Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

**SECURITIESEXCHANGE ACT OF 1934**

 

**For the quarterly period ended March 31, 2009**

 

**Commission File Number: 000-51961**

 

**BehringerHarvard Opportunity REIT I, Inc.**

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

**15601 Dallas Parkway, Suite 600,Addison, Texas 75001**

(Address of Principal Executive Offices) (ZIP Code)

 

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

 

**None**

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

** **

 

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

 

Indicateby check mark whether the Registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes o No o

 

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

 

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

 

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

 

Asof April 30, 2009, the Registrant had 55,222,457 shares of common stockoutstanding.

 

 

 

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Table of Contents

 

**BEHRINGER HARVARD OPPORTUNITY REIT I, INC.**

**FORM 10-Q**

**Quarter Ended March 31, 2009**

 
| ** **    | ** **                                                                                                         | **Page**   |
|---------------|--------------------------------------------------------------------------------------------------------------------|------------|
|          | **PART I  FINANCIAL INFORMATION**                                                                             |       |
|          |                                                                                                               |       |
| **Item 1.**   | **Financial  Statements (Unaudited)**                                                                              |       |
|          |                                                                                                               |       |
|          | Consolidated  Balance Sheets as of March 31, 2009 and December 31, 2008                                  | 3          |
|          |                                                                                                               |       |
|          | Consolidated  Statements of Operations for the Three Months Ended March 31, 2009 and  2008                    | 4          |
|          |                                                                                                               |       |
|          | Consolidated  Statements of Equity and Comprehensive Loss for the Three Months Ended  March 31, 2009 and 2008 | 5          |
|          |                                                                                                               |       |
|          | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2009 and  2008                    | 6          |
|          |                                                                                                               |       |
|          | Notes to  Consolidated Financial Statements                                                                        | 7          |
|          |                                                                                                               |       |
| **Item 2.**   | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                    | **25**     |
| ** **    | ** **                                                                                                         | ** ** |
| **Item 3.**   | **Quantitative  and Qualitative Disclosures About Market Risk**                                                    | **34**     |
| ** **    | ** **                                                                                                         | ** ** |
| **Item 4T.**  | **Controls and  Procedures**                                                                                       | **35**     |
| ** **    | ** **                                                                                                         | ** ** |
|          | **PART II  OTHER INFORMATION**                                                                                |       |
|          |                                                                                                               |       |
| **Item  1.**  | **Legal  Proceedings**                                                                                             | 36         |
|          |                                                                                                               |       |
| **Item  1A.** | **Risk  Factors**                                                                                                  | 36         |
|          |                                                                                                               |       |
| **Item 2.**   | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                   | 37         |
|          |                                                                                                               |       |
| **Item 3.**   | **Defaults  Upon Senior Securities**                                                                               | 38         |
|          |                                                                                                               |       |
| **Item 4.**   | **Submission  of Matters to a Vote of Security Holders**                                                           | 38         |
|          |                                                                                                               |       |
| **Item  5.**  | **Other  Information**                                                                                             | 38         |
|          |                                                                                                               |       |
| **Item 6.**   | **Exhibits**                                                                                                       | 39         |
|          |                                                                                                               |       |
| **Signature** |                                                                                                               | 40         |

 

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**PART IFINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

** **

**BehringerHarvard Opportunity REIT I, Inc.**

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

 
| ** **                                                                                                                                                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                | ** ** | **2009**           | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                                |       |               |       |                  |       |
| Real estate                                                                                                                                               |       |               |       |                  |       |
| Land and improvements, net                                                                                                                                |       | $                  | 131,065    |                  | $          | 131,028 |   |
| Buildings and improvements, net                                                                                                                           |       | 417,968            |       | 416,821               |       |
| Real estate under development                                                                                                                             |       | 18,300             |       | 17,306                |       |
| Total real estate                                                                                                                                         |       | 567,333            |       | 565,155               |       |
|                                                                                                                                                      |       |               |       |                  |       |
| Condominium inventory                                                                                                                                     |       | 92,616             |       | 94,723                |       |
| Cash and cash equivalents                                                                                                                                 |       | 20,252             |       | 25,260                |       |
| Restricted cash                                                                                                                                           |       | 4,812              |       | 4,134                 |       |
| Accounts receivable, net                                                                                                                                  |       | 16,508             |       | 14,946                |       |
| Prepaid expenses and other assets                                                                                                                         |       | 3,507              |       | 3,550                 |       |
| Leasehold interests, net                                                                                                                                  |       | 22,868             |       | 23,160                |       |
| Investments in unconsolidated joint  ventures                                                                                                             |       | 63,013             |       | 62,316                |       |
| Furniture, fixtures and equipment, net                                                                                                                    |       | 13,435             |       | 13,932                |       |
| Deferred financing fees, net                                                                                                                              |       | 5,723              |       | 6,407                 |       |
| Notes receivable                                                                                                                                          |       | 37,548             |       | 36,542                |       |
| Lease intangibles, net                                                                                                                                    |       | 26,112             |       | 28,303                |       |
| Other intangibles, net                                                                                                                                    |       | 8,855              |       | 9,025                 |       |
| Receivables from related parties                                                                                                                          |       | 3,341              |       | 3,413                 |       |
| Total assets                                                                                                                                              |       | $                  | 885,923    |                  | $          | 890,866 |   |
|                                                                                                                                                      |       |               |       |                  |       |
| **Liabilities and Equity**                                                                                                                                |       |               |       |                  |       |
| Notes payable                                                                                                                                             |       | $                  | 428,368    |                  | $          | 416,179 |   |
| Accounts payable                                                                                                                                          |       | 3,748              |       | 6,073                 |       |
| Payables to related parties                                                                                                                               |       | 1,430              |       | 1,643                 |       |
| Acquired below-market leases, net                                                                                                                         |       | 16,274             |       | 17,567                |       |
| Accrued and other liabilities                                                                                                                             |       | 23,412             |       | 26,037                |       |
| Total liabilities                                                                                                                                         |       | 473,232            |       | 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, 55,113,746 and  54,836,985 shares issued and outstanding at March 31, 2009, and  December 31, 2008, respectively |       | 6                  |       | 5                     |       |
| Additional paid-in capital                                                                                                                                |       | 491,749            |       | 489,139               |       |
| Accumulated distributions and net loss                                                                                                                    |       | (75,487            | )          | (66,085               | )          |
| Accumulated other comprehensive loss                                                                                                                      |       | (6,841             | )          | (5,194                | )          |
| Total Behringer Harvard Opportunity REIT  I, Inc. Stockholders’ Equity                                                                          |       | 409,427            |       | 417,865               |       |
| Noncontrolling interest                                                                                                                                   |       | 3,264              |       | 5,502                 |       |
| Total equity                                                                                                                                              |       | 412,691            |       | 423,367               |       |
| Total liabilities and equity                                                                                                                              |       | $                  | 885,923    |                  | $          | 890,866 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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**BehringerHarvard Opportunity REIT I, Inc.**

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

 
| ** **                                                                      | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                      | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                                                            |       |                                  |       |   |   |
| **Revenues**                                                                    |       |                                  |       |   |   |
| Rental revenue                                                                  |       | $                                     | 15,826     |   | $ | 12,213 |   |
| Hotel revenue                                                                   |       | 824                                   |       | 1,961 |   |
| Condominium sales                                                               |       | 3,820                                 |       | — |   |
|                                                                            |       |                                  |       |   |   |
| Total revenues                                                                  |       | 20,470                                |       | 14,174 |   |
|                                                                            |       |                                  |       |   |   |
| **Expenses**                                                                    |       |                                  |       |   |   |
| Property operating expenses                                                     |       | 6,505                                 |       | 5,526 |   |
| Cost of condominium sales                                                       |       | 3,842                                 |       | — |   |
| Interest expense                                                                |       | 4,134                                 |       | 2,271 |   |
| Real estate taxes                                                               |       | 2,310                                 |       | 1,545 |   |
| Property management fees                                                        |       | 600                                   |       | 514 |   |
| Asset management fees                                                           |       | 1,338                                 |       | 932 |   |
| General and administrative                                                      |       | 1,316                                 |       | 917 |   |
| Advertising costs                                                               |       | 182                                   |       | 515 |   |
| Depreciation and amortization                                                   |       | 7,763                                 |       | 5,655 |   |
|                                                                            |       |                                  |       |   |   |
| Total expenses                                                                  |       | 27,990                                |       | 17,875 |   |
|                                                                            |       |                                  |       |   |   |
| Interest income                                                                 |       | 43                                    |       | 981 |   |
|                                                                            |       |                                  |       |   |   |
| Loss before income taxes and equity in  losses of unconsolidated joint ventures |       | (7,477                                | )          | (2,720 | ) |
|                                                                            |       |                                  |       |   |   |
| Provision for income taxes                                                      |       | (51                                   | )          | (47 | ) |
| Equity in losses of unconsolidated joint  ventures                              |       | (125                                  | )          | (860 | ) |
| Net loss                                                                        |       | (7,653                                | )          | (3,627 | ) |
| Add: Net loss attributable to the  noncontrolling interest                      |       | 2,321                                 |       | 1,450 |   |
|                                                                            |       |                                  |       |   |   |
| Net loss attributable to Behringer Harvard  Opportunity REIT I, Inc.       |       | $                                     | (5,332     | ) | $ | (2,177 | ) |
|                                                                            |       |                                  |       |   |   |
| Weighted average shares outstanding:                                            |       |                                  |       |   |   |
| Basic and diluted                                                               |       | 55,032                                |       | 54,213 |   |
|                                                                            |       |                                  |       |   |   |
| Loss per share attributable to Behringer  Harvard Opportunity REIT I, Inc. |       |                                  |       |   |   |
| Basic and diluted                                                               |       | $                                     | (0.10      | ) | $ | (0.04 | ) |

 

*See Notesto Consolidated Financial Statements.*

 

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

**ConsolidatedStatements of Equity and Comprehensive Loss(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  three months ended March 31, 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                                    |       |                   |       |              |       | (40,693        | )          |              |       | (406        | )          |            |       |               |       |               |       | (406       | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Distributions  declared on common stock                        |       |                   |       |              |       |           |       |              |       |        |       | (4,070          | )          |               |       |               |       | (4,070     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Contributions  from non-controlling interest                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | 97                 |       | 97         |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Shares issued  pursuant to Distribution Reinvestment Plan, net |       |                   |       |              |       | 317,454        |       | 1                 |       | 3,016       |       |            |       |               |       |               |       | 3,017      |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Comprehensive  loss:                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Net loss                                                       |       |                   |       |              |       |           |       |              |       |        |       | (5,332          | )          |               |       | (2,321             | )          | (7,653     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Other  comprehensive income:                                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Foreign currency  translation gain (loss)                      |       |                   |       |              |       |           |       |              |       |        |       |            |       | (1,785             | )          | (1                 | )          | (1,786     | )          |
| Unrealized losses  on interest rate derivatives                |       |                   |       |              |       |           |       |              |       |        |       |            |       | (61                | )          | (13                | )          | (74        | )          |
| Reclassifications  due to hedging activities                   |       |                   |       |              |       |           |       |              |       |        |       |            |       | 199                |       | —             |       | 199        |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Total  comprehensive loss                                      |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | (2,336             | )          | (9,314     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Balance at  March 31, 2009                                |       | 1,000                  |       | $                 | —     |           | 55,113,746 |              | $          | 6           |       | $               | 491,749    |               | $          | (75,487            | )          | $          | (6,841     | ) | $ | 3,264 |   | $ | 412,691 |   |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| **For the  three months ended March 31, 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                                    |       |                   |       |              |       | (54,021        | )          |              |       | (490        | )          |            |       |               |       |               |       | (490       | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Distributions  declared on common stock                        |       |                   |       |              |       |           |       |              |       |        |       | (4,057          | )          |               |       |               |       | (4,057     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Contributions  from non-controlling interest                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | 355                |       | 355        |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Shares issued  pursuant to Distribution Reinvestment Plan, net |       |                   |       |              |       | 324,144        |       |              |       | 3,077       |       |            |       |               |       |               |       | 3,077      |       |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Comprehensive  loss:                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Net loss                                                       |       |                   |       |              |       |           |       |              |       |        |       | (2,177          | )          |               |       | (1,450             | )          | (3,627     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Other  comprehensive income:                                   |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Foreign currency  translation gain                             |       |                   |       |              |       |           |       |              |       |        |       |            |       | 1                  |       | 23                 |       | 24         |       |
| Unrealized losses  on interest rate derivatives                |       |                   |       |              |       |           |       |              |       |        |       |            |       | (2,165             | )          | (123               | )          | (2,288     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Total  comprehensive loss                                      |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       | (1,550             | )          | (5,891     | )          |
|                                                           |       |                   |       |              |       |           |       |              |       |        |       |            |       |               |       |               |       |       |       |
| Balance at  March 31, 2008                                |       | 1,000                  |       | $                 | —     |           | 54,326,477 |              | $          | 5           |       | $               | 484,108    |               | $          | (21,216            | )          | $          | (2,637     | ) | $ | 14,129 |   | $ | 474,389 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**ConsolidatedStatements of Cash Flows(in thousands)**(Unaudited)

