**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

| **[Mark One]**                                         |
|--------------------------------------------------------|
| ý                                                 | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                                   |   |   |
| **For the quarterly period ended March 31, 2006** |
|                                                   |   |   |
| **OR**                                                 |
|                                                   |   |   |
| o                                                      | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |

 

**For the transition period from                         to                         **

 

**CommissionFile Number: 000-51961**

 

**BehringerHarvard Opportunity REIT I, Inc.**

(Exact Name of Registrant asSpecified in Its Charter)

 

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

 

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

(Address of Principal ExecutiveOffices)

(Zip Code)

 

**Registrant’sTelephone Number, Including Area Code: (866) 655-1620**

 

Indicate by check mark whether the Registrant:  (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the Registrant wasrequired to file such reports) and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý  No o

 

Indicate by check mark whether the Registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer.

See definition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (check one):

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer ý |
|---------------------------|--------|---------------------|--------|------------------------------|

 

Indicate by check mark whether the Registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes o   No ý

 

As of May 1, 2006, Behringer Harvard Opportunity REIT I, Inc.had 7,322,903****shares of commonstock, $.0001 par value, outstanding.

 

 

 

**BEHRINGERHARVARD OPPORTUNITY REIT I, INC.**

**FORM 10-Q**

**QuarterEnded March 31, 2006**

 
| ** **    | ** **                                                                                                                                      | **Page**   |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|          |                                                                                                                                            |       |
|          | **PART I  FINANCIAL INFORMATION**                                                                                                          |       |
|          | ** **                                                                                                                                      |       |
| **Item 1.**   | **Financial Statements (Unaudited)**                                                                                                            |       |
| ** **    | ** **                                                                                                                                      |       |
|          | Consolidated Balance  Sheets as of March 31, 2006 and December 31, 2005                                                               | 3          |
|          |                                                                                                                                            |       |
|          | Consolidated  Statements of Operations for the three months ended March 31, 2006  and 2005                                            | 4          |
|          |                                                                                                                                            |       |
|          | Consolidated  Statements of Stockholders’ Equity for the Year ended  December 31, 2005 and the three months ended March 31, 2006 | 5          |
|          |                                                                                                                                            |       |
|          | Consolidated  Statements of Cash Flows for the three months ended  March 31, 2006 and 2005                                                 | 6          |
|          |                                                                                                                                            |       |
|          | Notes to  Consolidated Financial Statements                                                                                                     | 7          |
|          |                                                                                                                                            |       |
| **Item 2.**   | **Management’s Discussion and  Analysis of Financial Condition and  Results of Operations**                                                | **17**     |
| ** **    | ** **                                                                                                                                      | ** ** |
| **Item 3.**   | **Quantitative and Qualitative  Disclosures About Market Risk**                                                                                 | **21**     |
| ** **    | ** **                                                                                                                                      | ** ** |
| **Item 4.**   | **Controls  and Procedures**                                                                                                                    | **21**     |
|          |                                                                                                                                            |       |
|          | **PART II  OTHER INFORMATION**                                                                                                             |       |
|          |                                                                                                                                            |       |
|          |                                                                                                                                            |       |
| **Item 1.**   | **Legal Proceedings**                                                                                                                           | 21         |
|          |                                                                                                                                            |       |
| **Item 1A.**  | **Risk Factors**                                                                                                                                | 21         |
|          |                                                                                                                                            |       |
| **Item 2.**   | **Unregistered Sales of Equity  Securities and Use of Proceeds**                                                                                | 22         |
|          |                                                                                                                                            |       |
| **Item 3.**   | **Defaults Upon Senior  Securities**                                                                                                            | 22         |
|          |                                                                                                                                            |       |
| **Item 4.**   | **Submission of Matters to a  Vote of Security Holders**                                                                                        | 22         |
|          |                                                                                                                                            |       |
| **Item 5.**   | **Other Information**                                                                                                                           | 22         |
|          |                                                                                                                                            |       |
| **Item 6.**   | **Exhibits**                                                                                                                                    | 22         |
|          |                                                                                                                                            |       |
| **Signature** | 23                                                                                                                                              |

 

----

 

**PART I**

**FINANCIAL INFORMATION**

 

**Item 1.****           Financial Statements.**

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Consolidated Balance Sheets**

**(Unaudited)**

 
| ** **                                                                                                                                                                                       | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                       | ** ** | **2006**           | ** ** | **2005**              | ** ** |
|                                                                                                                                                                                             |       |               |       |                  |       |
| **Assets**                                                                                                                                                                                       | ** ** | ** **         | ** ** | ** **            | ** ** |
| **Real  estate**                                                                                                                                                                                 | ** ** | ** **         | ** ** | ** **            | ** ** |
| Land                                                                                                                                                                                             |       | $                  | 975,975    |                  | $          | — |   |
| Building,  net                                                                                                                                                                                   |       | 7,146,334          |       | —                |       |
| **Total  real estate**                                                                                                                                                                           |       | 8,122,309          |       | —                |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| Cash  and cash equivalents                                                                                                                                                                       |       | 45,182,969         |       | 18,560,885            |       |
| Restricted  cash                                                                                                                                                                                 |       | 361,160            |       | 460,470               |       |
| Accounts  receivable                                                                                                                                                                             |       | 112,899            |       | —                |       |
| Prepaid  expenses and other assets                                                                                                                                                               |       | 63,948             |       | 85,977                |       |
| Lease  intangibles, net                                                                                                                                                                          |       | 1,205,797          |       | —                |       |
| **Total  assets**                                                                                                                                                                                |       | $                  | 55,049,082 |                  | $          | 19,107,332 |   |
|                                                                                                                                                                                             |       |               |       |                  |       |
| **Liabilities  and stockholders’ equity**                                                                                                                                                   | ** ** | ** **         | ** ** | ** **            | ** ** |
| **Liabilities**                                                                                                                                                                                  | ** ** | ** **         | ** ** | ** **            | ** ** |
| Payables  to affiliates                                                                                                                                                                          |       | $                  | 1,994,061  |                  | $          | 2,158,017 |   |
| Acquired  below market leases, net                                                                                                                                                               |       | 249,848            |       | —                |       |
| Accrued  liabilities                                                                                                                                                                             |       | 308,138            |       | 88,673                |       |
| Subscriptions  for common stock                                                                                                                                                                  |       | 324,294            |       | 446,983               |       |
| **Total  liabilities**                                                                                                                                                                           |       | 2,876,341          |       | 2,693,673             |       |
|                                                                                                                                                                                             |       |               |       |                  |       |
| **Commitments  and contingencies**                                                                                                                                                               | ** ** | ** **         | ** ** | ** **            | ** ** |
|                                                                                                                                                                                             |       |               |       |                  |       |
| **Stockholders’  equity**                                                                                                                                                                   | ** ** | ** **         | ** ** | ** **            | ** ** |
| Preferred  stock, $.0001 par value per share; 50,000,000 shares authorized, none  outstanding                                                                                                    |       | —             |       | —                |       |
| Convertible  stock, $.0001 par value per share; 1,000 shares authorized, 1,000 shares  issued and outstanding                                                                                    |       | —             |       | —                |       |
| Common  stock, $.0001 par value per share; 350,000,000 shares authorized, 6,024,517  and 2,034,005 share issued and outstanding at March 31, 2006 and December 31,  2005, respectively |       | 602                |       | 203                   |       |
| Additional  paid-in capital                                                                                                                                                                      |       | 52,143,788         |       | 16,516,376            |       |
| Retained  earnings (deficit)                                                                                                                                                                     |       | 28,351             |       | (102,920              | )          |
| **Total  stockholders’ equity**                                                                                                                                                             |       | 52,172,741         |       | 16,413,659            |       |
| **Total  liabilities and stockholders’ equity**                                                                                                                                             |       | $                  | 55,049,082 |                  | $          | 19,107,332 |   |

 

*See Notesto Consolidated Financial Statements.*

 

3

----

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Consolidated Statements of Operations**

