not required to) be supplied from either (i) shares registered withthe SEC pursuant to an effective registration statement for shares for use inthe distribution reinvestment plan (a “Future Registration”) or (ii) sharespurchased by the plan administrator in a secondary market (if available) or ona national stock exchange (if listed) (collectively, the “Secondary Market”)and registered with the SEC for resale pursuant to the plan.  Shares registered in a Future Registrationthat are not purchased by the plan administrator in the Secondary Market willbe issued at a price equal to 100% of (A) the most recently disclosedValuation less (B) any Valuation Adjustment.  Shares purchased on the Secondary Market asset forth in (ii) above will be purchased at 

 

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the then-prevailingmarket price, and the average price paid by the plan administrator for all suchpurchases for a single distribution will be utilized for purposes ofdetermining the purchase price for shares purchased under the distributionreinvestment plan on such investment date; however, in no event will thepurchase price for shares purchased under the distribution reinvestment plan beless than 100% of the market price for shares on such investment date.

 

Regardless of thepricing determined above, our board of directors may determine, from time totime, in its sole discretion, the price at which the plan administrator willinvest distributions in shares; provided that if the new price so determined byour board of directors varies more than 5% from the pricing that would haveresulted pursuant to two paragraphs above, as applicable, it will deliver anotice regarding the new price to each plan participant at least 30 days priorto the effective date of the new price.

 

The Third Amendedand Restated DRP also clarifies that any notice to a participant under thedistribution reinvestment plan may be given by including such information in aCurrent Report on Form 8-K or in our annual or quarterly reports, allpublicly filed with the SEC as well as by letter addressed to the participantor delivered by electronic means.

 

In all othermaterial respects, the terms of the DRP will remain unchanged.  The information set forth herein with respectto the Third Amended and Restated DRP does not purport to be complete in scopeand is qualified in its entirety by the full text of the Third Amended andRestated DRP, which is being filed as Exhibit 4.1 and is incorporated intothis report by reference.

 

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

### ** **

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

 

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**SIGNATURE**

 

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

 

 
|                           | **Behringer  Harvard Opportunity REIT I, Inc.** |
|--------------------------------|------------------------------------------------------|
|                           |                                                 |
|                           |                                                 |
| Dated:  November 13, 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*                    |       | Third Amended and  Restated Distribution Reinvestment Plan                                                                                                                                                          |
|                    |       |                                                                                                                                                                                                                |
| 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)                                                                                                                                                              |
|                    |       |                                                                                                                                                                                                                |
| 99.1*                   |       | Third Amended and  Restated Share Redemption Program                                                                                                                                                                |

 

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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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