 
| ** **                                                                                       | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                       | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| **Cash flows from operating activities:**                                                        |       |                                  |       |   |   |
| Net loss                                                                                         |       | $                                     | (7,653     | ) | $ | (3,627 | ) |
| Adjustments to reconcile net loss to net cash  flows (used in) provided by operating activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                                    |       | 6,608                                 |       | 4,569 |   |
| Amortization of deferred financing fees                                                          |       | 780                                   |       | 330 |   |
| Equity in losses of unconsolidated joint  ventures                                               |       | 125                                   |       | 860 |   |
| Loss on derivatives                                                                              |       | 20                                    |       | — |   |
| Unrealized loss on derivatives                                                                   |       | —                                |       | (2,264 | ) |
| Change in accounts receivable                                                                    |       | (1,570                                | )          | (2,132 | ) |
| Change in condominium inventory                                                                  |       | 1,677                                 |       | (9,442 | ) |
| Change in prepaid expenses and other assets                                                      |       | 39                                    |       | (884 | ) |
| Change in accounts payable                                                                       |       | (1,051                                | )          | (80 | ) |
| Change in accrued and other liabilities                                                          |       | (556                                  | )          | (3,636 | ) |
| Change in payables to related parties                                                            |       | (141                                  | )          | (42 | ) |
| Addition of lease intangibles                                                                    |       | (352                                  | )          | (514 | ) |
| Cash used in operating activities                                                                |       | (2,074                                | )          | (16,862 | ) |
|                                                                                             |       |                                  |       |   |   |
| **Cash flows from investing activities:**                                                        |       |                                  |       |   |   |
| Escrow deposits and pre-acquisition costs on  real estate to be acquired                         |       | —                                |       | 1,063 |   |
| Purchases of real estate properties                                                              |       | —                                |       | (12,441 | ) |
| Investment in unconsolidated joint ventures                                                      |       | (823                                  | )          | (469 | ) |
| Capital expenditures for real estate under  development                                          |       | (6,982                                | )          | (12,316 | ) |
| Capital expenditures for real estate under  development of consolidated borrowers                |       | (583                                  | )          | (7,739 | ) |
| Additions of property and equipment                                                              |       | (1,939                                | )          | (741 | ) |
| Change in restricted cash                                                                        |       | (677                                  | )          | 192 |   |
| Investment in notes receivable                                                                   |       | (1,006                                | )          | (6,490 | ) |
| Fees paid to related party for mezzanine  loan arrangements                                      |       | —                                |       | (1,448 | ) |
| Cash used in investing activities                                                                |       | (12,010                               | )          | (40,389 | ) |
|                                                                                             |       |                                  |       |   |   |
| **Cash flows from financing activities:**                                                        |       |                                  |       |   |   |
| Financing costs                                                                                  |       | (183                                  | )          | (317 | ) |
| Proceeds from notes payable                                                                      |       | 5,893                                 |       | 16,392 |   |
| Proceeds from mortgages of consolidated  borrowers                                               |       | 1,551                                 |       | 11,065 |   |
| Net borrowings on senior secured revolving  credit facility                                      |       | 8,700                                 |       | — |   |
| Payments on notes payable                                                                        |       | (3,713                                | )          | (79 | ) |
| Redemptions of common stock                                                                      |       | (406                                  | )          | (490 | ) |
| Distributions                                                                                    |       | (1,047                                | )          | (965 | ) |
| Contributions from noncontrolling interest  holders                                              |       | 128                                   |       | 415 |   |
| Distributions to noncontrolling interest  holders                                                |       | (30                                   | )          | (171 | ) |
| Cash provided by financing activities                                                            |       | 10,893                                |       | 25,850 |   |
|                                                                                             |       |                                  |       |   |   |
| Effect of exchange rate changes on cash and  cash equivalents                                    |       | (1,817                                | )          | (16 | ) |
|                                                                                             |       |                                  |       |   |   |
| Net change in cash and cash equivalents                                                          |       | (5,008                                | )          | (31,417 | ) |
| Cash and cash equivalents at beginning of  the period                                            |       | 25,260                                |       | 78,498 |   |
|                                                                                             |       |                                  |       |   |   |
| Cash and cash equivalents at end of the  period                                                  |       | $                                     | 20,252     |   | $ | 47,081 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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

**Notes to Consolidated Financial Statements(Unaudited)**

 

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

 

***Organization***

 

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

 

Weinvest in and operate commercial real estate or real estate-related assetslocated in and outside the United States on an opportunistic basis.  In particular, we focus on acquiringproperties with significant possibilities for short-term capital appreciation,such as those requiring development, redevelopment, or repositioning, or thoselocated in markets and submarkets with higher volatility, lower barriers toentry, and high growth potential.  Wehave acquired a wide variety of properties, including office, industrial,retail, hospitality, recreation and leisure, multifamily, and otherproperties.  We have purchased existingand newly constructed properties and properties under development orconstruction, including multifamily properties. We have also originated two mezzanine loans.  We completed our first property acquisitionin March 2006, and, as of March 31, 2009, we wholly-owned 11properties and consolidated five properties through investments in jointventures.  In addition, we are themezzanine lender for two multifamily properties that we consolidate under FIN46R, both of which were fully operational as of March 31, 2009.  We also have noncontrolling, unconsolidatedownership interests in three properties and one investment in a joint ventureconsisting of 22 properties that are accounted for using the equity method.

 

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

 

We are externally managed and advised by Behringer Harvard OpportunityAdvisors I, LLC (“Behringer Opportunity Advisors I”), a Texas limited liabilitycompany formed in June 2007. Behringer Opportunity Advisors I is responsible for managing ourday-to-day affairs and for identifying and making acquisitions and investmentson our behalf.

 

Our office is located at 15601 Dallas Parkway, Suite 600, Addison,Texas 75001, and our toll-free telephone number is (866) 655-3600.  The name Behringer Harvard is the property ofBehringer Harvard Holdings, LLC (“Behringer Harvard Holdings”) and is used bypermission.

 

**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 March 31, 2009and consolidated statements of equity, consolidated statements of operations,and cash flows for the three months ended March 31, 2009 and 2008 have notbeen audited by our independent registered public accounting firm.  In the opinion of management, theaccompanying unaudited consolidated financial statements include alladjustments necessary to fairly present our consolidated financial position asof March 31, 2009 and December 31, 2008 and our consolidated resultsof operations and cash flows for the three months ended March 31, 2009 and2008.  Such adjustments are of a normalrecurring nature.

 

**3.****                          Summaryof Significant Accounting Policies**

 

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

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America (“GAAP”) requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the financial statements and the reported amounts of revenues and expensesduring the reporting period.  Theseestimates include such items as purchase price

 

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**Behringer Harvard Opportunity REIT I, Inc.Notes to Consolidated Financial Statements(Unaudited)**

 

allocationfor real estate acquisitions, impairment of long-lived assets, depreciation andamortization, and allowance for doubtful accounts.  Actual results could differ from thoseestimates.

 

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

 

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

 

Thereare judgments and estimates involved in determining if an entity in which wehave made an investment is a VIE and if so, if we are the primarybeneficiary.  The entity is evaluated todetermine if it is a VIE by, among other things, calculating the percentage ofequity being risked compared to the total equity of the entity.  FIN 46R provides some guidelines as to whatthe minimum equity at risk should be, but the percentage can vary dependingupon the industry and/or the type of operations of the entity and it is up tomanagement to determine that minimum percentage as it relates to our businessand the facts surrounding each of our acquisitions.  In addition, even if the entity’s equity atrisk is a very low percentage, we are required by FIN 46R to evaluate theequity at risk compared to the entity’s expected future losses to determine ifthere could still in fact be sufficient equity at the entity.  Determining expected future losses involvesassumptions of various possibilities of the results of future operations of theentity, assigning a probability to each possibility, and using a discount rateto determine the net present value of those future losses.  A change in the judgments, assumptions, andestimates outlined above could result in consolidating an entity that shouldnot be consolidated or accounting for an investment using the equity methodthat should in fact be consolidated, the effects of which could be material toour financial statements.

 

Inthe Notes to Consolidated Financial Statements, all dollar and share amounts intabulation are in thousands of dollars and shares, respectively, unlessotherwise noted.

 

***Real Estate***

 

Upon the acquisition of real estate properties, we recognize the assetsacquired, the liabilities assumed, and any noncontrolling interest as of theacquisition date, measured at their fair values in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 141(R), “BusinessCombinations.”  The acquisition date isthe date on which we obtain control of the real estate property.  These assets acquired and liabilities assumedmay consist of buildings, any assumed debt, identified intangible assets andasset retirement obligations.  Identifiedintangible assets generally consist of the above-market and below-marketleases, in-place leases, in-place tenant improvements and tenantrelationships.  Goodwill is recognized asof the acquisition date and measured as the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree overthe fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain isrecognized in current earnings when the aggregate fair value of 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.

 

Priorto the adoption of SFAS No. 141(R) on January 1, 2009, weallocated the purchase price of the real estate property we acquired to thetangible assets acquired, consisting of land, inclusive of associated rights,and buildings, and identified intangible assets based on their relative fairvalues in accordance with SFAS No. 142, “Goodwill and Other IntangibleAssets.”  Upon the completion of abusiness combination, we recorded the tangible assets acquired, consisting ofland and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their fair values in accordance with SFAS No. 141,“Business Combinations.”

 

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

 

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

 

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**Behringer Harvard Opportunity REIT I, Inc.Notes to Consolidated Financial Statements(Unaudited)**

 

Thefair value of any tangible assets acquired, consisting of land, landimprovements, buildings, building improvements, tenant improvements, andfurniture, fixtures and equipment, is determined by valuing the property as ifit were vacant, and the “as-if-vacant” value is then allocated to the tangibleassets.  Land values are derived fromappraisals and building values are calculated as replacement cost lessdepreciation or management’s estimates of the relative fair value of theseassets using discounted cash flow analyses or similar methods.  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 values of the buildings aredepreciated over their respective estimated useful lives ranging from 25 yearsfor commercial office property to 39 years for hotel/mixed-use property usingthe straight-line method.  Buildingimprovements are depreciated over their estimated useful lives ranging from 7to 25 years.  Tenant improvements aredepreciated over the term of the respective leases.  Land improvements are depreciated over theestimated useful life of 15 years, and furniture, fixtures, and equipment aredepreciated over estimated useful lives ranging from five to seven years usingthe straight-line method.  Our leaseholdinterest is depreciated over its remaining contractual life, or approximately101 years.

 

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

 

Thetotal value of identified real estate intangible assets for acquired propertiesis further allocated to in-place lease values and tenant relationships based onour evaluation of the specific characteristics of each tenant’s lease and ouroverall relationship with that respective tenant.  The aggregate value of in-place leasesacquired and tenant relationships is determined by applying a fair valuemodel.  The estimates of fair value ofin-place leases 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 expected lease-upperiod and carrying costs that would have otherwise been incurred had theleases not been in place, including tenant improvements and commissions.  The estimates of the fair value of tenantrelationships also include costs to execute similar leases including leasingcommissions, legal costs, and tenant improvements as well as an estimate of thelikelihood of renewal as determined by management on a tenant-by-tenant basis.

 

Weamortize the value of in-place leases acquired in the future to expense overthe term of the respective leases.  Thevalue of tenant relationship intangibles is amortized to expense over theinitial term and any anticipated renewal periods, but in no event does theamortization period for intangible assets exceed the remaining depreciable lifeof the building.  Should a tenantterminate its lease, the unamortized portion of the in-place lease value andtenant relationship intangibles would be charged to expense.  As of March 31, 2009, the estimatedremaining useful lives for acquired lease intangibles range from less than oneyear to approximately 12 years.

 

Otherintangible assets include the value of identified hotel trade names andin-place property tax abatements.  Thesefair values are based on management’s estimates of the relative fair value ofthese assets using discounted cash flow analyses or similar methods.  The value of the trade names is amortizedover 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.

 

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**Behringer Harvard Opportunity REIT I, Inc.Notes to Consolidated Financial Statements(Unaudited)**

 

Anticipatedamortization expense associated with the acquired lease intangibles andacquired other intangible assets as of March 31, 2009 is as follows:

 
| ** **                                   | ** ** | **Lease / Other  Intangibles** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|
| April 1,  2009 - December 31, 2009 |       | $                              | 1,335      |   |
| 2010                                         |       | 1,954                          |       |
| 2011                                         |       | 1,365                          |       |
| 2012                                         |       | 1,096                          |       |
| 2013                                         |       | 629                            |       |
|                                              |            |                                |            |  |

 

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

 
| ** **                          | ** ** | ** **        | ** ** | ** **       | ** ** | ** **      | ** ** | **Acquired**     | ** ** | ** **    | ** ** | ** **      | ** ** |
|-------------------------------------|------------|-------------------|------------|------------------|------------|-----------------|------------|------------------|------------|---------------|------------|-----------------|------------|
| ** **                          | ** ** | **Buildings and** | ** ** | **Land and**     | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** | **Leasehold** | ** ** | **Other**       | ** ** |
| **As of March 31, 2009**       | ** ** | **Improvements**  | ** ** | **Improvements** | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** | **Interest**  | ** ** | **Intangibles** | ** ** |
| Cost                                |       | $                 | 443,768    |             | $          | 131,401         |       | $                | 38,410     |          | $          | (25,711         | )          | $ | 23,253 |   | $ | 10,439 |   |
| Less: depreciation and amortization |       | (25,800           | )          | (336             | )          | (12,298         | )          | 9,437            |       | (385          | )          | (1,584          | )          |
|                                |       |              |       |             |       |            |       |             |       |          |       |            |       |
| Net                                 |       | $                 | 417,968    |             | $          | 131,065         |       | $                | 26,112     |          | $          | (16,274         | )          | $ | 22,868 |   | $ | 8,855 |   |

 
| ** **                          | ** ** | ** **        | ** ** | ** **       | ** ** | ** **      | ** ** | **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 |   |

 

***Condominium Inventory***

 

Condominiuminventory is stated at the lower of cost or fair market value.  In addition to land acquisition costs, landdevelopment costs, and construction costs, costs include interest and realestate taxes, which are capitalized during the period beginning with thecommencement of development and ending with the completion ofconstruction.  At March 31, 2009,condominium inventory consisted of $11.9 million of finished units and $80.7 millionof 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.

 

Forcondominium inventory, at each reporting date, management compares theestimated fair value less costs to sell to the carrying value.  An impairment charge is recorded to theextent that the fair value less costs to sell is less than the carryingvalue.  We determine the estimated fairvalue of condominiums based on comparable sales in the normal course ofbusiness under existing and anticipated market conditions.  This evaluation takes into considerationestimated future selling prices, costs incurred to date, estimated additionalfuture costs, and management’s plans for the property.  There were no impairment charges related toour condominium inventory for the three months ended March 31, 2009 or2008.  However, we may experienceimpairment of our condominium inventory in the future.

 

***Cash and Cash Equivalents***

 

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

 

***Restricted Cash***

 

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

 

***Accounts Receivable***

 

Accountsreceivable primarily consist of straight-line rental revenue receivables of $9million and $8.6 million as of March 31, 2009 and December 31, 2008,respectively, and receivables from our hotel operators and tenants related toour other consolidated properties.  Theallowance for doubtful accounts was $0.3 million and $0.2 million as of March 31,2009 and December 31, 2008, respectively.

 

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**Behringer Harvard Opportunity REIT I, Inc.Notes to Consolidated Financial Statements(Unaudited)**

 

***Prepaid Expenses and Other Assets***

 

Prepaidexpenses and other assets include prepaid directors’ and officers’ insurance,prepaid advertising, the fair value of certain derivative instruments, as wellas inventory, prepaid insurance, and real estate taxes of our consolidatedproperties.  Inventory consists of food,beverages, linens, glassware, china, and silverware and is carried at the lowerof cost or market value.

 

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

 

Furniture, fixtures, and equipment are recorded atcost and are depreciated using the straight-line method over their estimateduseful lives of five to seven years. Maintenance and repairs are charged to operations as incurred whilerenewals or improvements to such assets are capitalized.  Accumulated depreciation associated with ourfurniture, fixtures, and equipment was $4.1 million and $3.5 million as of March 31,2009 and December 31, 2008, respectively.