**(Unaudited)**

 
| ** **                                                 | ** ** | **Three months**        | ** ** | **Three months**        | ** ** |
|------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                 | ** ** | **ended**                    | ** ** | **ended**                    | ** ** |
| ** **                                                 | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
| ** **                                                 | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| **Rental revenue**                                         |       | $                            | 119,043    |                         | $          | — |   |
|                                                       |       |                         |       |                         |       |
| **Expenses**                                               | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Property  operating expense                                |       | 21,724                       |       | —                       |       |
| Real  estate taxes                                         |       | 20,984                       |       | —                       |       |
| Property  management fees                                  |       | 4,905                        |       | —                       |       |
| Asset  management fees                                     |       | 5,495                        |       | —                       |       |
| General  and administrative                                |       | 160,158                      |       | —                       |       |
| Depreciation  and amortization                             |       | 42,824                       |       | —                       |       |
| **Total expenses**                                         |       | 256,090                      |       | —                       |       |
|                                                       |       |                         |       |                         |       |
| Interest income                                            |       | 268,318                      |       | 585                          |       |
|                                                       |       |                         |       |                         |       |
| **Net income**                                             |       | $                            | 131,271    |                         | $          | 585 |   |
|                                                       |       |                         |       |                         |       |
| **Basic and diluted weighted  average shares outstanding** |       | 3,764,889                    |       | 21,739                       |       |
|                                                       |       |                         |       |                         |       |
| **Basic and diluted income per  share**                    |       | $                            | 0.03       |                         | $          | 0.03 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

4

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**BehringerHarvard Opportunity REIT I, Inc.**

**Consolidated Statements of Stockholders’ Equity**

**(Unaudited)**

 
| ** **                         | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional**             | ** ** | **Retained**   | ** ** | **Total**                 | ** ** |
|------------------------------------|------------|----------------------------|------------|-----------------------|------------|----------------------------|------------|----------------|------------|---------------------------|------------|
| ** **                         | ** ** | **Number of  Shares** | ** ** | **Par  Value**        | ** ** | **Number of  Shares** | ** ** | **Par  Value** | ** ** | **Paid In  Capital** | ** ** | **Earnings  (Deficit)** | ** ** | **Stockholders’  Equity** | ** ** |
|                               |       |                       |       |                  |       |                       |       |           |       |                      |       |   |   |   |   |
| Balance  at January 1, 2005   |       | 1,000                      |       | $                     | —     |                       | 21,739     |           | $          | 2                         |       | $ | 200,998 |   | $ | 313 |   | $ | 201,313 |   |
|                               |       |                       |       |                  |       |                       |       |           |       |                      |       |   |   |   |   |
| Issuance  of common stock, net     |       | —                     |       | —                |       | 2,012,266                  |       | 201            |       | 16,315,378                |       | — |   | 16,315,579 |   |
|                               |       |                       |       |                  |       |                       |       |           |       |                      |       |   |   |   |   |
| Net  loss                          |       |                       |       |                  |       |                       |       |           |       |                      |       | (103,233 | ) | (103,233 | ) |
|                               |       |                       |       |                  |       |                       |       |           |       |                      |       |   |   |   |   |
| Balance  at December 31, 2005 |       | 1,000                      |       | —                |       | 2,034,005                  |       | 203            |       | 16,516,376                |       | (102,920 | ) | 16,413,659 |   |
|                               |       |                       |       |                  |       |                       |       |           |       |                      |       |   |   |   |   |
| Issuance  of common stock, net     |       | —                     |       | —                |       | 3,990,512                  |       | 399            |       | 35,627,412                |       | — |   | 35,627,811 |   |
|                               |       |                       |       |                  |       |                       |       |           |       |                      |       |   |   |   |   |
| Net  income                        |       |                       |       |                  |       |                       |       |           |       |                      |       | 131,271 |   | 131,271 |   |
|                               |       |                       |       |                  |       |                       |       |           |       |                      |       |   |   |   |   |
| Balance  at March 31, 2006    |       | 1,000                      |       | $                     | —     |                       | 6,024,517  |           | $          | 602                       |       | $ | 52,143,788 |   | $ | 28,351 |   | $ | 52,172,741 |   |
|                                    |            |                            |            |                       |            |                            |            |                |            |                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

*See Notes to Consolidated FinancialStatements.*

 

5

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**BehringerHarvard Opportunity REIT I, Inc.**

**Consolidated Statements of Cash Flows**

**(Unaudited)**

 
| ** **                                                                               | ** ** | **Three months**        | ** ** | **Three months**        | ** ** |
|------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                               | ** ** | **ended**                    | ** ** | **ended**                    | ** ** |
| ** **                                                                               | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
|                                                                                     |       |                         |       |                         |       |
| **Cash flows from operating  activities:**                                               | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Net  income                                                                              |       | $                            | 131,271    |                         | $          | 525 |   |
| Adjustments  to reconcile net income to net cash flows provided by operating activities: |       |                         |       |                         |       |
| Depreciation  and amortization                                                           |       | 36,680                       |       | —                       |       |
| Change  in accounts receivable                                                           |       | (112,899                     | )          | —                       |       |
| Change  in prepaid expenses and other assets                                             |       | 28,781                       |       | —                       |       |
| Change  in accrued liabilities                                                           |       | 160,222                      |       | —                       |       |
| Change  in payables to affiliates                                                        |       | 10,400                       |       | —                       |       |
| **Cash provided by operating  activities**                                               |       | 254,455                      |       | 525                          |       |
|                                                                                     |       |                         |       |                         |       |
| **Cash flows from investing  activities:**                                               | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Purchase  of real estate                                                                 |       | (9,062,446                   | )          | —                       |       |
| **Cash used in investing  activities**                                                   |       | (9,062,446                   | )          | —                       |       |
|                                                                                     |       |                         |       |                         |       |
| **Cash flows from financing  activities:**                                               | ** ** | ** **                   | ** ** | ** **                   | ** ** |
| Issuance  of common stock                                                                |       | 41,380,683                   |       | —                       |       |
| Offering  costs                                                                          |       | (5,752,872                   | )          | —                       |       |
| Change  in subscriptions for common stock                                                |       | (122,689                     | )          | —                       |       |
| Change  in subscription cash received                                                    |       | 99,309                       |       | —                       |       |
| Change  in payables to affiliates                                                        |       | (174,356                     | )          | —                       |       |
| **Cash flows provided by  financing activities**                                         |       | 35,430,075                   |       | —                       |       |
|                                                                                     |       |                         |       |                         |       |
| Net change in cash and cash equivalents                                                  |       | 26,622,084                   |       | 525                          |       |
| Cash and cash equivalents at beginning of  period                                        |       | 18,560,885                   |       | —                       |       |
| Cash and cash equivalents at end of period                                               |       | $                            | 45,182,969 |                         | $          | 525 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

6

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**Behringer HarvardOpportunity REIT I, Inc.**

**Notesto Consolidated Financial Statements**

**(Unaudited)**

 

**1.****                         ****Organization**

 

Behringer Harvard OpportunityREIT I, Inc. (which may be referred to as the “Company,” “we,” “us,” or “our”)was organized in Maryland on November 23, 2004 and intends to qualify as areal estate investment trust (“REIT”). We were formed primarily to invest in and operate real estate or realestate related assets on an opportunistic basis.  We are currently offering our common stockpursuant to a public offering that commenced on September 20, 2005 (the “Offering”)and is described below.

 

We commenced our Offering ofshares of our common stock on September 20, 2005 and commenced operationson November 9, 2005 upon our acceptance of initial subscriptions for441,204 shares of common stock, which satisfied the minimum offeringrequirement of $2,000,000 established for the Offering.  Prior to November 9, 2005, we wereconsidered a development stage entity.  Ourfirst real estate acquisition was completed on March 1, 2006 with thepurchase of a two-story office building in Minnetonka, Minnesota (the “WhitewaterProperty”).

 

Substantiallyall of our business is conducted through Behringer Harvard Opportunity OP I,LP, a Texas limited partnership organized in November 2004 (“BehringerHarvard OP”).  We own a 0.1% interest inBehringer Harvard OP as its sole general partner.  The remaining 99.9% of Behringer Harvard OPis held as a limited partner’s interest by BHO Partners, LLC, a Delawarelimited liability company, which is our wholly-owned subsidiary.

 

Our advisor is BehringerHarvard Opportunity Advisors I LP (“Behringer Opportunity Advisors”), a Texaslimited partnership organized in 2004. Behringer Opportunity Advisors is our affiliate responsible for managingour affairs on a day-to-day basis and for identifying and making acquisitionsand investments on our behalf.

 

**2.****                         ****Public Offering**

 

On September 20, 2005,we commenced a public offering of up to 40,000,000 shares of common stockoffered at a price of $10 per share pursuant to a Registration Statement on Form S-11filed under the Securities Act of 1933, as amended (the “Securities Act”).  The Registration Statement also covers the Offeringof up to 8,000,000 shares of common stock to be offered at a price of $9.50 pershare pursuant to our distribution reinvestment plan (the “DRIP”).

 

Stockholders, after theirinitial purchase of shares, may elect to make cash investments of $25.00 ormore in additional shares of common stock at regular intervals as part of theour automatic purchase plan.

 

As of March 31, 2006, wehad accepted subscriptions for 6,024,517 shares of our common stock, including21,739 shares owned by Behringer Harvard Holdings, LLC (“Behringer Holdings”).  As of March 31, 2006, we had 1,000shares of non-participating, non-voting convertible stock (“Convertible Stock”)issued and outstanding and no shares of preferred stock issued and outstanding.

 

We admit new stockholderspursuant to the Offering at least monthly. All subscription proceeds are held in a separate account until thesubscribing investors are admitted as stockholders.  Upon admission of new stockholders, subscriptionproceeds are transferred to operating cash and may be utilized as considerationfor investments and the payment or reimbursement of dealer manager fees,selling commissions, organization and offering expenses and operatingexpenses.  Until required for suchpurposes, net offering proceeds are held in short-term, liquid investments.

 

We intend to use theproceeds from our Offering, after deducting offering expenses, primarily toacquire commercial properties, such as office buildings, shopping centers,business and industrial parks, manufacturing facilities, apartment buildings,warehouse and distribution facilities, and motel and hotel properties.

 

Our common stock is notcurrently listed on a national exchange. Unless liquidated earlier, our management anticipates listing the commonstock on a national securities exchange or for quotation on the Nasdaq NationalMarket System or liquidating our real estate portfolio on or before the sixthanniversary of the termination of the Offering. Depending upon the then-prevailing market conditions, it is theintention of our management to

 

7

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**Behringer HarvardOpportunity REIT I, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

consider beginning theprocess of listing or liquidating within three to six years after the terminationof the Offering.  In the event that we donot obtain such listing prior to the sixth anniversary of the termination ofthe Offering, unless a majority of our board of directors and a majority of ourindependent directors extend such date, our charter requires us to begin thesale of our properties and liquidation of our assets.

 

**3.****                         ****Interim Unaudited FinancialInformation**

 

The accompanyingconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in our AnnualReport on Form 10-K for the year ended December 31, 2005, which wasfiled with the Securities and Exchange Commission (“SEC”).  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)have been condensed or omitted in this report on Form 10-Q pursuant to therules and regulations of the SEC.

 

The results for the interimperiods shown in this report are not necessarily indicative of future financialresults.  The accompanying consolidatedbalance sheet and consolidated statement of stockholders’ equity as of March 31,2006 and consolidated statements of operations and cash flows for the periodsended March 31, 2006 and 2005 have not been audited by our independentregistered public accounting firm.  Inthe opinion of management, the accompanying unaudited consolidated financialstatements include all adjustments (of a normal recurring nature) necessary topresent fairly our consolidated financial position as of March 31, 2006and December 31, 2005 and our consolidated results of operations and cashflows for the periods ended March 31, 2006 and 2005.

 

**4.****                         ****Summary of Significant AccountingPolicies**

 

***Use of Estimates in the Preparation of Financial Statements***

 

The preparation of financialstatements in conformity with GAAP requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and disclosureof contingent assets and liabilities at the date of the financial statementsand the reported amounts of revenues and expenses during the reportingperiod.  These estimates include suchitems as purchase price allocation for real estate acquisitions, impairment oflong-lived assets, depreciation and amortization and allowance for doubtfulaccounts.  Actual results could differfrom those estimates.

 

***Principles of Consolidation and Basis of Presentation***

 

Our consolidated financialstatements include our accounts and the accounts of our subsidiaries.  All inter-company transactions, balances andprofits have been eliminated in consolidation. Interests in entities acquired are evaluated based on FinancialAccounting Standards Board Interpretation (“FIN”) No. 46R “Consolidationof Variable Interest Entities,” which requires the consolidation of variableinterest entities in which we are deemed to be the primary beneficiary.  If the interest in the entity is determinedto not be a variable interest entity under FIN No. 46R, then the entitiesare evaluated for consolidation under the American Institute of CertifiedPublic Accountants (“AICPA”) Statement of Position (“SOP”) 78-9, “Accountingfor Investments in Real Estate Ventures,” as amended by Emerging Issues TaskForce (“EITF”) 04-5, “Investor’s Accounting for an Investment in a LimitedPartnership When the Investor Is the Sole General Partner and the LimitedPartners Have Certain Rights.”

 

***Real Estate***

 

Upon the acquisition of realestate properties, we allocate the purchase price of those properties to thetangible assets acquired, consisting of land and buildings, and identifiedintangible assets based on their relative fair values in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 141, “BusinessCombinations” and No. 142, “Goodwill and Other Intangible Assets.”  Identified intangible assets consist of thefair value of above-market and below-market leases, in-place leases and tenantrelationships.  Initial valuations aresubject to change until our information is finalized, which is no later than 12months from the acquisition date.

 

8

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**Behringer HarvardOpportunity REIT I, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

The fair value of the tangibleassets acquired, consisting of land and buildings, is determined by valuing theproperty as if it were vacant, and the “as-if-vacant” value is then allocatedto land and buildings.  Land values arederived from appraisals, and building values are calculated as replacement costless depreciation or management’s estimates of the relative fair value of theseassets using discounted cash flow analyses or similar methods.  The value of the building is depreciated overthe estimated useful life of 25 years using the straight-line method.  Accumulated depreciation associated with thetangible assets of our wholly-owned property was approximately $24,000 at March 31,2006.

 

We determine the value ofabove-market and below-market in-place leases for acquired properties based onthe present value (using an interest rate that reflects the risks associatedwith the leases acquired) of the difference between (i) the contractualamounts to be paid pursuant to the in-place leases and (ii) management’sestimate of current market lease rates for the corresponding in-place leases,measured over a period equal to the remaining non-cancellable terms of therespective leases.  We record the fairvalue of above-market and below-market in-place leases as intangible assets orintangible liabilities, respectively, and amortize them as an adjustment torental income over the remaining non-cancellable terms of the respectiveleases.

 

The total value of identifiedreal estate intangible assets acquired is further allocated to in-place leasevalues and tenant relationships based on management’s evaluation of thespecific characteristics of each tenant’s lease and our overall relationshipwith that respective tenant.  Theaggregate value for tenant improvements and leasing commissions is based onestimates of these costs incurred at inception of the acquired leases,amortized through the date of acquisition. The aggregate value of in-place leases acquired and tenant relationshipsis determined by applying a fair value model. The estimates of fair value of in-place leases includes an estimate ofcarrying costs during the expected lease-up periods for the respective spacesconsidering current market conditions. In estimating the carrying costs that would have otherwise been incurredhad the leases not been in place, management includes such items as real estatetaxes, insurance and other operating expenses, as well as lost rental revenueduring the expected lease-up period based on current market conditions.  The estimates of the fair value of tenantrelationships also include costs to execute similar leases, including leasingcommissions, legal and tenant improvements, as well as an estimate of thelikelihood of renewal as determined by management on a tenant-by-tenant basis.

 

We amortize the value ofin-place leases to expense over the initial term of the respective leases.  The value of tenant relationship intangiblesis amortized to expense over the initial term and any anticipated renewalperiods, but in no event does the amortization period for intangible assetsexceed the remaining depreciable life of the building.  Should a tenant terminate its lease, theunamortized portion of the in-place lease value and tenant relationshipintangibles would be charged to expense. The estimated useful lives of our lease intangibles as of March 31,2006 range from 3.5 years to 8.5 years.