 

***Investment Impairment***

 

Forreal estate we wholly own, we monitor events and changes in circumstancesindicating that the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances are present, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset and from its eventual disposition to the carryingamount of the asset.  In the event thatthe carrying amount exceeds the estimated future undiscounted operating cashflows, we recognize an impairment loss to adjust the carrying amount of theasset to estimated fair value.  Weconsider projected future undiscounted cash flows, trends, strategic decisionsregarding future development plans, and other factors in our assessment ofwhether impairment conditions exist. While we believe our estimates of future cash flows are reasonable,different assumptions regarding factors such as market rents, economicconditions, and occupancy rates could significantly affect these estimates.

 

Inaddition, we evaluate our investments in unconsolidated joint ventures and ourinvestments in mezzanine or bridge loans at each reporting date and if webelieve there is an other than temporary decline in market value, or if it isprobable we will not collect all principal and interest in accordance with theterms of the mezzanine or bridge loan, we will record an impairment chargebased on these evaluations.  While webelieve it is currently probable we will collect all scheduled principal andinterest with respect to our mezzanine and bridge loans, current marketconditions with respect to credit availability and with respect to real estatemarket fundamentals create a significant amount of uncertainty.  Given this, any future adverse development inmarket conditions would cause us to re-evaluate our conclusions, and couldresult in material impairment charges with respect to our mezzanine or bridgeloans.

 

Inevaluating our investments for impairment, management may use appraisals andmakes estimates and assumptions, including, but not limited to, the projecteddate of disposition 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 under development.  We have analyzed trends and other informationrelated to each potential development and incorporated this information as wellas our current outlook into the assumptions we use in our impairmentanalyses.  Due to the judgment andassumptions 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.

 

AtMarch 31, 2009 and 2008, we believe the carrying value of our operatingreal estate assets, properties under development, investments in unconsolidatedjoint ventures, and mezzanine and bridge loans is currently recoverable.  Accordingly, there were no impairment chargesfor the three months ended March 31, 2009 or 2008.  However, if market conditions worsen beyondour current expectations, or if changes in our development strategysignificantly affect any key assumptions used in our fair value calculations,we may need to take additional charges in future periods for impairmentsrelated to existing assets.  Any suchnon-cash charges would have an adverse effect on our consolidated financialposition and results of operations.

 

***Deferred Financing Fees***

 

Deferredfinancing fees are recorded at cost and are amortized to interest income fornotes receivable and interest expense for notes payable using a straight-linemethod that approximates the effective interest method over the life of therelated debt.  Accumulated amortizationof deferred financing fees was $5.7 million and $4.9 million as of March 31,2009 and December 31, 2008, respectively.

 

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**Behringer Harvard Opportunity REIT I, Inc.Notes to Consolidated Financial Statements(Unaudited)**

 

***Derivative Financial Instruments***

 

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

 

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

 

As of March 31, 2009, we do not have any derivatives designated asfair value hedges, nor are derivatives being used for trading or speculativepurposes.  See Notes 5 and 12 for furtherinformation regarding our derivative financial instruments.

 

***Foreign Currency Translation***

 

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

 

The British pound is the functional currency for ourinvestment operating in London, England and the Euro is the functional currencyfor the operations of our Central Europe Joint Venture.  We also maintain Euro-denominated bank accountsthat are translated into U.S. dollars at the current exchange rate at eachreporting period.  The resultingtranslation adjustments are recorded as a separate component of accumulatedother comprehensive income (loss) in our consolidated statement of equity.  The cumulative foreign currency translationadjustment was a loss of $4.1 million and $2.2 million as of March 31,2009 and December 31, 2008, respectively.

 

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

 

Accumulated othercomprehensive income (loss)(“AOCI”), which is reported in the accompanyingconsolidated statement of equity, consists of gains and losses affecting equitythat are excluded from net income (loss) under GAAP.  The components of accumulated othercomprehensive income (loss) consist of foreign currency translation gains andlosses and unrealized gains and losses on derivatives designated as hedgesunder SFAS No. 133.

 

***Revenue Recognition***

 

We recognizerental income generated from leases on real estate assets on a straight-linebasis over the terms of the respective leases, including the effect of rentholidays, if any.  Straight-line rentalrevenue of $0.5 million and $1.4 million was recognized in rental revenues forthe three months ended March 31, 2009 and 2008, respectively.  Hotel revenue is derived from the operationsof The Lodge & Spa at Cordillera and consists of guest room, food andbeverage, and other revenue, and is recognized as the services are rendered.

 

Revenuesfrom the sales of condominiums are recognized when sales are closed and titlepasses to the new owner, the new owner’s initial and continuing investment isadequate to demonstrate a commitment to pay for the condominium, the new owner’sreceivable is not subject to future subordination and we do not have a substantialcontinuing involvement

 

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**Behringer Harvard Opportunity REIT I, Inc.Notes to Consolidated Financial Statements(Unaudited)**

 

withthe new condominium in accordance with SFAS No. 66, “Accounting for Salesof Real Estate.”  Amounts received priorto closing on sales of condominiums are recorded as deposits in our financialstatements.

 

***Advertising Costs***

 

Marketing costs, including the costs of model units andtheir 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.

 

***Income Taxes***

 

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

 

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 each of the three months ended March 31,2009 and 2008, we recognized a current and deferred tax provision of less than$0.1 million related to the Texas margin tax.

 

***Stock-Based Compensation***

 

Wehave a stock-based incentive award plan for our directors and consultants andfor employees, directors, and consultants of our affiliates.  We account for our incentive award plan inaccordance with SFAS No. 123R, “Share-Based Payment.”  Awards are granted at the fair market valueon the date of grant with fair value estimated using the Black-Scholes-Mertonoption valuation model, which incorporates assumptions surrounding volatility,dividend yield, the risk-free interest rate, expected life, and the exerciseprice as compared to the underlying stock price on the grant date.  SFAS No. 123R also requires the taxbenefits associated with these share-based payments to be classified asfinancing activities in the consolidated statement of cash flows, rather thanas operating cash flows as required under previous regulations.  For the three months ended March 31,2009 and 2008, we had no significant compensation cost related to our incentiveaward plan.

 

***Concentration of Credit Risk***

 

AtMarch 31, 2009 and December 31, 2008, we had cash and cashequivalents deposited in certain financial institutions in excess of federallyinsured levels.  We have diversified ourcash and cash equivalents between several banking institutions in an attempt tominimize exposure to any one of these entities. We regularly monitor the financial stability of these financial institutionsand believe that we are not exposed to any significant credit risk in cash andcash equivalents 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.

 

***Noncontrolling Interest***

 

Weapply SFAS No. 160, “Noncontrolling Interests in Consolidated FinancialStatements” when recording noncontrolling interests.  We hold a primary beneficiary interest as alender in two variable interest entities that own real estate properties andthus, we consolidate their accounts with and into our accounts.  Noncontrolling interest represents thenoncontrolling ownership interest’s proportionate share of the equity in ourconsolidated real estate investments including the 5%, 10%, 10%, 19%, and 20%unaffiliated partners’ share of the equity in Chase Park Plaza, The Lodge &Spa at Cordillera, Rio Salado Business Center, Frisco Square, and Becket House,respectively, as well as 100% of the equity of the two properties weconsolidated under FIN 46R as a lender and primary beneficiary.  Income and losses are allocated tononcontrolling interest holders based on their ownership percentage.

 

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**Behringer Harvard Opportunity REIT I, Inc.Notes to Consolidated Financial Statements(Unaudited)**

 

***Reportable Segments***

 

FASBNo. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” establishes standards for reporting financial and descriptiveinformation about an enterprise’s reportable segments.  We have determined that we have onereportable segment, with activities related to the ownership, development andmanagement of real estate assets.  Ourincome producing properties generated 100% of our consolidated revenues for thethree months ended March 31, 2009 and 2008.  Our chief operating decision maker evaluatesoperating performance on an individual property level.  Therefore, our properties are aggregated intoone reportable segment.

 

***Earnings per Share***

 

Earnings(loss) per share is calculated based on the weighted average number of sharesoutstanding during each period.  As of March 31,2009 and 2008, we had options to purchase 54,583 and 39,583 shares of commonstock outstanding at a weighted average exercise price of $9.21 and $9.10,respectively.  These options are excludedfrom the calculation of earnings per share for the three months ended March 31,2009 and 2008 because the effect would be anti-dilutive.

 

***Inflation***

 

Thereal estate market has not been affected significantly by inflation in the pastseveral years due to the relatively low inflation rate.  However, we include provisions in themajority of our tenant leases that would protect us from the impact ofinflation.  These provisions includereimbursement billings for common area maintenance charges, real estate tax andinsurance reimbursements on a per square foot basis, or in some cases, annualreimbursement of operating expenses above a certain per square foot allowance.

 

**4.****                         ****New AccountingPronouncements**

 

InApril 2009, the FASB issued FASB Staff Position (“FSP”) SFAS 157-4, “DeterminingFair Value When the Volume and Level of Activity for the Asset or LiabilityHave Significantly Decreased and Identifying Transactions That Are Not Orderly,”which provides additional guidance for estimating fair value in accordance withSFAS No. 157 when the volume and level of activity for the asset orliability have significantly decreased.   We adopted the provisionsof FSP SFAS 157-4 effective April 1, 2009, and we do not expect it to havea material effect on our consolidated financial statements.

 

InApril 2009, the FASB issued FSP FAS 107-1 “Interim Disclosures about FairValue of Financial Instruments.”  The FSPamends SFAS No. 107 “Disclosures about Fair Value of Financial Instruments”to require an entity to provide disclosures about fair value of financialinstruments in interim financial information. This FSP is to be applied prospectively and is effective for interim andannual periods ending after June 15, 2009 with early adoption permittedfor periods ending after March 15, 2009. We will begin including therequired disclosures in our quarterly report on Form 10-Q for the quarterending June 30, 2009.

 

In April 2009, the FASBissued FSPs 115-2 and 124-2, *“*Recognition and Presentation of Other-Than-Temporary  Impairments,”**to amend the current other-than-temporary impairment guidancefor debt securities. The intent of these FSPs is to improve the presentation and disclosure of other-than-temporaryimpairment of debt and equity securities in the financial statements. TheseFSPs do not amend existing recognition and measurement guidance onother-than-temporary impairment of equity securities. The FSPs will beeffective for us for the quarter ending June 30, 2009. We do not believethe adoption of these FSPs will have a material impact on our financialstatements.

 

**5.****                         ****Assets and LiabilitiesMeasured at Fair Value**

 

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

 

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

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

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

 

*Derivativefinancial instruments*

 

Currently, we useinterest rate swaps and caps to manage our interest rate risk and foreignexchange put/call options to manage the impact of foreign currency movements onour financial position for our net investments in  foreign real estate joint ventures.  The valuation of these instruments isdetermined using widely accepted valuation techniques including discounted cashflow analysis on the expected cash flows of each derivative.  This analysis reflects the contractual termsof the derivatives, including the period to maturity, and uses observablemarket-based inputs, including interest rate curves, implied volatilities, andforeign currency exchange rates.

 

To comply with theprovisions of SFAS No. 157, we incorporate credit valuation adjustments toappropriately reflect both our own nonperformance risk and the respectivecounterparty’s performance risk in the fair value measurements.  Although we have determined that the majorityof the inputs used to value our derivatives fall within Level 2 of thefair value hierarchy, the credit valuation adjustments associated with ourderivatives utilize Level 3 inputs, such as estimates of current creditspreads, to evaluate the likelihood of default by itself and itscounterparties.  However, as of March 31,2009, we have assessed the significance of the impact of the credit valuationadjustments on the overall valuation of our derivative positions and havedetermined that the credit valuation adjustments are not significant to theoverall valuation of our derivatives.  Asa result, we have determined that our derivative valuations in their entiretyare classified in Level 2 of the fair value hierarchy.

 

The following fairvalue hierarchy table presents information about our assets and liabilitiesmeasured at fair value on a recurring basis as of March 31, 2009:

 
| ** **                       | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** |
|----------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|------------|------------|
| **Assets**                       | ** ** | ** **  | ** ** | ** **  | ** ** | ** **  | ** ** | ** ** | ** ** |
| Derivative financial instruments |       | $           | —     |        | $          | 997         |       | $          | —     |   | $ | 997 |   |
|                             |       |        |       |        |       |        |       |       |       |
| **Liabilities**                  |       |        |       |        |       |        |       |       |       |
| Derivative financial instruments |       | $           | —     |        | $          | 5,248       |       | $          | —     |   | $ | 5,248 |   |

 

Derivative financialinstruments classified as assets are included in other assets on the balancesheet while derivative financial instruments classified as liabilities areincluded in other liabilities.  See Notes3 and 12 for further information regarding our use of hedging instruments.

 

**6.****        ****Real Estate Investments**

 

As of March 31,2009, 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 under FIN 46R, both fully operational as of March 31,2009.  In addition, we havenoncontrolling, unconsolidated ownership interests in three properties and oneinvestment in a joint venture consisting of 22 properties that are accountedfor using the equity method.  Capitalcontributions, distributions, and profits and losses of these properties areallocated in accordance with the terms of the applicable partnership agreement.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

***Investments inUnconsolidated Joint Ventures***

 

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

 
| ** **                   | ** ** | ** **              | ** ** | **Carrying Value of Investment** | ** ** |
|------------------------------|------------|-------------------------|------------|----------------------------------|------------|
| **Property Name**            | ** ** | **Ownership  Interest** | ** ** | **March 31,  2009**         | ** ** | **December 31,  2008** | ** ** |
| Royal Island                 |       | 31%                     |       | $                                | 22,174     |   | $ | 22,060 |   |
| GrandMarc at Westberry Place |       | 50%                     |       | 7,429                            |       | 7,324 |   |
| GrandMarc at the Corner      |       | 50%                     |       | 6,915                            |       | 5,527 |   |
| Central Europe Joint Venture |       | 49%                     |       | 26,495                           |       | 27,405 |   |
| Total                        |       |                    |       | $                                | 63,013     |   | $ | 62,316 |   |

 

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

 
| ** **                   | ** ** | **March 31,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Real estate assets, net      |       | $                        | 364,915    |                        | $          | 371,223 |   |
| Cash and cash equivalents    |       | 23,698                   |       | 24,636                      |       |
| Other assets                 |       | 3,950                    |       | 2,791                       |       |
| Total assets                 |       | $                        | 392,563    |                        | $          | 398,650 |   |
|                         |       |                     |       |                        |       |
| Notes payable                |       | $                        | 237,437    |                        | $          | 245,203 |   |
| Other liabilities            |       | 27,413                   |       | 25,442                      |       |
| Total liabilities            |       | 264,850                  |       | 270,645                     |       |
|                         |       |                     |       |                        |       |
| Equity                       |       | 127,713                  |       | 128,005                     |       |
| Total liabilities and equity |       | $                        | 392,563    |                        | $          | 398,650 |   |

 

Forthe three months ended March 31, 2009 and 2008, we recognized $0.1 millionand $0.9 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 months ended March 31, 2009 and 2008 as follows:

 
| ** **                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------|------------|---------------------------------------|------------|
| ** **                       | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Revenue                          |       | $                                     | 5,600      |   | $ | 2,169 |   |
|                             |       |                                  |       |   |   |
| Operating expenses:              |       |                                  |       |   |   |
| Operating expenses               |       | 1,346                                 |       | 646 |   |
| Property taxes                   |       | 206                                   |       | 221 |   |
| Total operating expenses         |       | 1,552                                 |       | 867 |   |
|                             |       |                                  |       |   |   |
| Operating income                 |       | 4,048                                 |       | 1,302 |   |
|                             |       |                                  |       |   |   |
| Non-operating expenses:          |       |                                  |       |   |   |
| Depreciation and amortization    |       | 2,419                                 |       | 1,015 |   |
| Interest and other, net          |       | 1,911                                 |       | 2,292 |   |
| Total non-operating expenses     |       | 4,330                                 |       | 3,307 |   |
|                             |       |                                  |       |   |   |
| Net loss                         |       | $                                     | (282       | ) | $ | (2,005 | ) |
|                             |       |                                  |       |   |   |
| Company’s share of net loss |       | $                                     | (125       | ) | $ | (860 | ) |

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**7.****        ****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.  On February 24,2009, we received the notice of completion on Alexan Voss.  Accordingly, in accordance with the optionagreement, we have ninety days from the delivery of the notice of completion toexercise our option to purchase the completed property.  Should we waive our rights to purchase theproperty, the general partner and mezzanine borrower at its sole discretion mayelect to exercise its put option requiring us to purchase the property.