 

Accumulated amortizationassociated with the lease intangibles of our consolidated property wasapproximately $13,000 at March 31, 2006.

 

Anticipated amortization associatedwith lease intangibles for the period from April 1 through December 31,2006 and for each of the following four years ended December 31 is asfollows:

 
| ** **                                  | ** ** | **Lease**       | ** ** |
|---------------------------------------------|------------|-----------------|------------|
| ** **                                  | ** ** | **Intangibles** | ** ** |
| April 1, 2006 - December 31, 2006 |       | $               | 115,672    |   |
| 2007                                        |       | 154,229         |       |
| 2008                                        |       | 154,229         |       |
| 2009                                        |       | 131,705         |       |
| 2010                                        |       | 86,657          |       |
|                                             |            |                 |            |  |

 

9

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**Behringer HarvardOpportunity REIT I, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

As of March 31, 2006, accumulateddepreciation and amortization related to wholly-owned real estate assets andrelated lease intangibles were as follows:

 
| ** **                          | ** ** | **Building and  Improvements** | ** ** | **In-Place  Leases** | ** ** | **Acquired  Below-Market  Leases** | ** ** |
|-------------------------------------|------------|-------------------------------------|------------|----------------------|------------|------------------------------------|------------|
| Cost                                |       | $                                   | 7,170,162  |                 | $          | 1,224,793                          |       | $ | (255,992 | ) |
| Less: depreciation and amortization |       | (23,828                             | )          | (18,996              | )          | 6,144                              |       |
| Net                                 |       | $                                   | 7,146,334  |                 | $          | 1,205,797                          |       | $ | (249,848 | ) |

 

***Cash and Cash Equivalents***

 

We consider investments inhighly-liquid money market funds with original maturities of three months orless to be cash equivalents.  Thecarrying amount of cash and cash equivalents reported on the balance sheetapproximates fair value.

 

***RestrictedCash***

 

Restricted cash includessubscription proceeds that are held in a separate account until the subscribinginvestors are admitted as stockholders. We admit new stockholders at least monthly.  Upon acceptance of stockholders, subscriptionproceeds are transferred to operating cash and may be utilized as considerationfor investments and the payment or reimbursement of dealer manager fees,selling commissions, organization and offering expenses and operating expenses.

 

***AccountsReceivable***

 

Accounts receivable primarilyconsists of receivables from tenants related to our wholly-owned property.  There was no allowance for doubtful accounts forthe three months ended March 31, 2006.

 

***PrepaidExpenses and Other Assets***

 

Prepaid expenses and otherassets includes prepaid directors’ and officers’ insurance, as well as prepaidinsurance and real estate taxes of our consolidated property.

 

***Investment Impairments***

 

For real estate we wholly own,our management monitors events and changes in circumstances indicating that thecarrying amounts of the real estate assets may not be recoverable.  When such events or changes in circumstancesare present, we assess potential impairment by comparing estimated futureundiscounted operating cash flows expected to be generated over the life of theasset and from its eventual disposition to the carrying amount of the asset.  In the event that the carrying amount exceedsthe estimated future undiscounted operating cash flows, we recognize animpairment loss to adjust the carrying amount of the asset to estimated fairvalue.

 

For real estate we will ownthrough an investment in a joint venture, tenant-in-common (“TIC”) interest orother similar investment structure, at each reporting date management willcompare the estimated fair value of our investment to the carrying value.  An impairment charge will be recorded to theextent the fair value of our investment is less than the carrying amount andthe decline in value is determined to be other than a temporary decline.  There were no impairment charges during thethree months ended March 31, 2006.

 

***DeferredFinancing Fees***

 

Deferred financing fees will berecorded at cost and will be amortized using a method that approximates theeffective interest method over the life of the related debt.

 

10

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**Behringer HarvardOpportunity REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

***RevenueRecognition***

 

We recognize rental incomegenerated from leases on real estate assets on the straight-line basis over theterms of the respective leases, including the effect of rent holidays, ifany.  Some leases may contain provisionsfor the tenant’s payment of additional rent after certain tenant sales revenuethresholds are met.  Such contingent rentis recognized as revenue after the related revenue threshold is met.  We had no contingent rent for the threemonths ended March 31, 2006 and 2005. The total net increase to rental revenues due to straight-line rentadjustments for the three months ended March 31, 2006 and 2005 was $3,901and none, respectively.  As discussedabove, our rental revenue also includes amortization of above and below market in-placeleases.

 

***Organizational and  Offering Costs***

 

Our advisor funds organizationand offering costs on our behalf.  We arerequired to reimburse our advisor for such organization and offering costs upto 2% of the cumulative capital raised in the Offering.  Organization and offering costs include itemssuch as legal and accounting fees, marketing, promotional and printingcosts.  All offering costs are recordedas an offset to additional paid-in capital, and all organization costs arerecorded as an expense at the time we become liable for the payment of theseamounts.

 

***IncomeTaxes***

 

We currently account for incometaxes in accordance with SFAS No. 109, Accounting for Income Taxes. Under the liability method of SFAS No. 109, deferred taxes aredetermined based on the differences between the financial statements and taxbases of assets and liabilities using enacted tax rates in effect in the yearsthe differences are expected to reverse.

 

Our management will evaluateplans to make an election to be taxed as a REIT under Sections 856 through 860of the Internal Revenue Code, effective for our taxable year ending December 31,2006.  We believe that, commencing withthe taxable year for which such election is made, we will be organized and willoperate in such a manner as to qualify for taxation as a REIT under theInternal Revenue Code.

 

If we qualify for taxation as aREIT, we generally will not be subject to federal corporate income taxes onincome that we distribute currently to our stockholders.

 

***Stock Based Compensation***

 

We have a stock-based incentiveaward plan for our directors and consultants and employees, directors andconsultants of our affiliates.  Weaccount for this plan under the “modified prospective” method of SFAS No. 123R,“Share-Based Payment.”  In the “modifiedprospective” method, compensation cost is recognized for all share-basedpayments granted after the effective date and for all unvested awards grantedprior to the effective date.  Inaccordance with SFAS No. 123R, prior period amounts were not restated.  SFAS No. 123R also requires the taxbenefits associated with these share-based payments to be classified asfinancing activities in the Consolidated Statements of Cash Flows, rather thanas operating cash flows as required under previous regulations.  For the three months ended March 31,2006, we had no significant compensation cost related to this incentive awardplan.

 

***Concentration of Credit Risk***

 

At March 31, 2006, we hadcash and cash equivalents and restricted cash in excess of federally insuredlevels on deposit in one financial institution. We regularly monitor the financial stability of the financialinstitution and believe that we are not exposed to any significant credit riskin cash and cash equivalents or restricted cash.

 

***Earnings per Share***

 

Earningsper share are calculated based on the weighted average number of common sharesoutstanding during each period.  Our ConvertibleStock was excluded from the calculation of earnings per share because theeffect would be anti-dilutive for the period ended March 31, 2006.

 

11

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**Behringer HarvardOpportunity REIT I, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

***ReportableSegments***

 

SFAS No. 131, “Disclosures about Segments of an Enterpriseand Related Information,” establishes standards for reporting financialand descriptive information about an enterprise’s reportable segments.  Our current business consists only of owning,managing, operating, leasing, acquiring, developing, investing in and disposingof real estate assets.  Managementevaluates operating performance on an individual property level.  However, as each of our properties will havesimilar economic characteristics, our properties will be aggregated into onereportable segment.

 

**5.****                                     ****Acquisitions**

 

On March 1, 2006, weacquired the Whitewater Property, a two-story office building containingapproximately 70,705 rentable square feet (unaudited), located on approximately6.14 acres (unaudited) of land in Minnetonka, Minnesota.  The purchase price of the Whitewater Propertywas approximately $9,000,000, excluding closing costs.  We used proceeds from the Offering to pay theentire purchase price and all closing costs of the acquisition.