 

Based on ourevaluation, we have determined that these entities meet the criteria ofvariable interest entities under FIN 46R and that we are the primarybeneficiary of these variable interest entities.  Therefore, we have consolidated the entities,including the related real estate assets and third-party constructionfinancing.  As of March 31, 2009,there was  $89 million of related realestate assets related to Alexan Voss and Alexan Black Mountain, whichcollateralizes the outstanding principal balance of the constructionloans.  The third-party constructionlenders have no recourse to the general credit of us as the primarybeneficiary, but their loans are guaranteed by the owners of the variableinterest entities.  As of March 31,2009, the outstanding principal balance under our mezzanine loans was $22.7million, which is eliminated, along with accrued interest and loan originationfees, upon consolidation.  We, as themezzanine lender, are in discussion with the mezzanine borrower and the seniorconstruction lender to restructure and extend the Alexan Black Mountain notepayable which matures in September 2009.

 

In May 2007, for aninitial cash investment of $20 million, we acquired an approximate 31% equityinterest as a limited partner in the development and construction of a resorthotel, spa, golf course, marina, and residences on three islands located in theCommonwealth of Bahamas (“Royal Island”). In December 2007, we committed up to $40 million as a bridge loanto the Royal Island entity for the continuing construction and development ofthe property, of which $38.7 million including accrued interest and fees wasoutstanding to us at March 31, 2009 (See Note 8).  Based on our evaluation, we have determinedthat the entity meets the criteria of a variable interest entity under FIN 46Rbut that we are not the primary beneficiary. Accordingly, we do not consolidate the Royal Island entity and insteadaccount for it under the equity method of accounting in accordance with SOP78-9, as amended and interpreted.  At March 31,2009, there was approximately $134.4 million of real estate assets underdevelopment related to Royal Island.

 

**8.****        ****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 March 31, 2009, thenote receivable balance was $1.9 million.

 

*RoyalIsland Bridge Loan*

 

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.

 

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

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

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 to protect our investmentincluding foreclosure, exercise of power of sale, or conveyance in satisfactionof deed.  In accordance with GAAP, fromthe time the loan went into default until the time that a foreclosure occurs, asatisfactory workout is completed, or the loan is reinstated by the borrower,we do not recognize interest income on the loan.

 

At March 31, 2009,the loan balance owed to us was $38.7 million which includes $3.1 million ofaccrued interest and fees included in receivables from related parties at March 31,2009.  We have not recorded an allowanceagainst the recorded balance as our estimates of the fair value of the RoyalIsland property securing the bridge loan significantly exceeds the currentcarrying value of the loan and accordingly, we believe it is probable that allof the outstanding balance is collectible. In April 2009, we collected $2.1 million in unpaid interest andfees from the borrower.

 

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

 

**9.****        ****Capitalized Costs**

 

We capitalize interest,property taxes, insurance, and construction costs to real estate underdevelopment.  During the three monthsended March 31, 2009 we capitalized $5.2 million of such costs associatedwith real estate under development and certain investments accounted for by theequity method, including $0.7 million in interest costs.  Capitalized interest costs include interestexpense and amortization of deferred financing costs.

 

Certain redevelopmentcosts including interest, property taxes, insurance, and construction costsassociated with Chase Park Plaza and The Lodge & Spa at Cordillerahave been capitalized to condominium inventory on our consolidated balancesheet at March 31, 2009.  During thethree months ended March 31, 2009, we capitalized a total of $1.6 millionof such costs associated with the condominium redevelopment at Chase Park Plazaand The Lodge & Spa at Cordillera.

 

During the first quarterof 2009, $0.1 million in costs were transferred from real estate underdevelopment to land on our balance sheet. Also, during the first quarter of 2009, $4 million and $0.1 million ofreal estate under development costs were transferred to building andimprovements and to furniture, fixtures, and equipment, respectively, on ourbalance sheet.

 

# **10.**      NotesPayable

 

Our notes payable balancewas $428.4 million at March 31, 2009, as compared to $416.2 million at December 31,2008, and consists of borrowings and assumptions of debt related to ourproperty acquisitions as well as the notes payable of our mezzanine borrowerswe consolidate under FIN 46R and our borrowings under our $75 million seniorsecured credit facility.  Each of our notes payable is collateralized byone or more of our properties.  At March 31, 2009, our notes payableinterest rates ranged from 2.1% to 6.3%, with a weighted average interest rateof approximately 3%.  Of our $428.4 million in notes payable at March 31,2009, $388.6 million represented debt subject to variable interest rates. At March 31, 2009, our notes payable have maturity dates that range from April 2009to January 2016.  Our loan agreements generally stipulate that wecomply with certain reporting and financial covenants.  These covenantsinclude among other things, notifying the lender of any change in managementand maintaining minimum debt service coverage ratios.  At March 31,2009, we are not aware of any non-compliance with our debt covenants under ourloan agreements.  We have unconditionallyguaranteed payment of the notes payable related to Frisco Square, Chase ParkPlaza Hotel, Chase — Private Residences, Northborough Tower, and CrossroadsOffice Park.

 

In March 2009,we amended our £12.7 million loan facility agreement with the Royal Bank ofScotland PLC (“RBS”) related to the Becket House leasehold interest.  Under the terms of the amended agreement, £1million of the total principal balance outstanding is due and payable on April 30,2009 with the remaining principal balance of £11.7 million plus accrued andunpaid interest due on March 9, 2011, the amended maturity date.  The interest rate under the amended agreementis equal to LIBOR plus 2.5%.

 

In February 2008, weentered into a senior secured revolving credit facility providing for up to $75million of secured borrowings.  Theinitial credit facility allows us to borrow up to $75 million in revolvingloans, of which up to $20 million is available for issuing letters ofcredit.  The credit facility may beincreased to up to $150 million upon satisfaction of certain conditionsincluding additions to the collateral pool. We have unconditionally guaranteed payment of the $75 million seniorsecured revolving credit facility.  Theavailability of credit under the revolving credit facility is limited by the

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

terms of the creditagreement.  As of March 31, 2009,the maximum availability under the revolving credit facility was $69.3million.  The outstanding balance underthe revolving credit facility was $56.7 million.

 

The following tablesummarizes our contractual obligations for principal payments as of March 31,2009:

 
| **Principal Payments Due:**                  | ** ** | ** ** | ** **    |
|----------------------------------------------|------------|------------|---------------|
| April 1, 2009 -  December 31, 2009 |       | $          | 58,838        |   |
| 2010                                         |       | 201,233    |          |
| 2011                                         |       | 129,634    |          |
| 2012                                         |       | 1,660      |          |
| 2013                                         |       | 16,664     |          |
| Thereafter                                   |       | 19,244     |          |
| Unamortized premium                          |       | 1,095      |          |
|                                         |       |       |          |
|                                         |       | $          |  428,368 |   |

 

**11.      LeasingActivity**

 

Futureminimum base rental payments due to us under non-cancelable leases in effect asof March 31, 2009 for our consolidated properties are as follows:

 
| ** **                                   | ** ** | **Future  Minimum  Lease  Payments** | ** ** |
|----------------------------------------------|------------|--------------------------------------|------------|
| April 1, 2009 -  December 31, 2009 |       | $                                    | 30,403     |   |
| 2010                                         |       | 35,229                               |       |
| 2011                                         |       | 33,029                               |       |
| 2012                                         |       | 31,702                               |       |
| 2013                                         |       | 18,182                               |       |
| Thereafter                                   |       | 47,747                               |       |
|                                         |       |                                 |       |
| Total                                        |       | $                                    | 196,292    |   |

 

As of March 31,2009, 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 its operationsand accounted for rental revenue of approximately $2 million, or approximately12.6% of our aggregate rental revenues for the three months ended March 31,2009.  There was no contingent rentincluded in rental revenue for the three months ended March 31, 2009.  Less than $4,000 of contingent rent wasincluded in rental revenue for the three months ended March 31, 2008.

 

**12.****      Derivative Instruments andHedging Activities**

 

We account for ourderivatives and hedging activities under SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities — an Amendment of FASB Statement No. 133,”and SFAS No. 133 “Accounting for Derivative Instruments and HedgingActivities,” as amended and interpreted.  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.

 

Derivative instrumentsclassified as assets were reported at their combined fair values of $1 millionand $1.3 million in prepaid expenses and other assets at March 31, 2009and December 31, 2008, respectively. Derivative instruments classified as liabilities were reported at theircombined fair values of $5.2 million and $5.5 million in accrued and otherliabilities at March 31, 2009 and December 31, 2008,respectively.  During the three monthsended March 31, 2009 we recorded unrealized losses of $1.8 million toaccumulated other comprehensive loss in our statement of equity to adjust thecarrying amount of the interest rate swaps and caps qualifying as hedges underSFAS No. 133 to their

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

fair values at March 31,2009.  Unrealized losses on interest ratederivatives for the three months ended March 31, 2009 reflect areclassification of unrealized losses from accumulated other comprehensive lossto interest expense of $0.2 million.

 

The following table summarizesthe notional values of our derivative financial instruments as of March 31,2009.  The notional values provide anindication of the extent of our involvement in these instruments at March 31,2009, but do not represent exposure to credit, interest rate, or market risks:

 
| **Type / Description**                              | ** ** | **Notional  Value** | ** ** | **Interest Rate /  Strike Rate** | ** ** | **Maturity** | ** **              | **Fair Value  Asset /  (Liability)** | ** ** |
|-----------------------------------------------------|------------|---------------------|------------|----------------------------------|------------|--------------|-------------------------|--------------------------------------|------------|
| Cash Flow Hedges                                    | ** ** | ** **          | ** ** | ** **                       | ** ** | ** **   | ** **              | ** **                           | ** ** |
| Interest rate cap - Santa Clara Tech Center         |       | $                   | 35,115     |                             | 6.00       | %            | June 15,  2010     |                                 | $          | — |   |
| Interest rate cap - Santa Clara Tech Center         |       | $                   | 17,000     |                             | 6.00       | %            | June 15,  2010     |                                 | $          | — |   |
| Interest rate cap - Chase - Private Residences      |       | $                   | 30,000     |                             | 6.00       | %            | December 15,  2009 |                                 | $          | — |   |
| Interest rate cap - Becket House                    |       | £              | 12,700     |                             | 5.75       | %            | November 21,  2010 |                                 | $          | 2 |   |
| Interest rate swap - Becket House                   |       | £              | 12,700     |                             | 5.50       | %            | November 21,  2009 |                                 | $          | (448 | ) |
| Interest rate swap - Crossroads                     |       | $                   | 25,000     |                             | 3.10       | %            | November 1,  2010  |                                 | $          | (912 | ) |
|                                                |       |                |       |                             |       |         |                    |                                 |       |
| Net Investment Hedges                               |       |                |       |                             |       |         |                    |                                 |       |
| Foreign currency put - Becket House                 |       | £              | 6,120      |                             | £     | 1.30         |                    | November 23,  2011              |       | $ | 569 |   |
| Foreign currency put - Central Europe Joint Venture |       | €              | 17,000     |                             | €     | 1.10         |                    | July 28,  2010                  |       | $ | 426 |   |
| Other                                               |       |                |       |                             |       |         |                    |                                 |       |
| Interest rate swap - Chase Park Plaza Hotel         |       | $                   | 80,594     |                             | 3.82       | %            | November 15,  2010 |                                 | $          | (3,888 | ) |

 

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

 
| ** **                                                             | ** ** | ** **                        | ** ** | **Asset Derivatives**                   | ** ** | **Liability Derivatives**                  | ** ** |
|------------------------------------------------------------------------|------------|-----------------------------------|------------|-----------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                             | ** ** | **Balance  Sheet  Location**      | ** ** | **Fair Value at  March 31,  2009** | ** ** | **Fair Value at  December 31,  2008** | ** ** | **Fair Value at  March 31,  2009** | ** ** | **Fair Value at  December 31,  2008** | ** ** |
| **Derivatives designated as hedging instruments  under SFAS 133:**     |       |                              |       |                                    |       |                                       |       |   |   |   |   |
|                                                                   |       |                              |       |                                    |       |                                       |       |   |   |   |   |
| Interest rate derivative contracts                                     |       | Prepaid expenses and other assets |       | $                                       | 2          |                                       | $          | 6 |   | $ | — |   | $ | — |   |
| Interest rate derivative contracts                                     |       | Accrued and other liabilities     |       | —                                  |       | —                                     |       | (1,360 | ) | (1,468 | ) |
| Foreign exchange contracts                                             |       | Prepaid expenses and other assets |       | 995                                     |       | 1,267                                      |       | — |   | — |   |
|                                                                   |       |                              |       |                                    |       |                                       |       |   |   |   |   |
| Total derivatives designated as hedging instruments under SFAS 133     |       |                              |       | $                                       | 997        |                                       | $          | 1,273 |   | $ | (1,360 | ) | $ | (1,468 | ) |
|                                                                   |       |                              |       |                                    |       |                                       |       |   |   |   |   |
| **Derivatives not designated as hedging  instruments under SFAS 133:** |       |                              |       |                                    |       |                                       |       |   |   |   |   |
|                                                                   |       |                              |       |                                    |       |                                       |       |   |   |   |   |
| Interest rate derivative contract                                      |       | Accrued and other liabilities     |       | $                                       | —     |                                       | $          | — |   | $ | (3,888 | ) | $ | (4,050 | ) |
|                                                                   |       |                              |       |                                    |       |                                       |       |   |   |   |   |
| Total derivatives                                                      |       |                              |       | $                                       | 997        |                                       | $          | 1,273 |   | $ | (5,248 | ) | $ | (5,518 | ) |

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

The tables below present the effect of our derivativefinancial instruments on the consolidated statements of operations as of March 31,2009 and 2008.

 

**Derivativesin SFAS 133 Cash Flow Hedging Relationships**

 
| ** **                         | ** ** | **Amount of Gain or (Loss)  Recognized in AOCI on  Derivative (Effective Portion)** | ** ** | **Amount of Gain or (Loss)  Reclassified from AOCI into  Income (Effective Portion)(1)** | ** ** |
|------------------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                         | ** ** | **Three months ended March 31,**                                               | ** ** | **Three months ended March 31,**                                                    | ** ** |
| ** **                         | ** ** | **2009**                                                                            | ** ** | **2008**                                                                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest rate derivative contracts |       | $                                                                                   | 121        |                                                                                     | $          | (2,407 | ) | $ | 14 |   | $ | — |   |
|                                    |            |                                                                                     |            |                                                                                          |            |  |  |  |  |  |  |  |  |

 

----

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

** **

**Derivativesin SFAS 133 Net Investment Hedging Relationships**

 
| ** **                 | ** ** | **Amount of Gain or (Loss)  Recognized in AOCI on  Derivative (Effective Portion)** | ** ** | **Amount of Gain or (Loss)  Reclassified from AOCI into  Income (Effective Portion)(1)** | ** ** |
|----------------------------|------------|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Three months ended March 31,**                                               | ** ** | **Three months ended March 31,**                                                    | ** ** |
| ** **                 | ** ** | **2009**                                                                            | ** ** | **2008**                                                                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Foreign exchange contracts |       | $                                                                                   | (272       | )                                                                                        | $          | 263 |   | $ | — |   | $ | — |   |
|                            |            |                                                                                     |            |                                                                                          |            |  |  |  |  |  |  |  |  |

 

----

(1)   We do not expect to reclassify any gainor loss from AOCI into income until the sale or upon complete or substantiallycomplete liquidation of the respective investment in the foreign entity.

** **

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

 
| ** **                        | ** ** | ** **                     | ** ** | **Amount of Gain or (Loss)**          | ** ** |
|-----------------------------------|------------|--------------------------------|------------|---------------------------------------|------------|
| ** **                        | ** ** | ** **                     | ** ** | **Recognized in Income on**           | ** ** |
| ** **                        | ** ** | **Location of Gain or (Loss)** | ** ** | **Derivative**                        | ** ** |
| ** **                        | ** ** | **Recognized in Income on**    | ** ** | **Three months ended March 31,** | ** ** |
| ** **                        | ** ** | **Derivative**                 | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| Interest rate derivative contract |       | Interest  expense              |       | $                                     | 185        |   | $ | — |   |
|                                   |            |                                |            |                                       |            |  |  |  |  |

 

*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 March 31, 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.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**13.****      Distributions**

 

We initiatedthe payment of monthly distributions in August 2006 in the amount of a 2%annualized rate of return, based on an investment in our common stock of $10.00per share and calculated on a daily record basis of $0.0005479 per share.  In December 2006, our board of directorsdeclared distributions to be paid in the first quarter of 2007 in the amount ofa 2.5% annualized rate of return, calculated on a daily record basis of$0.0006849 per share.  In April 2007,and through March 2009, the declared distributions rate increased to a 3%annualized rate of return, calculated on a daily record basis of $0.0008219 pershare.  Pursuant to our Second Amendedand Restated Distribution Reinvestment Plan (the “DRIP”), stockholders mayelect to reinvest any cash distribution in additional shares of commonstock.  We record all distributions whendeclared, except that the stock issued through the DRIP is recorded when theshares are actually issued.

 

Thefollowing are the distributions declared for the first quarter ended March 31,2009 and 2008:

 
| **2009**    | ** ** | **Cash** | ** ** | **DRIP** | ** ** | **Total** | ** ** | **Per Share** | ** ** |
|-------------|------------|----------|------------|----------|------------|-----------|------------|---------------|------------|
| 1st Quarter |       | $        | 1,063      |     | $          | 3,007     |       | $             | 4,070      |   | $ | 0.07 |   |
|             |            |          |            |          |            |           |            |               |            |  |  |  |  |

 
| **2008**    | ** ** | **Cash** | ** ** | **DRIP** | ** ** | **Total** | ** ** | **Per  Share** | ** ** |
|-------------|------------|----------|------------|----------|------------|-----------|------------|----------------|------------|
| 1st Quarter |       | $        | 969        |     | $          | 3,086     |       | $              | 4,055      |   | $ | 0.07 |   |
|             |            |          |            |          |            |           |            |                |            |  |  |  |  |

 

**14.****     ****Related Party Transactions**

 

Behringer Opportunity Advisors I and certain of itsaffiliates receive fees and compensation in connection with our offering ofcommon stock to the public, and in connection with the acquisition, management,and sale of our assets.  We terminatedour initial public offering on December 28, 2007 and currently areoffering shares of our common stock only to our existing stockholders throughthe 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 three monthsended March 31, 2009.  In the threemonths ended March 31, 2008, we incurred $0.8 million in acquisition andadvisory fees and $0.2 million in acquisition expense reimbursements.

 

We pay BehringerOpportunity Advisors I or its affiliates a debt financing fee equal to 1% ofthe amount of any debt made available to us. We incurred no debt financing fees for the three months ended March 31,2009.  We incurred $0.2 million of debtfinancing fees during the three months ended March 31, 2008.

 

We pay HPT ManagementServices LP, Behringer Harvard Real Estate Services, LLC, or Behringer HarvardOpportunity Management Services, LLC (collectively, “BH Property Management”),affiliates of our advisor and our property managers, fees for management,leasing, and construction supervision of our properties, which may besubcontracted to unaffiliated third parties. Such fees are equal to 4.5% of gross revenues plus leasing commissionsbased upon the customary leasing commission applicable to the same geographiclocation of the respective property.  Inthe event that we contract directly with a non-affiliated third-party propertymanager in respect of a property, we will pay BH Property Management anoversight fee equal to 0.5% of gross revenues of the property managed.  In no event will we pay both a propertymanagement fee and an oversight fee to BH Property Management with respect toany particular property.  We incurred andexpensed property management fees or oversight fees totaling $0.5 million and$0.2 million in the three months ended March 31, 2009 and 2008,respectively.  We did not incur anyconstruction management fees to BH Property Management for either of the threemonths ended March 31, 2009 or 2008.

 

We pay BehringerOpportunity Advisors I an annual asset management fee of 0.75% of the aggregateasset value of acquired real estate.  Thefee is payable monthly in an amount equal to one-twelfth of 0.75% of theaggregate asset value as of the last day of the preceding month.  For the three months ended March 31,2009, we expensed $1.3 million of asset management fees and capitalized lessthan $0.1 million of asset management fees to real estate.  For the three months ended March 31,2008, we expensed $0.9 million of asset management fees and capitalized $0.1million 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 employed bythose entities and performing services for us, subject to the limitation thatwe will not reimburse for any

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

amount by whichour advisor’s operating expenses (including the asset management fee) at theend of the four fiscal quarters immediately preceding the date reimbursement issought exceeds the greater of:  (1) 2%of our average invested assets or (2) 25% of our net income for that fourquarter period other than any additions to reserves for depreciation, bad debtsor other similar non-cash reserves and any gain from the sale of our assets forthat period.  Notwithstanding thepreceding sentence, we may reimburse the advisor for expenses in excess of thislimitation if a majority of our independent directors determines that suchexcess expenses are justified based on unusual and non-recurring factors.  For the three months ended March 31,2009 and 2008, we incurred and expensed costs for administrative servicestotaling $0.5 million and $0.1 million, respectively.

 

At March 31, 2009,we had a payable to our advisor and its affiliates of $1.4 million.  This balance consists primarily of assetmanagement fees and administrative service expenses payable to BehringerOpportunity Advisors I, management fees payable to BH Property Management, andother miscellaneous payables.  Thispayable is offset by a receivable from our advisor and its affiliates of $0.2million, which is included in receivables from related parties at March 31,2009.

 

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

 

**15.****     ****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 July 24, 2008, weissued options to purchase 5,000 shares of our common stock at $9.50 per shareto each of our three independent directors pursuant to the Incentive AwardPlan. The options issued become exercisable one year after the date ofgrant.  As of March 31, 2009,options to purchase 54,583 shares of stock were outstanding, of which none werefully vested, at a weighted average exercise price per share of $9.21.  The remaining contractual life of theoutstanding options is five years. Compensation expense associated with our Incentive Award Plan was notmaterial for the three months ended March 31, 2009 or 2008.

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

**16.****                  ****Supplemental Cash FlowInformation**

 

Supplementalcash flow information is summarized below.

 
| ** **                                                                                                                    | ** ** | **Three months ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                    | ** ** | **2009**                              | ** ** | **2008** | ** ** |
| **Supplemental disclosure:**                                                                                                  |       |                                  |       |   |   |
| Interest paid, net of amounts capitalized                                                                                     |       | $                                     | 3,581      |   | $ | 2,622 |   |
|                                                                                                                          |       |                                  |       |   |   |
| **Non-cash investing activities:**                                                                                            |       |                                  |       |   |   |
| Property and equipment additions and purchases  of real estate in accrued liabilities                                         |       | $                                     | 513        |   | $ | 575 |   |
| Capital expenditures for real estate under development  in accounts payable and accrued liabilities                           |       | $                                     | 2,944      |   | $ | 6,558 |   |
| Capital expenditures for real estate under development  of consolidated borrowers in accounts payable and accrued liabilities |       | $                                     | —     |   | $ | 7,252 |   |
| Amortization of deferred financing fees in  properties under development                                                      |       | $                                     | 87         |   | $ | 45 |   |
| Amortization of deferred financing fees in  properties under development of consolidated borrowers                            |       | $                                     | —     |   | $ | 7 |   |
|                                                                                                                          |       |                                  |       |   |   |
| **Non-cash financing activities:**                                                                                            |       |                                  |       |   |   |
| Common stock issued in distribution reinvestment  plan                                                                        |       | $                                     | 1,975      |   | $ | 3,078 |   |
| Assumed debt on acquisition of real estate  investment                                                                        |       | $                                     | —     |   | $ | 22,229 |   |

** **

*********

 

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**Item 2.**                                                           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-Looking Statements**

 

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

 

### **Forward-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 the “Risk Factors” section of ourAnnual Report on Form 10-K for the year ended December 31, 2008, asfiled with the SEC and the risks identified in Part II, Item 1A of thisquarterly report.**

### ** **

**Cautionary Note**

 

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

 

**Critical Accounting Policies and Estimates**

 

Management’sdiscussion and analysis of financial condition and results of operations arebased upon our consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States of America (“GAAP”).  The preparation of these financial statementsrequires our management to make estimates and assumptions that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities.  On a regular basis, we will evaluate theseestimates, including investment impairment. 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.

 

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

 

Ourconsolidated financial statements include our accounts, the accounts ofvariable interest entities (“VIEs”) in which we are the primary beneficiary,and the accounts of other subsidiaries over which we have control.  All inter-company transactions, balances andprofits have been eliminated in consolidation. Interests in entities acquired are evaluated for consolidation based onFIN 46R, which requires the consolidation of VIEs in which we are deemed to bethe primary beneficiary.  If the interestin the entity is determined not to be a VIE under FIN 46R, then the entity isevaluated for consolidation under the American Institute of Certified PublicAccountants’ Statement of Position 78-9, “Accounting for Investments in RealEstate Ventures,” and by Emerging Issues Task Force 04-5, “Determining Whethera General Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights.”

 

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Thereare judgments and estimates involved in determining if an entity in which wehave made an investment is a VIE and, if so, whether we are the primarybeneficiary.  The entity is evaluated todetermine if it is a VIE by, among other things, calculating the percentage ofequity being risked compared to the total equity of the entity.  FIN 46R provides some guidelines as to whatthe minimum equity at risk should be, but the percentage can vary dependingupon the industry and/or the type of operations of the entity, and it is up tomanagement to determine that minimum percentage as it relates to our businessand the facts surrounding each of our acquisitions.  In addition, even if the entity’s equity atrisk is a very low percentage, we are required by FIN 46R to evaluate theequity at risk compared to the entity’s expected future losses to determine ifthere could still in fact be sufficient equity at the entity.  Determining expected future losses involvesassumptions of various possibilities of the results of future operations of theentity, assigning a probability to each possibility and using a discount rateto determine the net present value of those future losses.  A change in the judgments, assumptions, andestimates outlined above could result in consolidating an entity that shouldnot be consolidated or accounting for an investment on the equity method thatshould in fact be consolidated, the effects of which could be material to ourfinancial statements.

 

***Real Estate***

 

Upon the acquisition of real estate properties, we recognize the assetsacquired, the liabilities assumed, and any noncontrolling interest as of theacquisition date, measured at their fair values in accordance with Statement ofFinancial Accounting Standards (“SFAS”) No. 141(R), “Business Combinations.”  The acquisition date is the date on which weobtain control of the real estate property. These assets acquired and liabilities assumed may consist of buildings,any assumed debt, identified intangible assets and asset retirementobligations.  Identified intangibleassets generally consist of the above-market and below-market leases, in-placeleases, in-place tenant improvements and tenant relationships.  Goodwill is recognized as of the acquisitiondate and measured as the aggregate fair value of the consideration transferredand any noncontrolling interests in the acquiree over the fair value ofidentifiable net assets acquired. Likewise, a bargain purchase gain is recognized in current earnings whenthe aggregate fair value of the consideration transferred and anynoncontrolling interests in the acquiree is less than the fair value of theidentifiable net assets acquired. Acquisition-related costs are expensed in the period incurred.

 

Priorto the adoption of SFAS No. 141(R) on January 1, 2009, weallocated the purchase price of the real estate property we acquired to thetangible assets acquired, consisting of land, inclusive of associated rights,and buildings, and identified intangible assets based on their relative fairvalues in accordance with SFAS No. 142, “Goodwill and Other IntangibleAssets.”  Upon the completion of abusiness combination, we recorded the tangible assets acquired, consisting ofland and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their fair values in accordance with SFAS No. 141,“Business Combinations.”

 

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

 

Thefair value of any tangible assets acquired, expected to consist of land, landimprovements, buildings, building improvements, and furniture, fixtures andequipment, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to the tangible assets. Land values are derived from appraisals, and building 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 25 years forcommercial office property to 39 years for hotel/mixed-use property using thestraight-line method.  Land improvementsare depreciated over the estimated useful life of 15 years, and furniture,fixtures, and equipment are depreciated over estimated useful lives rangingfrom five to seven years using the straight-line method.