 

**6.****                                     ****Stockholders’ Equity**

 

***Capitalization***

 

Asof March 31, 2006, we were authorized to issue 350,000,000 shares ofcommon stock, 50,000,000 shares of preferred stock and 1,000 shares of ConvertibleStock.  All shares of such stock have apar value of $.0001 per share.  On November 23,2004 (date of inception), we sold 1,000 shares of Convertible Stock and 21,739shares of common stock to Behringer Holdings for $201,000 in cash.  The shares of Convertible Stock will beconverted into shares of common stock if (1) the holders of the commonstock have received distributions equal to the sum of the aggregate capitalinvested by such stockholders and a 10% cumulative, non-compounded, annualreturn on such capital contributions; or (2) the shares of common stockare listed for trading on a national securities exchange or for quotation on theNasdaq National Market System. Conversion of the Convertible Stock may be limited by our board of directorsif it determines that full conversion may jeopardize our qualifications as aREIT.  The terms of the Convertible Stockprovide that, generally, Behringer Holdings, as the holder of such shares, willreceive shares of common stock with a value equal to 15% of the amount that thesum of the enterprise value, as defined, plus distributions paid tostockholders exceeds the sum of the capital invested by the stockholders and a10% cumulative, non-compounded, annual return on such capital.  Our board of directors may authorizeadditional shares of capital stock and their characteristics without obtainingstockholder approval.

 

As of March 31, 2006, wehad accepted subscriptions for 6,024,517 shares of our common stock, including21,739 shares owned by Behringer Holdings. As of March 31, 2006, we had 1,000 shares of our Convertible Stockissued and outstanding and no shares of preferred stock issued and outstanding.

 

***ShareRedemption Program***

 

Our board of directors hasauthorized and adopted a share redemption program that enables our stockholdersto sell their shares to us in limited circumstances after they have held themfor at least one year.  The purchaseprice for the redeemed shares is set forth in the prospectus for our Offeringof common stock.  Our board of directorsreserves the right in its sole discretion at any time, and from time to time,to (1) waive the one-year holding period in the event of the death,disability or bankruptcy of a stockholder or other exigent circumstances, (2) rejectany request for redemption, (3) change the purchase price for redemptions,or (4) terminate, suspend or amend the share redemption program.  Under the terms of the program, during anycalendar year, we will not redeem in excess of 5% of the weighted averagenumber of shares outstanding during the prior calendar year.  In addition, our board of directors willdetermine whether we have sufficient cash from operations to repurchase shares,and such purchases will generally be limited to proceeds of our DRIP plus 1% ofoperating cash flow for the previous fiscal year.  As of March 31, 2006, no shares wereredeemed.

 

12

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**Behringer HarvardOpportunity REIT I, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

***IncentiveAward Plan***

 

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 employees, directors and consultants of ouraffiliates.  A total of 11,000,000 shareshave been authorized and reserved for issuance under our Incentive AwardPlan.  An option to acquire 1,250 shareswas awarded to an independent board member on February 17, 2006 when hewas elected to our board of directors.  Inaddition, on that date, an option to acquire 5,000 shares of our common stockwas awarded to each of the other two independent board members.

 

**7.****                         ****Related Party Arrangements**

 

Certain of our affiliatesreceive fees and compensation in connection with the Offering.  The following is a summary of the relatedparty fees and compensation we incurred during the three months ended March 31,2006.  No such fees were incurred in the threemonths ended March 31, 2005.

 
| ** **                                                                           | ** ** | ** **   | ** ** | **Total reduction** | ** ** | **Total**                    | ** ** | ** **   | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------|------------|--------------------------|------------|------------------------------|------------|--------------|------------|
| ** **                                                                           | ** ** | **Total**    | ** ** | **of additional**   | ** ** | **capitalized**              | ** ** | **Total**    | ** ** |
| **For the three months ended March 31, 2006**     | ** ** | **incurred** | ** ** | **paid-in capital** | ** ** | **to real estate** | ** ** | **expensed** | ** ** |
| Behringer  Securities, commissions and dealer manager fees                           |       | $            | 3,504,696  |                     | $          | 3,504,696                    |       | $            | —     |   | $ | — |   |
|                                                                                 |       |         |       |                     |       |                         |       |         |       |
| Behringer  Opportunity Advisors, reimbursement of organization and offering expenses |       | 801,926      |       | 801,926                  |       | —                       |       | —       |       |
|                                                                                 |       |         |       |                     |       |                         |       |         |       |
| Behringer  Opportunity Advisors, acquisition, advisory fees and expenses             |       | 270,000      |       | —                   |       | 270,000                      |       | —       |       |
|                                                                                 |       |         |       |                     |       |                         |       |         |       |
| HPT  Management, property management and leasing fees                                |       | 4,905        |       | —                   |       | —                       |       | 4,905        |       |
|                                                                                 |       |         |       |                     |       |                         |       |         |       |
| Behringer  Opportunity Advisors, asset management fees                               |       | 5,495        |       | —                   |       | —                       |       | 5,495        |       |
|                                                                                 |       |         |       |                     |       |                         |       |         |       |
| Total                                                                                |       | $            | 4,587,022  |                     | $          | 4,306,622                    |       | $            | 270,000    |   | $ | 10,400 |   |

 

BehringerSecurities LP (“Behringer Securities”), our affiliated dealer-manager for theOffering, receives commissions of up to 7% of gross offering proceeds beforereallowances of commissions earned by participating broker-dealers; providedthat Behringer Securities will receive 1% of the gross proceeds of purchasespursuant to our DRIP.  BehringerSecurities reallows 100% of the commissions earned to participatingbroker-dealers.  In addition, up to 2% ofgross proceeds before reallowance to participating broker-dealers will be paidto Behringer Securities as a dealer manager fee; provided that BehringerSecurities will not receive dealer manager fees pursuant to our DRIP.  Behringer Securities reallows a portion ofits dealer manager fees of up to 1.5% of the gross offering proceeds to be paidto such participating broker-dealers as marketing fees and bona fide duediligence expense reimbursement.  In the threemonths ended March 31, 2006, Behringer Securities’ commissions and dealermanager fees totalled $2,702,770 and $801,926, respectively and all werecapitalized as offering costs in additional paid-in capital on our balancesheet.  In the three months ended March 31,2005, there were no commissions and dealer manager fees paid to BehringerSecurities, as the Offering did not commence until September 20, 2005.

 

Behringer Opportunity Advisors,or its affiliates, receives up to 2% of gross offering proceeds forreimbursement of organization and offering expenses incurred in connection withthe Offering.  As of March 31, 2006,$2,585,773 of organization and offering expenses had been incurred by BehringerOpportunity Advisors on our behalf.  Asof March 31, 2006, organization and offering expenses reimbursable by us totalled$2,585,773, including $1,206,386 reimbursed and $1,379,387 of reimbursementspayable. The $1,379,387 of offering costs payable as of March 31, 2006 isincluded in “Payables to affiliates” on our balance sheet.  All of the $1,206,386 of organization andoffering expenses to be reimbursed by us through March 31, 2006 had beenrecorded as a reduction of additional paid-in capital.  For the three months ended March 31,2006, $801,926 of organization and offering expenses were to be reimbursed byus, of which all was recorded as a reduction of additional paid-incapital.  In the three months ended March 31,2005, there were no organization and offering expenses paid, as the

 

13

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**Behringer HarvardOpportunity REIT I, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

Offering did not commence until September 20,2005.  Behringer Opportunity Advisors orits affiliates determines the amount of organization and offering expenses owedbased on specific invoice identification as well as an allocation of costs tous and other Behringer Harvard programs, based on respective equity offeringresults of those entities in offering.

 

Ouradvisor or its affiliates will also receive acquisition and advisory fees of2.5% of the contract purchase price of each asset for the acquisition,development or construction of real property or, with respect to any mortgageloan, up to 2.5% of the funds advanced in respect of a loan.  Our advisor or its affiliates also receivesreimbursement of acquisition expenses up to 0.5% of the contract purchase priceof each asset, or with respect to a mortgage, up to 0.5% of the funds advanced.  In the three months ended March 31,2006, our advisor earned $225,000 in acquisition and advisory fees for ourfirst real estate acquisition.  Wecapitalized these fees as part of our real estate.