 

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

 

Thetotal value of identified real estate intangible assets that we may acquire inthe future is further allocated to in-place lease values and tenantrelationships based on our evaluation of the specific characteristics of eachtenant’s lease and our overall relationship with that respective tenant.  The aggregate value of in-place leasesacquired and tenant relationships is determined by applying a fair valuemodel.  The estimates of fair value ofin-place leases include an estimate of carrying costs during the expectedlease-up periods for the respective spaces considering current marketconditions.  In estimating fair

 

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valueof in-place leases, we consider items such as real estate taxes, insurance andother operating expenses as well as lost rental revenue during the expectedlease-up period and carrying costs that would have otherwise been incurred hadthe leases not been in place, including tenant improvements andcommissions.  The estimates of the fairvalue of tenant relationships also include costs to execute similar leasesincluding leasing commissions, legal costs and tenant improvements as well asan estimate of the likelihood of renewal as determined by management on atenant-by-tenant basis.

 

Weamortize the value of in-place leases acquired in the future to expense overthe term of the respective leases.  Thevalue of tenant relationship intangibles is amortized to expense over theinitial term and any anticipated renewal periods, but in no event does theamortization period for intangible assets exceed the remaining depreciable lifeof the building.  Should a tenantterminate their lease, the unamortized portion of the in-place lease value andtenant relationship intangibles would be charged to expense.

 

Otherintangible assets include the value of identified hotel trade names andin-place property tax abatements.  Thesefair values are based on management’s estimates of the relative fair value ofthese assets using discounted cash flow analyses or similar methods.  The value of the trade names is amortizedover 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.

 

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

 

***Investment Impairments***

 

Forreal estate we wholly own, we monitor events and changes in circumstancesindicating that the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances are present, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset and from its eventual disposition to the carryingamount of the asset.  In the event thatthe carrying amount exceeds the estimated future undiscounted operating cashflows, we recognize an impairment loss to adjust the carrying amount of theasset to estimated fair value.  Weconsider projected future undiscounted cash flows, trends, strategic decisionsregarding future development plans, and other factors in our assessment ofwhether impairment conditions exist. While we believe our estimates of future cash flows are reasonable,different assumptions regarding such factors as market rents, economies, andoccupancies could significantly affect these estimates.

 

Inaddition, we evaluate our investments in unconsolidated joint ventures and ourinvestments in mezzanine or bridge loans at each reporting date and if webelieve there is an other than temporary decline in market value, or if it isprobable we will not collect all principal and interest in accordance with theterms of the mezzanine or bridge loan, we will record an impairment chargebased on these evaluations.  While webelieve it is currently probable that we will collect all scheduled principaland interest with respect to our mezzanine and bridge loans, current marketconditions with respect to credit availability and with respect to real estatemarket fundamentals create a significant amount of uncertainty.  Given this, any future adverse development inmarket conditions would cause us to re-evaluate our conclusions, and couldresult in material impairment charges with respect to our mezzanine or bridgeloans.

 

Inevaluating our investments for impairment, management may use appraisals andmakes estimates and assumptions, including, but not limited to, the projecteddate of disposition 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.

 

Webelieve the carrying value of our operating real estate assets, propertiesunder development, investments in unconsolidated joint ventures, and mezzanineand bridge loans is currently recoverable. However, if market conditions worsen beyond our current expectations, orif changes in our development strategy significantly affect any key assumptionsused in our fair value calculations, we may need to take additional charges infuture periods for impairments related to existing assets.  Any such non-cash charges would have anadverse effect on our consolidated financial position and results ofoperations.

 

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**Overview**

 

During 2008 andcontinuing into the first quarter of 2009, the U.S. economy experienced asignificant downturn, which included disruptions in the broader financial andcredit markets, declining consumer confidence and an increase in unemploymentrates.  These conditions have contributedto weakened market conditions.  While itis unclear as to when the overall economy will recover, we do not expectconditions to improve in the near future. As a result of the current economy, our primary objectives will be topreserve capital and sustain property values.

 

**Resultsof Operations**

 

Asof March 31, 2009, we had invested in 22 assets:  11 consolidated wholly-owned properties; fiveproperties consolidated through investments in joint ventures, including twohotel and development properties and a mixed-used property; an investment in anisland development accounted for under the equity method; an investment in aportfolio of 22 properties located in four Central European countries accountedfor under the equity method; two investments in student housing projects inTexas and Virginia, also accounted for under the equity method; and twomultifamily development properties as a mezzanine lender consolidated under FIN46R.  Our investment properties arelocated in Arizona, California, Colorado, Massachusetts, Minnesota, Missouri,Nevada, Texas, Virginia, the Commonwealth of The Bahamas, London, England, theCzech Republic, Poland, Hungary, and Slovakia.

 

Asof March 31, 2008, we had invested in 20 assets:  ten consolidated wholly-owned properties;five properties consolidated through investments in joint ventures, includingtwo hotel and development properties and a mixed-use property; one investmentin an island development accounted for under the equity method; two investmentsin student housing projects in Texas and Virginia, also accounted for under theequity method; and two apartment development properties as a mezzanine lender consolidatedunder FIN 46R.  Our investment propertiesare located in Arizona, California, Colorado, Massachusetts, Minnesota,Missouri, Nevada, Texas, Virginia, the Commonwealth of the Bahamas, and London,England.

 

*Three months ended March 31, 2009 as comparedto three months ended March 31, 2008*

 

*Revenues.*  Our total revenues increased by $6.3 millionto $20.5 million for the three months ended March 31, 2009 as compared to$14.2 million for the three months ended March 31, 2008.  The increase in revenues is primarily due to:

 

·                  rentalrevenue of $0.9 million from Crossroads Office Park which was acquired in June 2008;

 

·                  anincrease in rental revenue of $1 million from Northborough Tower, which wasacquired on February 26, 2008 and therefore contributed only one month ofrevenue to the three months ended March 31, 2008; and

 

·                  condominiumsales of $3.8 million as of March 31, 2009 as compared to no condominiumsales as of March 31, 2008.

 

Hotelrevenues for the three months ended March 31, 2009 totaled $0.8 million ascompared to $2 million for the three months ended March 31, 2008, andconsisted of revenues generated by the operations of The Lodge & Spaat Cordillera.  The decrease is primarilydue to a 36.4% decrease in occupancy and a softening of the average daily roomrate at The Lodge & Spa at Cordillera for the three months ended March 31,2009 as compared to the three months ended March 31, 2008.

 

Weclosed on the sale of five condominium units at The Private Residences at TheChase Park Plaza during the three months ended March 31, 2009.  Of the remaining 66 units, 25 units wereunder sales contracts with non-refundable deposits and six units were reservedwith refundable deposits as of March 31, 2009.

 

Weexpect rental revenue to be flat for the remainder of 2009 due to slowinglease-up of available space at our operating properties and moderating rentalrates on rollover of existing leases in the current weak economy.  Condominium sales are expected to increase aswe complete construction of units and close sales at The Private Residences atThe Chase Park Plaza.

 

*PropertyOperating Expenses.* Property operating expenses for the three months ended March 31,2009 were $6.5 million as compared to $5.5 million for the three months ended March 31,2008, and were comprised of operating expenses from our consolidatedproperties.  The increase in propertyoperating expenses was primarily due to the operating expenses incurred by bothCrossroads Office Park, acquired in June 2008, and by Northborough Tower,acquired in late February 2008, totaling $0.6 million.  In addition, property operating expenses forAlexan Voss increased by $0.5 million as this property was still underconstruction and therefore not operational during the first three months of2008.  These increases were partiallyoffset by a decrease in property operating expenses related to Cordillera of$0.5 million due to decreased occupancy levels.

 

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*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 March 31,2009 were $3.8 million.  We did not haveany such sales and related costs for the three months ended March 31,2008.

 

*Interest Expense.*  Interest expense for the threemonths ended March 31, 2009 was approximately $4.1 million as compared toapproximately $2.3 million for the three months ended March 31, 2008 andwas primarily due to the increase in notes payable balances related to ouracquisition of real estate properties and borrowings under our senior securedcredit facility.  Our total notes payableat March 31, 2009 was $428.4 million as compared to $293.5 million at March 31,2008.  In addition, interest costsassociated with our investment properties under development are capitalizedrather than expensed until development is complete and the asset isoperational.  For the three months ended March 31,2009, we capitalized $0.7 million of interest costs for properties underdevelopment compared to $2.8 million of such interest costs for the threemonths ended March 31, 2008.

 

*Real Estate Taxes.*Real estate taxes, net of amounts capitalized, for the three monthsended March 31, 2009 were $2.3 million as compared to $1.5 million for thethree months ended March 31, 2008 and were comprised of real estate taxesfrom each of our consolidated properties. The increase in real estate taxes is primarily due to our increasednumber of consolidated real estate properties. We expect increases in real estate taxes in the future as availablespace at our operating properties is leased-up.

 

*Property/AssetManagement Fees. *Propertyand asset management fees for the three months ended March 31, 2009totaled $1.9 million as compared to $1.4 million for the three months ended March 31,2008 and were comprised of fees incurred by our consolidated properties.  We expect increases in property and assetmanagement fees in the future as available space at our operating properties isleased-up.

 

*General and Administrative Expenses.* General and administrative expenses for thethree months ended March 31, 2009 were $1.3 million as compared to$0.9 million for the three months ended March 31, 2008 and were comprisedof corporate general and administrative expenses, including directors’ andofficers’ insurance premiums, auditing fees, legal fees and otheradministrative expenses.  The increase isprimarily due to a $0.5 million reimbursement to Behringer Harvard OpportunityAdvisors for expenses incurred by them in the first quarter of 2009 forservices provided to us.  There was noreimbursement for such services in the first quarter of 2008.

 

*Depreciation and Amortization Expense. *Depreciationand amortization expense for the three months ended March 31, 2009was $7.8 million as compared to $5.7 million for the three months ended March 31,2008 and was comprised of depreciation and amortization of our consolidatedproperties.  The increase in depreciationand amortization expense was primarily due to the increased number of operatingproperties and investments for the three months ended March 31, 2009,including Alexan Black Mountain, Alexan Voss, Northborough Tower, andCrossroads Office Park, as compared to the three months ended March 31,2008.

 

*Advertising Costs.*  Advertising costs for the three months ended March 31, 2009decreased by $0.3 million to $0.2 million as of March 31, 2009 as comparedto $0.5 million for the three months ended March 31, 2008 and consisted ofmarketing and advertising costs related to The Lodge & Spa atCordillera and to Chase Park Plaza.

 

*Interest Income*.  Interest income was less than $0.1 millionand $1 million for the three months ended March 31, 2009 and 2008,respectively, and was comprised primarily of interest income associated withour notes receivable and funds on deposit with banks.  The decrease in interest income is primarilydue to a decrease in average funds on deposit with banks and lower interestrates.

 

*Equity in Losses of Unconsolidated Joint Ventures.* Equity in losses of unconsolidated joint ventures totaled $0.1 millionfor the three months ended March 31, 2009 as compared to $0.9 million forthe three months ended March 31, 2008, and consisted of net losses of $0.2million for our noncontrolling interests in Royal Island, GrandMarc atWestberry Place, GrandMarc at the Corner, offset by net income of $0.1 millionfrom our noncontrolling interest in the Central Europe Joint Venture for thethree months ended March 31, 2009, as compared to the net losses of ournoncontrolling interests in Royal Island, GrandMarc at Westberry Place, andGrandMarc at the Corner for the three months ended March 31, 2008.

 

*Noncontrolling Interest. *Noncontrolling interest for the three monthsended March 31, 2009 and 2008 was $2.3 million and $1.5 million,respectively and reduced our net loss for each period.  Noncontrolling interest represents the netincome or loss that is not allocable to us from properties that we consolidate.

 

**CashFlow Analysis**

 

Cashflows used in operating activities for the three months ended March 31,2009 were $2.1 million and were comprised primarily of the net loss of $7.7million offset by depreciation and amortization expense of $6.6 million.  During the three months ended March 31,2008, cash flows used by operating activities were $16.9 million and werecomprised

 

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primarilyof the net loss of $3.6 million and a change in accounts receivable of $2.1million, adjusted for depreciation and amortization expense of $4.6 million, anincrease in condominium inventory of $9.4 million and a decrease in accrued andother liabilities of $3.6 million. Operating cash flows are expected to be flatdue to rental revenue stabilizing on our operating properties combined withlower hotel revenues at The Lodge and Spa at Cordillera offset by higher condominiumsales at The Private Residences at The Chase Park Plaza.

 

Cashflows used in investing activities for the three months ended March 31,2009 were $12 million and primarily represent capital expenditures for realestate under development, including capital expenditures of consolidatedborrowers totaling $7.6 million and additions of property and equipment of $1.9million.  During the three months ended March 31,2008, cash flows used in investing activities were $40.4 million and primarilyrepresented acquisitions of real estate totaling $12.4 million, capitalexpenditures for real estate under development, including capital expendituresof consolidated borrowers totaling $20.1 million, and investment in notesreceivable of $6.5 million.

 

Cashflows provided by financing activities for the three months ended March 31,2009 were $10.9 million and were comprised primarily of net borrowings on oursenior secured revolving credit facility of $8.7 million and proceeds fromnotes payable of $5.9 million, offset by payments on notes payable of $3.7million.  Cash flows provided byfinancing activities for the three months ended March 31, 2008 were $25.9million and were comprised primarily of proceeds from notes payable of $16.4million related to development activities at our Chase Park and Frisco Squareproperties and proceeds from mortgages of our consolidated borrowers of $11.1million.

 

**Liquidity and Capital Resources**

 

Ourprincipal demands for funds will be for the payment of costs associated withthe lease-up of available space at our operating properties (includingcommissions, tenant improvements, and capital improvements), for ongoing costsat our development properties, for the payment of operating expenses anddistributions, and for the payment of interest and principal on our outstandingindebtedness.  Generally, cash needs foritems other than costs associated with the lease-up of available space at ouroperating properties (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 increase as available space at ouroperating properties is leased-up, properties under development becomeoperational, and we close on the sale of condominium inventory. For both ourshort-term and long-term liquidity requirements, other potential future sourcesof capital may include proceeds from secured or unsecured financings frombanks or other lenders, proceeds from the sale of our investments, if and whenany are sold, and undistributed funds from operations.  If necessary, wemay use financings or other sources of capital in the event of unforeseensignificant capital expenditures.

 

*Debt Financings*

 

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

 

Ournotes payable increased to $428.4 million at March 31, 2009 from $416.2million at December 31, 2008 primarily as a result of notes payableassociated with property acquisitions. Each of our loans is secured by one or more of our properties.  At March 31, 2009, our notes payableinterest rates ranged from 2.1% to 6.3%, with a weighted average interest rateof 3%.  Generally, our notes payablemature at approximately two to ten years from origination and require paymentsof interest only for approximately two to five years, with all principal andinterest due at maturity.  At March 31,2009, our notes payable had maturity dates that range from April 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 March 31,2009, we believe we were in compliance with each of the debt covenants underour loan agreements.