 

Ouradvisor or its affiliates will also receive debt financing fees of 1% of theamount of any debt made available to us. It is anticipated that our advisor will pay some or all of these fees tothird parties with whom it subcontracts to coordinate financing with us.

 

We pay HPT Management ServicesLP (“HPT Management”), our property manager and an affiliate of ours, fees forthe management and leasing of our properties, which may be subcontracted tounaffiliated third parties.  Such feesare equal to 4.5% of gross revenues plus leasing commissions based upon thecustomary leasing commission applicable to the same geographic location of therespective property.  In the event thatwe contract directly with a non-affiliated third party property manager inrespect of a property, we will pay HPT Management an oversight fee equal to 1%of gross revenues of the property managed. In no event will we pay both a property management fee and an oversightfee to HPT Management with respect to any particular property.  We incurred and expensed such fees of $4,905in the three months ended March 31, 2006.

 

We pay our advisor an annualasset management fee of 0.75% of the aggregate asset value of acquired realestate.  The fee is payable monthly in anamount equal to one-twelfth of 0.75% of the aggregate asset value of the last dayof the immediately preceding month.  Forthe three months ended March 31, 2006, we incurred and expensed $5,495 ofasset management fees.

 

BehringerOpportunity Advisors or its affiliates is paid a disposition fee if our advisorprovides a substantial amount of services, as determined by our independentdirectors, in connection with the sale of one or more properties.  In such event, we pay our advisor (1) inthe case of the sale of real property, the lesser of:  (A) one-half of the aggregate brokeragecommission paid (including the subordinate disposition fee) or if none is paid,the amount that customarily would be paid, or (B) 3% of the sales price ofeach property sold, and (2) in the case of the sale of any asset otherthan real property, 3% of the sales price of such assets.  This fee shall not be earned or paid unlessand until the investors have received total distributions in an amount equal toor in excess of the sum of the aggregate capital contributions by investorsplus a 10% cumulative, non-compounded, annual return on such capitalcontributions.  Subordinated dispositionfees that are not payable at the date of sale, because investors have not yetreceived their required minimum distributions, will be deferred and paid atsuch time as these subordination conditions have been satisfied.  In addition, after investors have received totaldistributions equal to or in excess of the sum of their aggregate capitalcontributions plus a 10% annual, cumulative, non-compounded return on suchcapital contributions, then our advisor is entitled to receive an additionalparticipation in net sale proceeds fee equal to 15% of remaining net saleproceeds less the amount that our debt for borrowed money exceeds the aggregatebook value of our remaining assets.  Thesubordinated participation in net sales proceeds will be reduced or eliminatedupon the determination of the number of shares of common stock issuable uponconversion of our convertible stock.

 

Uponlisting of our common stock for trading on a national securities exchange orfor quotation on the Nasdaq National Market System, an incentive listing fee upto 15% of the amount by which the market value of our outstanding stock plusdistributions paid by us prior to listing exceeds the sum of the aggregatecapital contributions by investors plus a 10% annual, cumulative,non-compounded return on such capital contributions will be paid to

 

14

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**Behringer HarvardOpportunity REIT I, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

ouradvisor.  The subordinated participationin net sales proceeds will be reduced or eliminated upon the determination ofthe number of shares of common stock issuable upon conversion of ourconvertible stock.

 

Inaddition, upon termination of the advisory agreement with our advisor, we willpay our advisor a performance fee of 15% of the amount by which (A) ourappraised asset value at the time of such termination less our indebtedness,plus cash and cash equivalents at the time of termination plus totaldistributions paid to our stockholders through the termination date exceeds (B) theaggregate capital contributed by investors plus payment to the investors of a10% annual, cumulative, non-compounded return on the capital contributed byinvestors.  No performance fee will bepaid if we have already paid or become obligated to pay our advisor an incentivelisting fee.  The subordinatedparticipation in net sales proceeds will be reduced or eliminated upon thedetermination of the number of shares of common stock issuable upon conversionof our convertible stock.

 

Wewill reimburse our advisor or its affiliates for all expenses paid or incurredby them in connection with the services they provide to us, subject to thelimitation that we will not reimburse for any amount by which our advisor’soperating expenses (including the asset management fee) at the end of the fourpreceding fiscal quarters exceeds the greater of:  (i) 2% of our average invested assets,or (ii) 25% of our net income.

 

We will pay a development feein an amount that is usual and customary for comparable services rendered tosimilar projects in the geographic market of the project; provided,however, we will not pay a development fee to an affiliate of our advisorif our advisor or any of its affiliates elects to receive an acquisitionand advisory fee based on the cost of such development.

 

We are dependent on BehringerOpportunity Advisors, Behringer Securities and HPT Management for certainservices that are essential to us, including the sale of shares of our commonstock, asset acquisition and disposition decisions, property management andleasing services and other general administrative responsibilities.  In the event that these companies were unableto provide us with the respective services, we would be required to obtain suchservices from other sources.

 

# **8.**                                      SubsequentEvents

 

We issued approximately 1,300,000 shares of our commonstock between April 1, 2006 and May 1, 2006, resulting in grossproceeds to us of approximately $13,000,000.

 

# **9.**                                      RecentlyAnnounced Accounting Pronouncements

 

We adopted SFAS No. 123R, “Share-BasedPayment,” a revision to SFAS No. 123 “Accounting for Stock-BasedCompensation” on January 2, 2006. The Statement supersedes Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees” and its related implementationguidance.  This statement focusesprimarily on accounting for transactions in which an entity obtains employeeservices in share-based payment transactions and requires the measurement andrecognition of the cost of the employee services received in exchange for an awardof equity instruments for goods or services. The adoption of this Statement did not have a material effect on ourfinancial condition, results of operations, or liquidity.

 

We adopted SFAS Statement No. 154,“Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20and SFAS Statement No. 3, on January 1, 2006.  The Statement provides guidance on theaccounting for and reporting of accounting changes and error corrections. Itestablishes, unless impracticable, retrospective application as the requiredmethod for reporting a change in accounting principle in the absence ofexplicit transition requirements specific to the newly adopted accountingprinciple.  This Statement is effectivefor accounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005.  Theadoption of this Statement did not have a material effect on our financialcondition, results of operations, or liquidity.

 

In April 2006, the FASBissued FASB Staff Position FIN 46R-6, “Determining the Variability to beConsidered in Applying FASB Interpretation No. 46R,” that will becomeeffective beginning the third quarter of 2006. FIN 46R-6 clarifies that the variability to be considered in applyingFIN 46R shall be based on an analysis of

 

15

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**Behringer HarvardOpportunity REIT I, Inc.**

**Notes to ConsolidatedFinancial Statements**

**(Unaudited)**

 

the design of the variable interestentity.  The adoption of this Statementis not expected to have a material effect on our financial condition, resultsof operations, or liquidity.

 

16

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**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations.**

 

The following discussion andanalysis should be read in conjunction with the accompanying financialstatements of the Company and the notes thereto:

 

### **Forward-Looking Statements**

 

This section containsforward-looking statements, including discussion and analysis of the financialcondition of us and our subsidiaries, our anticipated capital expendituresrequired to complete projects, amounts of anticipated cash distributions to ourstockholders in the future and other matters. These forward-looking statements are not historical facts but are theintent, belief or current expectations of our management based on theirknowledge and understanding of our business and industry.  Words such as “may,” “anticipates,” “expects,”“intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should”and variations of these words and similar expressions are intended to identifyforward-looking statements.  Thesestatements are not guarantees of future performance and are subject to risks,uncertainties and other factors, some of which are beyond our control, aredifficult to predict and could cause actual results to differ materially fromthose expressed or forecasted in the forward-looking statements.

### ** **

### **Forward-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 ofour Annual Report on Form 10-K, as filed with the SEC.**

 

The following discussion andanalysis should be read in conjunction with the accompanying consolidatedfinancial statements and the notes thereto.

### ** **

### **Critical Accounting Policiesand Estimates**

 

Management’s discussion andanalysis of financial condition and results of operations are based upon ourconsolidated financial statements, which have been prepared in accordance with 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.  Ourmost sensitive estimates involve the allocation of the purchase price ofacquired properties and evaluating our real estate related investments forimpairment.

 

Below is a discussion of theaccounting policies that we consider will be critical in that they may requirecomplex judgment in their application or require estimates about matters thatare inherently uncertain.

 

***InvestmentImpairments***

 

For real estate we wholly own,we monitor events and changes in circumstances indicating that the carryingamounts of the real estate assets may not be recoverable.  When such events or changes in circumstancesare present, we assess potential impairment by comparing estimated futureundiscounted operating cash flows expected to be generated over the life of theasset and from its eventual disposition to the carrying amount of the asset.  In the event that the carrying amount exceedsthe estimated future undiscounted

 

17

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operating cash flows, we recognize animpairment loss to adjust the carrying amount of the asset to estimated fair value.

 

For real estate we own throughan investment in a joint venture, TIC interest or other similar investmentstructure, at each reporting date we compare the estimated fair value of ourinvestment to the carrying value.  Animpairment charge is recorded to the extent the fair value of our investment isless than the carrying amount and the decline in value is determined to beother than a temporary decline.  Noimpairment charges have been taken for the three months ended March 31,2006.

 

***Real Estate***

 

Upon the acquisition of realestate properties, we allocate the purchase price of those properties to thetangible assets acquired, consisting of land and buildings, and identifiedintangible assets based on their relative fair values in accordance with SFAS No. 141,“Business Combinations” and No. 142, “Goodwill and Other IntangibleAssets.”  Identified intangible assetsconsist of the fair value of above-market and below-market leases, in-placeleases, in-place tenant improvements and tenant relationships.  Initial valuations are subject to changeuntil our information is finalized, which is no later than 12 months from theacquisition date.

 

The fair value of the tangibleassets to be acquired, consisting of land and buildings, is determined byvaluing the property as if it were vacant, and the “as-if-vacant” value isallocated to land and buildings.  Landvalues are derived from appraisals, and building values are calculated asreplacement cost less depreciation or management’s estimates of the relative fairvalue of these assets using discounted cash flow analyses or similarmethods.  The value of the building isdepreciated over the estimated useful life of 25 years using the straight-linemethod.

 

We determine the value ofabove-market and below-market in-place leases for acquired properties based onthe present value (using an interest rate that reflects the risks associatedwith the leases acquired) of the difference between (i) the contractualamounts to be paid pursuant to the in-place leases and (ii) management’sestimate of current market lease rates for the corresponding in-place leases,measured over a period equal to the remaining non-cancellable terms of therespective 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 remaining non-cancellable terms of the respectiveleases.

 

The totalvalue of identified real estate intangible assets acquired is further allocatedto in-place lease values and tenant relationships based on our evaluation ofthe specific characteristics of each tenant’s lease and our overallrelationship with that respective tenant. The aggregate value of in-place leases acquired and tenant relationshipsis determined by applying a fair value model. The estimates of fair value of in-place leases include an estimate ofcarrying costs during the expected lease-up periods for the respective spacesconsidering current market conditions. In estimating fair value of in-place leases, we consider items such asreal estate taxes, insurance and other operating expenses, as well as lostrental revenue during the expected lease-up period and carrying costs thatwould have otherwise been incurred had the leases not been in place, includingtenant improvements and commissions.  Theestimates of the fair value of tenant relationships also include costs toexecute similar leases, including leasing commissions, legal and tenantimprovements as well as an estimate of the likelihood of renewal as determinedby management on a tenant-by-tenant basis.

 

We amortizethe value of in-place leases to expense over the term of the respectiveleases.  The value of tenant relationshipintangibles is amortized to expense over the initial term and any anticipatedrenewal periods, but in no event does the amortization period for intangibleassets exceed the remaining depreciable life of the building.  Should a tenant terminate its lease, theunamortized portion of the in-place lease value and tenant relationshipintangibles would be charged to expense.

 

**Overview**

 

We were formed primarily toinvest in and operate real estate or real estate related assets on anopportunistic basis.

 

As of March 31, 2006, weowned one property located in Minnetonka, Minnesota.

 

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On September 20, 2005,our Registration Statement on Form S-11 (File No. 333-120847),covering the Offering of up to 40,000,000 shares of common stock to be offeredat a price of $10.00 per share was declared effective under the SecuritiesAct.  The Offering also includes up to8,000,000 shares of common stock at a price of $9.50 per share pursuant to our DRIP.

 

On October 27, 2005, theconditions of our escrow agreement with Citibank Texas, N.A. were satisfied andas a result, operations commenced on November 9, 2005 upon acceptance ofinitial subscriptions.  On November 9,2005, we had received and accepted subscriptions for 441,204 shares of commonstock for gross offering proceeds of $4,408,510.  As of March 31, 2006, we had acceptedsubscriptions for 6,024,517 shares of our common stock, including 21,739 sharesowned by Behringer Holdings, for gross offering proceeds of $59,904,278.  As of March 31, 2006, we had no sharesof preferred stock issued and outstanding and 1,000 shares of Convertible Stockissued and outstanding.

 

**Results of Operations**

 

We commenced activeoperations when we made our first real estate acquisition on March 1, 2006with the purchase of the Whitewater Property. Accordingly, our results of operations for the three months ended March 31,2006, as compared to the three months ended March 31, 2005, reflectsignificant increases in most categories.

 

*Three months ended March 31,2006 as compared to three months ended March 31, 2005*

 

*Revenue.* Rental revenue was $119,043 for the three months ended March 31,2006 and was comprised of revenue, including adjustments for straight line rentand amortization of above and below market leases, from the Whitewater Propertyfrom date of acquisition, March 1, 2006, through March 31, 2006.  During the three months ended March 31,2005, we did not own any real estate. Management expects future increases in rental revenue as we continue toinvest in additional real estate properties.

 

*Property Operating Expense.* Property operating expense for the three months ended March 31,2006 was $21,724 and was comprised of operating expenses from the WhitewaterProperty from date of acquisition, March 1, 2006, through March 31, 2006.  During the three months ended March 31,2005, we did not own any real estate.

 

*Real Estate Taxes. *Realestate taxes for the three months ended March 31, 2006 were $20,984 andwere comprised of real estate taxes from the Whitewater Property from date ofacquisition, March 1, 2006, through March 31, 2006.  During the three months ended March 31,2005, we did not own any real estate.

 

*Property Management Fees.*Property management fees for the three months ended March 31,2006 were $4,905 and were comprised of property management fees from theWhitewater Property from date of acquisition, March 1, 2006, through March 31,2006.  During the three months ended March 31,2005, we did not own any real estate.

 

*Asset Management Fees.*Asset management fees for the three months ended March 31, 2006were $5,495 and were comprised of asset management fees from the WhitewaterProperty from date of acquisition, March 1, 2006, through March 31,2006.  During the three months ended March 31,2005, we did not own any real estate.

 

*General and Administrative Expense.* General and administrative expenses for the three months ended March 31,2006 were $160,158 and were comprised of corporate general and administrativeexpenses, including directors’ and officers’ insurance premiums, auditing fees,legal fees and other administrative expenses. During the three months ended March 31, 2005, we had no general andadministrative expenses.

 

*Depreciation and Amortization Expense.*Depreciation and amortization expense for the three months ended March 31,2006 was $42,824 and was comprised of depreciation and amortization of the WhitewaterProperty from date of acquisition, March 1, 2006, through March 31,2006.  During the three months ended March 31,2005, we did not own any real estate.

 

*Interest Income*. Interest income for the three months ended March 31,2006 and 2005 was $268,318 and $585, respectively, and represented interestincome on funds on deposit net of bank fees.  As we admit new

 

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stockholders, subscriptionproceeds are released to us and may be utilized as consideration forinvestments in real properties and the payment or reimbursement of dealermanager fees, selling commissions, organization and offering expenses and operatingexpenses.  Until required for suchpurposes, net offering proceeds are held in short-term, liquid investments andearn interest income.