 

Recently,the U.S. credit markets and the sub-prime residential mortgage market haveexperienced severe dislocations and liquidity disruptions. Sub-prime mortgageloans have experienced increasing rates of delinquency, foreclosure andloss.  Although we have not directly orindirectly invested in sub-prime mortgage loans, these and other related eventscontinue to have a significant impact on the capital markets associated notonly with sub-prime mortgage-backed securities, asset-backed securities andcollateralized debt obligations, but also with the U.S. housing, credit andfinancial markets as a whole.

 

Thecommercial real estate debt markets are currently experiencing volatility as aresult of certain factors, including the tightening of underwriting standardsby lenders and credit rating agencies and the significant inventory of unsoldcollateralized mortgage backed securities in the market.  Credit spreads for major sources of capitalhave widened

 

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significantlyas investors have demanded a higher risk premium.  This is resulting in lenders increasing thecost for debt financing.  Consequently,there is greater uncertainty regarding our ability to access the credit marketsin order to attract financing on reasonable terms. Our ability to borrow fundsto finance future acquisitions or refinance existing debt obligations could beadversely affected by our inability to secure permanent financing on reasonableterms, if at all.

 

Shouldthe overall cost of borrowings increase, either by increases in the index ratesor by increases in lender spreads, we will need to factor such increases intothe economics of our acquisitions, developments and propertycontributions.  This may result in ourinvestment operations generating lower overall economic returns and a reducedlevel of cash flow, which could potentially impact our ability to makedistributions to our stockholders at current levels.  In addition, the recent dislocations in thedebt markets have reduced the amount of capital that is available to financereal estate, which, in turn: (1) leads to a decline in real estate valuesgenerally; (2) slows real estate transaction activity; (3) reducesthe loan to value upon which lenders are willing to extend debt and (4) resultsin difficulty in refinancing debt as it becomes due, all of which mayreasonably be expected to have a material adverse impact on the value of realestate investments and the revenues, income or cash flow from the acquisitionand operations of real properties and mortgage loans.

 

Ifthe current debt market environment persists, we may modify our investmentstrategies in order to seek to optimize our portfolio performance.  Our strategies may include, among otheroptions, limiting or eliminating the use of debt and focusing on thoseinvestments that do not require the use of leverage to meet our portfoliogoals.

 

Oneof our principal long-term liquidity requirements includes the repayment ofmaturing debt, including borrowings under our senior secured creditfacility.  At March 31, 2009, wehave two notes payable on our consolidated balance sheet relating to ourpartnerships in investments which we consolidate scheduled to mature as follows:

 
| **Description**             | ** ** | **Balance at  March 31,  2009** | ** ** | **Scheduled  Maturity** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|-------------------------|------------|
| Frisco Square I, LLC (Land) |       | 25,789                               |       | 07/28/09                |       |
| Alexan Black Mountain       |       | 29,000                               |       | 09/29/09                |       |
|                        |       |                                 |       |                    |       |
| Total debt maturing in 2009 |       | $                                    | 54,789     |                    |       |   |
|                             |            |                                      |            |                         |            |  |

 

In March 2009,we amended and extended our £12.7 million (US$18.3 million) loan facilityagreement with the Royal Bank of Scotland PLC (“RBS”) related to the BecketHouse leasehold interest.  Under theterms of the amended agreement, £1 million of the total principal balanceoutstanding is due and payable on April 30, 2009 (which was paid by thedue date) with the remaining principal balance of £11.7 million plus accruedand unpaid interest due on March 9, 2011, the amended maturity date.  The interest rate under the amended agreementis equal to LIBOR plus 2.5%. Under the terms of the Frisco Square I loanagreement, we have the ability to extend the note for one year uponsatisfaction of certain conditions.  Thenote payable related to Alexan Black Mountain is not our obligation but is theobligation of our mezzanine borrower. We, as the mezzanine lender, are in discussion with the mezzanineborrower and the senior construction lender to restructure and extend theAlexan Black Mountain note payable which matures in September 2009.

 

*CreditFacility*

 

OnFebruary 13, 2008, we entered into a senior secured revolving creditfacility (the “Credit Agreement”) providing for up to $75 million of securedborrowings with Bank of America, as lender and administrative agent, and otherlending institutions that become a party to the Credit Agreement.  The facility under this Credit Agreementallows us to borrow up to $75 million of revolving loans including up to $20million available for issuing letters of credit.  Loans under the credit facility bear interestat an annual rate that is equal to 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.  The credit facility is secured bya first lien on all real property assets in a collateral pool consisting ofseven wholly-owned properties.

 

Thecredit facility may be increased to up to $150 million upon satisfaction ofcertain conditions including additions to the collateral pool.  We have unconditionally guaranteed payment ofthe $75 million senior secured revolving credit facility.  The availability of credit under the seniorsecured credit facility is limited by the terms of the Credit Agreement.  As of March 31, 2009, the maximumavailability under the senior secured credit facility was $69.3 million and theoutstanding balance was $56.7 million. The proceeds of the senior secured credit facility were used to fundongoing costs at our development properties, to fund a portion of ouracquisition of the Central Europe Joint Venture, and for general corporatepurposes.

 

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**Fundsfrom Operations**

 

Fundsfrom operations (“FFO”) is a non-GAAP financial measure that is widelyrecognized as a measure of REIT operating performance.  FFO is defined by the National Association ofReal Estate Investment Trusts as net income (loss), computed in accordance withGAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses)from sales of property, plus depreciation and amortization on real estateassets, and after adjustments for unconsolidated partnerships, joint ventures,and subsidiaries.  We believe that FFO ishelpful to investors and our management as a measure of operating performanceof our operating assets because it excludes depreciation and amortization,gains and losses from property dispositions, and extraordinary items, and as aresult, when compared year to year, reflects the impact on operations fromtrends in occupancy rates, rental rates, operating costs, developmentactivities, general and administrative expenses, and interest costs, which isnot immediately apparent from net income. Historical cost accounting for real estate assets in accordance withGAAP implicitly assumes that the value of real estate diminishes predictablyover time.  Since real estate values havehistorically risen or fallen with market conditions, many industry investorsand analysts have considered the presentation of operating results for realestate companies that use historical cost accounting alone to beinsufficient.  As a result, ourmanagement believes that the use of FFO, together with the required GAAPpresentations, provides a supplemental understanding of our performance and amore informed and appropriate basis on which to make decisions involvingoperating, financing and investing activities. Factors that impact FFO include start-up costs, fixed costs, delay inbuying assets, lower yields on cash held in accounts pending investment, incomefrom portfolio properties and other portfolio assets, interest rates onacquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss) oras an indication of our liquidity, nor is it indicative of funds available tofund our cash needs, including our ability to make distributions.

 

Ourcalculation of FFO for the three months ended March 31, 2009 and 2008 ispresented below (amounts in thousands, except per share amounts):

 
| ** **                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                       | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                                             |       |                                  |       |   |   |
| Net Loss                                                         |       | $                                     | (7,653     | ) | $ | (3,627 | ) |
| Net loss attributable to noncontrolling  interest                |       | 2,321                                 |       | 1,450 |   |
| Adjustments for:                                                 |       |                                  |       |   |   |
| Real estate depreciation (1)                                     |       | 6,314                                 |       | 3,999 |   |
| Real estate amortization (1)                                     |       | 2,639                                 |       | 2,165 |   |
| Noncontrolling interest  depreciation & amortization(2) |       | (1,001                                | )          | (511 | ) |
|                                                             |       |                                  |       |   |   |
| Funds from operations (FFO)                                      |       | $                                     | 2,620      |   | $ | 3,476 |   |
|                                                             |       |                                  |       |   |   |
| GAAP weighted average shares:                                    |       |                                  |       |   |   |
| Basic and diluted                                                |       | 55,032                                |       | 54,213 |   |
| FFO per share                                                    |       | $                                     | 0.05       |   | $ | 0.06 |   |

 

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(1) This represents the depreciation and amortization expense ofthe properties we consolidate and our share of depreciation and amortizationexpense of the properties which we account for under the equity method ofaccounting.

(2) This reflects the noncontrolling interest adjustment for thethird-party partners’ proportionate share of the real estate depreciation andamortization.

 

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

 

·                  Straight-line rental revenue of $0.5million and $1.4 million was recognized for the three months ended March 31,2009 and 2008, respectively.

 

·                  Amortization of intangible leaseassets and liabilities was recognized as a net increase to rental revenues $1.2million for both of the three months ended March 31, 2009 and 2008.

 

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·                  Amortization of intangible propertytax abatement assets was recognized as an increase to real estate tax expenseof $0.1 million for both of the three months ended March 31, 2009 and2008.

 

·                  Bad debt expense of $0.2 million and$0.1 million was recognized for the three months ended March 31, 2009 and2008, respectively.

 

·                  Amortization of deferred financingcosts of $0.8 million and $0.3 million was recognized as interest expense formortgages and notes payable for the three months ended March 31, 2009 and2008, respectively; and $0.2 million and $0.1 million was recognized as areduction of interest income for the three months ended March 31, 2009 and2008, respectively.

 

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

 

**NetOperating Income**

 

Netoperating income (“NOI”) is a non-GAAP financial measure that is defined as netincome (loss), computed in accordance with GAAP, generated from propertiesbefore interest expense, asset management fees, interest income, general andadministrative expenses, depreciation, amortization, and the sale of assets.  We believe that NOI provides an accuratemeasure of the operating performance of our operating assets because NOIreflects the operating performance of our properties and excludes certain itemsthat are not associated with management of the properties.  To facilitate understanding of this financialmeasure, a reconciliation of net operating income to net income (loss) has beenprovided in accordance with GAAP.

 

Ourcalculation of NOI for the three months ended March 31, 2009 and 2008 ispresented below:

 
| ** **                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------|------------|---------------------------------------|------------|
| ** **                             | ** ** | **2009**                              | ** ** | **2008** | ** ** |
|                                   |       |                                  |       |   |   |
| Revenues                               |       | $                                     | 20,470     |   | $ | 14,174 |   |
|                                   |       |                                  |       |   |   |
| Operating expenses:                    |       |                                  |       |   |   |
| Property operating expenses            |       | 6,505                                 |       | 5,526 |   |
| Real estate taxes                      |       | 2,310                                 |       | 1,545 |   |
| Cost of condominium sales              |       | 3,842                                 |       | — |   |
| Property management fees               |       | 600                                   |       | 514 |   |
| Total operating expenses               |       | 13,257                                |       | 7,585 |   |
|                                   |       |                                  |       |   |   |
| Net operating income                   |       | $                                     | 7,213      |   | $ | 6,589 |   |
|                                   |       |                                  |       |   |   |
| Reconciliation to Net Loss             |       |                                  |       |   |   |
|                                   |       |                                  |       |   |   |
| Net operating income                   |       | $                                     | 7,213      |   | $ | 6,589 |   |
|                                   |       |                                  |       |   |   |
| Less:                                  |       |                                  |       |   |   |
| Depreciation and amortization          |       | (7,763                                | )          | (5,655 | ) |
| General and administrative expense     |       | (1,316                                | )          | (917 | ) |
| Interest expense                       |       | (4,134                                | )          | (2,271 | ) |
| Asset management fees                  |       | (1,338                                | )          | (932 | ) |
| Advertising costs                      |       | (182                                  | )          | (515 | ) |
| Provision for income tax               |       | (51                                   | )          | (47 | ) |
| Equity in losses on unconsolidated JVs |       | (125                                  | )          | (860 | ) |
| Add:                                   |       |                                  |       |   |   |
| Interest income                        |       | 43                                    |       | 981 |   |
|                                   |       |                                  |       |   |   |
| Net loss                               |       | $                                     | (7,653     | ) | $ | (3,627 | ) |

 

**Distributions**

 

Distributionsare authorized at the discretion of our board of directors based on itsanalysis of our performance over the previous period, expectations ofperformance for future periods, including actual and anticipated operating cashflow, changes in market capitalization rates for investments suitable for ourportfolio, capital expenditure needs, general financial condition, and otherfactors that our board deems relevant. The board’s decision will be influenced, in substantial part, by its

 

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obligationto ensure that we maintain our status as a REIT.  In light of the pervasive and fundamentaldisruptions in the global financial and real estate markets, we cannot provideassurance that we will be able to achieve expected cash flows necessary tocontinue to pay distributions at any particular level, or at all.  If the current economic conditions continue,our board could determine to reduce our current distribution rate or ceasepaying distributions in order to conserve cash.

 

Thedistributions paid during the three months ended March 31, 2009 were $4.1million.  For the three months ended March 31,2009, cash flow used in operating activities was $2.1 million.  Accordingly, for the three months ended March 31,2009, distributions were funded from borrowings on our senior secured creditfacility.

 

Thefollowing are the distributions paid and declared for the three months ended March 31,2009 and 2008.

 
| ** **     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **       | ** ** | **Total**    | ** ** | **Declared**  | ** ** |
|----------------|------------|------------------------|------------|-------------------|------------|------------------|------------|--------------|------------|---------------|------------|
| ** **     | ** ** | **Distributions Paid** | ** ** | **Distributions** | ** ** | **Distribution** | ** ** |
| **2009**       | ** ** | **Cash**               | ** ** | **DRIP**          | ** ** | **Total**        | ** ** | **Declared** | ** ** | **Per Share** | ** ** |
| First  Quarter |       | $                      | 1,048      |              | $          | 3,015            |       | $            | 4,063      |          | $          | 4,070 |   | $ | 0.07 |   |
|                |            |                        |            |                   |            |                  |            |              |            |               |            |  |  |  |  |  |

 
| ** **     | ** ** | ** **             | ** ** | ** **        | ** ** | ** **       | ** ** | **Total**    | ** ** | **Declared**  | ** ** |
|----------------|------------|------------------------|------------|-------------------|------------|------------------|------------|--------------|------------|---------------|------------|
| ** **     | ** ** | **Distributions Paid** | ** ** | **Distributions** | ** ** | **Distribution** | ** ** |
| **2008**       | ** ** | **Cash**               | ** ** | **DRIP**          | ** ** | **Total**        | ** ** | **Declared** | ** ** | **Per Share** | ** ** |
| First  Quarter |       | $                      | 964        |              | $          | 3,079            |       | $            | 4,043      |          | $          | 4,055 |   | $ | 0.07 |   |
|                |            |                        |            |                   |            |                  |            |              |            |               |            |  |  |  |  |  |

 

Distributionsdeclared per share assumes the share was issued and outstanding each day duringthe period and is based on a declared daily distribution for the period of$0.0008219 per share per day.  Each dayduring the first quarter was a record date for distributions.

 

Over the long term, we expect that more of ourdistributions will be paid from cash flow from operations (except with respect todistributions related to sales of our assets). However, operating performance cannot be accurately predicted due tonumerous factors, including the financial performance of our investments in thecurrent real estate environment, the types and mix of investments in ourportfolio and the accounting treatment of our investments in accordance withour accounting policies.  Asa result, future distributions declared and paid may continue to exceed cashflow from operating activities.

 

**Share Redemption Plan**

 

Ourboard of directors has authorized a share redemption program for stockholderswho have held their shares for more than one year.  On March 30, 2009, our board ofdirectors suspended, until further notice, redemptions other than thosesubmitted in respect of a stockholder’s death, disability or need for long-termcare.  On May 11, 2009, our board ofdirectors approved certain amendments to the program which are described inmore detail in Part II, Item 2 of this quarterly report.

 

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

** **

*Foreign Currency Exchange Risk*

 

Forour net investments in foreign real estate properties, we use British pound andEuro foreign currency forward exchange contracts and foreign currency put/calloptions to eliminate the impact of foreign currency movements on our financialposition.  At March 31, 2009, ourforeign currency derivative contracts were reported at their fair value of  $1 million within prepaid expenses and otherassets in our consolidated balance sheet. A 10% increase in the respective forward foreign currency - US dollarexchange rate would result in a $0.3 million decrease in fair value.  A 10% decrease in the respective forwardforeign currency - US dollar exchange rate would result in a $0.6 millionincrease in fair value.

 

Wemaintain approximately $0.3 million in Euro-denominated accounts at Europeanfinancial institutions.  Accordingly, weare not materially exposed to any significant foreign currency fluctuationsrelated to these accounts.  We do notenter into derivatives for trading or speculative purposes, nor do we maintainany market risk sensitive instruments for trading or speculative purposes.

 

*Interest Rate Risk*

 

Wemay be exposed to interest rate changes primarily as a result of long-term debtused to acquire properties 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

 

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continuallyidentifying and monitoring changes in interest rate exposures that mayadversely impact expected future cash flows and by evaluating hedgingopportunities.  We may enter intoderivative financial instruments such as options, forwards, interest rateswaps, caps, or floors to mitigate our interest rate risk on a relatedfinancial instrument or to effectively lock the interest rate portion of ourvariable rate debt.  Of our $428.4million in notes payable at March 31, 2009, $388.6 million representeddebt subject to variable interest rates, which included the mortgages payableof borrowers we consolidated under FIN 46R. If our variable interest rates increased 100 basis points, we estimatethat total annual interest cost, including interest expensed, interestcapitalized, and the effects of the interest rate caps and swaps, wouldincrease by $2.7 million.

 

AtMarch 31, 2009, interest rate caps used to mitigate our interest rate riskclassified as assets were reported at their combined fair value of less than$0.1 million within prepaid expenses and other assets.  Interest rate swaps classified as liabilitieswere reported at their combined fair values of $5.2 million in other liabilitiesat March 31, 2009.  A 100 basispoint decrease in interest rates would result in a $1.6 million net decrease inthe fair value of our interest rate caps and swaps.  A 100 basis point increase in interest rateswould result in a $1.9 million net increase in the fair value of our interestrate caps and swaps.

 

**Item 4T.**   Controls and Procedures.

** **

*Evaluation of Disclosure Controls and Procedures*

 

Asrequired by Rule 13a-15(b) and Rule 15d-15(b) under theExchange Act, our management, including our Chief Executive Officer and ChiefFinancial Officer, evaluated, as of March 31, 2009, the effectiveness ofour disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) andRule 15d-15(e). Based on that evaluation, our Chief Executive Officer andChief Financial Officer concluded that our disclosure controls and procedureswere effective as of March 31, 2009, to provide reasonable assurance thatinformation required to be disclosed by us in this report is recorded,processed, summarized and reported within the time periods specified by the rules andforms of the Exchange Act and is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate to allow timely decisions regarding required disclosures.

 

Webelieve, however, that a controls system, no matter how well designed andoperated, cannot provide absolute assurance that the objectives of the controlssystems are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud or error, if any, within acompany have been detected.

 

*Changes in Internal Control over Financial Reporting*

 

Therehas been no change in internal control over financial reporting that occurredduring the quarter ended March 31, 2009 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

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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.**                                                  RiskFactors.

### ** **

The following risk factors update and should be readin conjunction with the risk factors contained in the “Risk Factors” sectionset forth in our Annual Report on Form 10-K for the year ended December 31,2008.

 

### ***Because we rely on affiliates ofBehringer Harvard Holdings for the provision of advisory and propertymanagement services, if Behringer Harvard Holdings is unable to meet itsobligations we may be required to find alternative providers of these services,which could result in a significant and costly disruption of our business.***

### ** **

Behringer HarvardHoldings, through one or more of its subsidiaries, owns and controls ouradvisor and our property manager. The operations of our advisor and ourproperty manager rely substantially on Behringer Harvard Holdings. In light ofthe common ownership of these entities and their reliance on Behringer HarvardHoldings, we consider the financial condition of Behringer Harvard Holdingswhen assessing the financial condition of our advisor and our propertymanager.  Behringer Harvard Holdings islargely dependent on fee income from its sponsored real estate programs.  The current real estate market disruptionscould adversely affect the amount of such fee income.  In the event that Behringer Harvard Holdingsbecomes unable to meet its obligations as they become due, we might be requiredto find alternative service providers, which could result in a significantdisruption of our business and would likely adversely affect the value of yourinvestment in us.

 

*From time to time, we may rely on financialinstitutions for debt financing and, as a result, may be adversely affected bythe failure of a financial institution to honor itslending obligations.*

 

From time to time, we mayrely on financial institutions for financing acquisitions, for financingdevelopment projects in which we invest, for funding credit facilities used forgeneral corporate purposes or for other funding needs.  As a result of the recent and continuingeconomic slowdown and financial market disruptions, certain financialinstitutions have become insolvent or been served with cease and desist ordersor other administration actions by federal bank regulators due to a lack ofrequired capital.  While not presently anissue for us, some of these financial institutions may become insolvent, enterinto receivership or otherwise become unable to fulfill or be prevented fromfulfilling their respective financial obligations to their borrowers.  Should a financial institution on which werely fail to meet its funding obligations to us or to an entity in which wehave invested, our liquidity or the liquidity of the entity in which we haveinvested could be materially adversely affected, we could become unable to takeadvantage of acquisition opportunities and we could suffer losses ondevelopment projects or other investments that require additional capital.  Furthermore, if the loan is made to an entityin which we have invested, such as a development project, and we and ouraffiliates are not parties to the loan, we will be unable to take direct actionagainst the financial institution to compel it to honor its financialobligations.  In addition, if a financialinstitution on which we rely becomes insolvent or enters into receivership, orif other regulatory action is taken against it, we may not be able to enforceany contractual rights we would otherwise have against it.

 

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

 

**Public Offering 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.

 

**ShareRedemption Program**

 

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

 

On May 11,2009, our board approved certain amendments to the program.  Under the amended and restated shareredemption program, the per share redemption price will equal:

 

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

 

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

 

“Original share price” means the average price pershare the original purchaser or purchasers of shares paid to us for all of hisor her shares (as adjusted for any stock dividends, combinations, splits,recapitalizations and the like with respect to our common stock).

 

Notwithstanding the redemption prices set forth above,our board of directors may determine, whether pursuant to formulae or processesapproved or set by our board, the redemption price of the shares, which maydiffer between exceptional and other redemptions; provided, however, that wemust provide at least 30 days’ notice to stockholders before applying this newprice determined by the board.

 

Wewill not redeem, during any twelve-month period, more than 5% of the weightedaverage number of shares outstanding during the twelve-month period immediatelyprior to the date of redemption. Further, our board may, from time to time, inits sole discretion, limit the funds that we use to redeem shares; provided,that in no event may the funds used for redemption during any period exceed theamount of gross proceeds generated from the sale of shares through the DRIPduring that period.  Our board 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 exceptional redemptionsor other exigent circumstances such as bankruptcy, a mandatory distributionrequirement under a stockholder’s IRA or with respect to shares purchased underor through the DRIP, (2) reject any request for redemption, (3) changethe purchase price for redemptions, (4) limit the funds to be used forredemptions or otherwise change the limitations on redemption or (5) amend,suspend (in whole or in part) or terminate the program.

 

Theinformation set forth above with respect to the redemption program does notpurport to be complete in scope and is qualified in its entirety by the fulltext of the redemption program, which is being filed as Exhibit 99.1 andis incorporated into this report by reference.

 

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Duringthe quarter ended March 31, 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** | ** ** |
|----------|------------|--------------------------------------|------------|-----------------------------------|------------|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|
| January  |       | —                               |       | $                                 | —     |                                                                                           | —     |                                                                                     |       |   |
| February |       | 40,692                               |       | $                                 | 9.97       |                                                                                           | 40,692     |                                                                                     | (1)        |   |
| March    |       | —                               |       | $                                 | —     |                                                                                           | —     |                                                                                     |       |   |
|     |       |                                 |       |                              |       |                                                                                           |       |                                                                                     |       |
|     |       | 40,692                               |       | $                                 | 9.97       |                                                                                           | 40,692     |                                                                                     | (1)        |   |

 

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(1) Themaximum number of shares that may be purchased under the program is limited to5% of the weighted average number of shares outstanding during the twelve-monthperiod immediately prior to the date of redemption.  In addition, our board of directors willdetermine whether we have sufficient cash from operations to repurchase shares,and such purchases will generally be limited to proceeds from our distributionreinvestment plan plus 1% of operating cash flow for the previous fiscal year(to the extent positive).

 

**Item 3.****                                                           DefaultsUpon Senior Securities.**

 

None.

 

### **Item 4.**                                                           Submissionof Matters to a Vote of Security Holders.

### ** **

None.

 

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

### ** **

**Adoptionof Valuation Policy**

 

OnMay 11, 2009, our board of directors adopted a valuation policy in respectof estimating the per share value of our common stock in order to assistfiduciaries in discharging their obligations under ERISA reporting requirementsand to assist broker-dealers in connection with their obligations underapplicable FINRA Rules with respect to customer account statements.

 

Underthe valuation policy, we are required to provide to our stockholders a pershare estimated value of our common stock on a periodic basis, generallyannually.  Until 18 months have passedwithout a sale in an offering of our common stock (or other securities fromwhich the board believes the value of a share of common stock can beestimated), not including any offering related to a distribution reinvestmentplan, employee benefit plan or the redemption of interests in our operatingpartnership, we generally will use the gross offering price of a share of thecommon stock in our most recent offering as the per share estimated valuethereof or, with respect to an offering of other securities from which thevalue of a share of common stock can be estimated, the value derived from thegross offering price of the other security as the per share estimated value ofthe common stock.  No later than 18months after the last sale in an offering, we will disclose an estimated pershare value that is not based solely on the offering price of securities insuch offering.  This estimate will bedetermined by our board of directors, or a committee thereof, afterconsultation with Behringer Opportunity Advisors I, or if we are no longeradministered by Behringer Opportunity Advisors I, our officers, and employees, subjectto the restrictions and limitations set forth in the valuation policy.  After first publishing an estimate by theboard of directors within 18 months after an offering, we will repeat theprocess of estimating share value of the common stock periodically thereafter,generally annually.

 

The information set forth above with respect to thevaluation policy does not purport to be complete in scope and is qualified inits entirety by the full text of the valuation policy, which is being filed as Exhibit 99.2and is incorporated into this report by reference.

 

**Adoption of Amendment to Second Amended and RestatedDistribution Reinvestment Plan**

 

OnMay 11, 2009, our board of directors adopted the First Amendment to theDRIP (the “Amendment to the DRIP”).  TheAmendment to the DRIP clarifies the prices at which participants may invest inadditional shares of our common stock. Prior to the termination of our current public offering of shares of ourcommon stock pursuant to the DRIP,

 

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participantsmay invest their distributions in shares of our common stock at a price equalto 95% of the most recently disclosed estimated value per share as determinedin accordance with our valuation policy, as amended from time to time.

 

Further,pursuant to the Amendment to the DRIP, regardless of the pricing determined asdescribed above our board of directors also may determine, from time to time,in its sole discretion, the price at which distributions may be reinvested inshares of our common stock; provided that if our board of directors makes suchdetermination, we will deliver a notice regarding the new price to eachparticipant at least 30 days prior to the effective date of the new price.

 

In all other material respects, the terms of the DRIP remainunchanged.  The information set forthabove with respect to the Amendment to the DRIP does not purport to be completein scope and is qualified in its entirety by the full text of the Amendment tothe DRIP, which is being filed as Exhibit 4.2 and is incorporated into this 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:  May 15, 2009 | By:                                                 | /s/  Gary S. Bresky |
|                      | Gary  S. Bresky                                     |
|                      | Chief Financial Officer                             |
|                      | (Principal Financial Officer)                       |

 

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**Index to Exhibits**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                              |
|-------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                    |       |                                                                                                                                                                                                                                                                         |
| 3.1                     |       | Second Articles of Amendment and Restatement of the Registrant  (previously filed in and incorporated by reference to Form 8-K, filed on  July 29, 2008)                                                                                                           |
|                    |       |                                                                                                                                                                                                                                                                         |
| 3.2                     |       | Bylaws of the Registrant (previously filed in and incorporated by  reference to Registrant’s Registration Statement on Form S-11,  Commission File No. 333-120847, filed on November 30, 2004)                                                           |
|                    |       |                                                                                                                                                                                                                                                                         |
| 3.2(a)                  |       | Amendment to Bylaws of the Registrant (previously filed in and  incorporated by reference to Form 8-K filed on February 24, 2006)                                                                                                                                  |
|                    |       |                                                                                                                                                                                                                                                                         |
| 4.1                     |       | Second  Amended and Restated Distribution Reinvestment Plan (previously filed in and  incorporated by reference to Exhibit A to prospectus contained in  Registration Statement on Form S-3, Commission File No. 333-146965,  filed on October 26, 2007) |
|                    |       |                                                                                                                                                                                                                                                                         |
| 4.2*                    |       | First  Amendment to the Second Amended and Restated Distribution Reinvestment Plan                                                                                                                                                                                           |
|                    |       |                                                                                                                                                                                                                                                                         |
| 31.1*                   |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                         |
| 31.2*                   |       | Rule 13a-14(a)/15d-14(a) Certification                                                                                                                                                                                                                             |
|                    |       |                                                                                                                                                                                                                                                                         |
| 32.1*(1)                |       | Section 1350  Certifications (furnished herewith)                                                                                                                                                                                                                       |
|                    |       |                                                                                                                                                                                                                                                                         |
| 99.1*                   |       | Second  Amended and Restated Share Redemption Program                                                                                                                                                                                                                        |
|                    |       |                                                                                                                                                                                                                                                                         |
| 99.2*                   |       | Policy  for Estimation of Common Stock Value                                                                                                                                                                                                                                 |

 

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*filedherewith

 

(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 specifically incorporatesit by reference.

 

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