 

**Cash Flow Analysis**

 

We commenced active operationswhen we made our first real estate acquisition on March 1, 2006 with thepurchase of the Whitewater Property.  Asa result, our cash flows for the three months ended March 31, 2006 are notcomparable to the cash flows for the three months ended March 31, 2005.

 

Cash flows provided byoperating activities for the three months ended March 31, 2006 were$254,455 and were comprised of net income of $131,271, changes in workingcapital accounts of $86,504, and depreciation and amortization of $36,680.  There were no cash flows from operatingactivities for the three months ended March 31, 2005 due to the lack ofreal estate investments and corporate activity.

 

Cash flows used in investingactivities for the three months ended March 31, 2006 were $9,062,446 and representedthe acquisition of the Whitewater Property. During the three months ended March 31, 2005, we had not yet begunto operate.

 

Cash flows provided by financingactivities for the three months ended March 31, 2006 were $35,430,075 andwere comprised primarily of funds received from the issuance of stock, net ofoffering costs of $35,627,811.  Duringthe three months ended March 31, 2005, we had not yet begun to operate.

 

**Liquidityand Capital Resources**

 

The amount of distributionspayable to our stockholders will be determined by our board of directors and isdependent on a number of factors, including funds available for distribution,financial condition, capital expenditure requirements and annual distributionrequirements needed to maintain our status as a REIT under the Internal RevenueCode.  Operating cash flows are expectedto increase as properties are acquired in the development of our investmentportfolio.

 

Our principal demands forfunds will be for property acquisitions, either directly or through investmentinterests, for mortgage loan investments, for the payment of operating expensesand distributions, and for the payment of interest on our outstandingindebtedness and other investments. Generally, cash needs for items other than property acquisitions and mortgageloan investments will be met from operations, and cash needs for propertyacquisitions will be met from public offerings of our shares.  However, there may be a delay between thesale of our shares and our purchase of properties and mortgage loan investments,which could result in a delay in the benefits to our stockholders, if any, ofreturns generated from our operations. Our advisor evaluates potential acquisitions of real estate and realestate related assets and engages in negotiations with sellers and borrowers onour behalf.  Investors should be awarethat after a purchase contract is executed that contains specific terms, theproperty will not be purchased until the successful completion of due diligenceand negotiation of final binding agreements. During this period, we may decide to temporarily invest any unusedproceeds from the Offering in certain investments that could yield lowerreturns than the properties.  These lowerreturns may affect our ability to make distributions.

 

Potential future sources ofcapital include proceeds from secured or unsecured financings from banks orother lenders, proceeds from the sale of properties and undistributed fundsfrom operations.  If necessary, we mayuse financings or other sources of capital in the event of unforeseensignificant capital expenditures.

 

**Contractual Obligations**

 

We had no contractualobligations as of March 31, 2006.

 

**Off-Balance Sheet Arrangements**

 

We have no off-balance sheetarrangements that are reasonably likely to have a current or future materialeffect on our financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capitalresources.

 

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**Inflation**

 

The real estate market hasnot been affected significantly by inflation in the past several years due tothe relatively low inflation rate. However, we intend to include provisions in the majority of our tenantleases that would protect us from the impact of inflation.  These provisions include reimbursementbillings for common area maintenance charges, real estate tax and insurancereimbursements on a per square foot basis, or in some cases, annualreimbursement of operating expenses above a certain per square foot allowance.

** **

**Item3.**           Quantitative and Qualitative DisclosuresAbout Market Risk.

 

We will be exposed to interestrate changes primarily as a result of long-term debt used to acquireproperties.  Our management’s objectiveswith regard to interest rate risk are to limit the impact of interest ratechanges on earnings 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, the ability to convert variable rates to fixed rates.  With regard to variable rate financing, wewill assess interest rate cash flow risk by continually identifying andmonitoring changes in interest rate exposures that may adversely impact expectedfuture cash flows and by evaluating hedging opportunities.

 

We do not have any foreignoperations and thus we are not exposed to foreign currency fluctuations.

** **

**Item4.**           Controls and Procedures.

 

As required by Rule 15d-15(b) underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), ourmanagement, including our Chief Executive Officer and Chief Financial Officer,evaluated, as of March 31, 2006, the effectiveness of our disclosurecontrols and procedures as defined in Exchange Act Rule 15d-15(e).  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures, as of March 31, 2006, were effective for the purpose ofensuring that information required to be disclosed by us in this report isrecorded, processed, summarized and reported within the time periods specifiedby the rules and forms of the Exchange Act and is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosures.

 

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

 

There has been no change ininternal controls over financial reporting that occurred during the quarterended March 31, 2006 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

 

**PART II**

**OTHER INFORMATION**

 

### **Item1.**                       Legal Proceedings.

 

We are not party to, and ourproperty is not subject to, any material pending legal proceedings.

### ** **

### **Item1A.**              Risk Factors.

 

There have been no materialchanges from the risk factors set forth in our Annual Report on Form 10-Kfor the year ended December 31, 2005.

 

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### **Item2.**                       Unregistered Sales of Equity Securities andUse of Proceeds.

 

As of March 31, 2006, wehad sold 6,002,778 shares of our common stock on a best efforts basis pursuantto the Offering (declared effective September 20, 2005, SEC Registration No. 333-120847)for aggregate gross offering proceeds of $59,904,278.

 

The above-stated number ofshares sold and the gross offering proceeds received from such sales does notinclude 21,739 shares of common stock purchased by Behringer Holdings in aprivate placement in 2004, prior to the commencement of the Offering.

 

From the commencement of theOffering through March 31, 2006, we incurred the following expenses inconnection with the issuance and distribution of the registered securitiespursuant to the Offering:

 

| **Type of Expense**     | ** ** | **Amount** | ** ** |
|-----------------------------------|------------|------------|------------|
|                              |       |       |       |
| Other  expenses to affiliates *   |       | $          | 7,867,836  |   |
| Other  expenses to non-affiliates |       | 93,052     |       |
|                              |       |       |       |
| Total  expenses                   |       | $          | 7,960,888  |   |

 

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*“Other expenses to affiliates” includescommissions and dealer manager fees paid to Behringer Securities, our affiliate,which reallowed all or a portion of the commissions and fees to solicitingdealers.

 

The net offering proceeds tous, after deducting the total expenses incurred and described above, were$51,943,390.

 

From the commencement of theOffering through March 31, 2006, we had used $9,062,446 of such netoffering proceeds to purchase real estate. Of the amount used for the purchase of real estate, $270,000 was paid toBehringer Opportunity Advisors, our affiliate, as acquisition and advisory feesand acquisition expense reimbursement.

 

**Item 3.****                      ****Defaults Upon Senior Securities.**

 

None.

### ** **

### **Item4.**                       Submission of Matters to a Vote of SecurityHolders.

 

No matters were submitted toa vote of security holders during the first quarter of 2006.

### ** **

### **Item5.**                       Other Information.

 

None.

### ** **

### **Item6.**                       Exhibits.

 

The exhibits filed inresponse to Item 601 of Regulation S-K are listed on the Exhibit Indexattached hereto.

 

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**SIGNATURE**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
| ** **               |   | **Behringer Harvard  Opportunity REIT I, Inc.** |
|--------------------------|--------|------------------------------------------------------|
|                     |   |                                                 |
|                     |   |                                                 |
| Dated: May 15, 2006 | By:    |   /s/ Gary S. Bresky                       |   |
|                     |   | Gary S. Bresky                                       |
|                     |   | Chief  Financial Officer                             |
|                     |   | (Principal  Financial Officer)                       |

 

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**Indexto Exhibits**

 
| **Exhibit Number** | ** ** | **Description**                                                                  |
|-------------------------|------------|----------------------------------------------------------------------------------|
|                    |       |                                                                             |
| 31.1                    |       | Rule 13a-14(a)/15d-14(a) Certification  of Principal Executive Officer |
|                    |       |                                                                             |
| 31.2                    |       | Rule 13a-14(a)/15d-14(a) Certification  of Principal Financial Officer |
|                    |       |                                                                             |
| 32.1*                   |       | Section 1350 Certifications of Chief  Executive and Financial Officers      |

 

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

 

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