**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended March 31, 2008**

 

**OR**

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

 

**For thetransition period from                        to                        **

 

**Commission File Number: 000-51961**

 

**BehringerHarvard Opportunity REIT I, Inc.**

(Exact Name of Registrant as Specified in Its Charter)

 

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

 

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

(Address of Principal Executive Offices) (ZIP Code)

 

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

 

**None**

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

 

Indicateby check mark whether the Registrant:  (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the Registrant was required to file such reports) and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes x   Noo

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,” “accelerated filer,” and“smaller reporting company” in Rule 12b-2 of the Exchange Act. (Checkone):

 

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

 

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

 

Asof May 1, 2008, the Registrant had 54,437,140 shares of common stockoutstanding outstanding.

 

 

----

 

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

**FORM 10-Q**

**Quarter Ended March 31, 2008**

 

**PART I**

**FINANCIALINFORMATION**

 
| ** **             | ** **                                                                                                                                                             | **Page**   |
|------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Item 1.**            | **Financial  Statements (Unaudited)**                                                                                                                                  |       |
|                   |                                                                                                                                                                   |       |
|                   | Consolidated  Balance Sheets as of March 31, 2008 and December 31, 2007                                                                                      | 3          |
|                   |                                                                                                                                                                   |       |
|                   | Consolidated  Statements of Operations for the Three Months Ended March 31, 2008 and  2007                                                                        | 4          |
|                   |                                                                                                                                                                   |       |
|                   | Consolidated  Statements of Stockholders’ Equity and Comprehensive Loss for the Year Ended  December 31, 2007 and the Three Months Ended March 31, 2008 | 5          |
|                   |                                                                                                                                                                   |       |
|                   | Consolidated  Statements of Cash Flows for the Three Months Ended March 31, 2008 and  2007                                                                        | 6          |
|                   |                                                                                                                                                                   |       |
|                   | Notes to Consolidated Financial Statements                                                                                                                             | 7          |
|                   |                                                                                                                                                                   |       |
| **Item 2.**            | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                                        | **23**     |
| ** **             | ** **                                                                                                                                                             | ** ** |
| **Item 3.**            | **Quantitative  and Qualitative Disclosures About Market Risk**                                                                                                        | **31**     |
| ** **             | ** **                                                                                                                                                             | ** ** |
| **Item 4T.**           | **Controls and  Procedures**                                                                                                                                           | **31**     |
| ** **             | ** **                                                                                                                                                             | ** ** |
| **PART II**       |
| **OTHER  INFORMATION** |
|                   |                                                                                                                                                                   |       |
| **Item 1.**            | **Legal Proceedings**                                                                                                                                                  | 32         |
|                   |                                                                                                                                                                   |       |
| **Item 1A.**           | **Risk Factors**                                                                                                                                                       | 32         |
|                   |                                                                                                                                                                   |       |
| **Item 2.**            | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                                       | 32         |
|                   |                                                                                                                                                                   |       |
| **Item 3.**            | **Defaults  Upon Senior Securities**                                                                                                                                   | 33         |
|                   |                                                                                                                                                                   |       |
| **Item 4.**            | **Submission  of Matters to a Vote of Security Holders**                                                                                                               | 33         |
|                   |                                                                                                                                                                   |       |
| **Item 5.**            | **Other Information**                                                                                                                                                  | 33         |
|                   |                                                                                                                                                                   |       |
| **Item 6.**            | **Exhibits**                                                                                                                                                           | 33         |
|                   |                                                                                                                                                                   |       |
| **Signature**          |                                                                                                                                                                   | 34         |

 

2

----

 

**PART I**

**FINANCIAL INFORMATION**

 

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

 

**BehringerHarvard Opportunity REIT I, Inc.**

**ConsolidatedBalance Sheets**

**(inthousands, except share and per share amounts)**

(Unaudited)

 
| ** **                                                                                                                                               | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                               | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                                                                                                                                     |       |               |       |                  |       |
| **Assets**                                                                                                                                               |       |               |       |                  |       |
| **Real estate**                                                                                                                                          |       |               |       |                  |       |
| Land and improvements, net                                                                                                                               |       | $                  | 107,782    |                  | $          | 107,428 |   |
| Buildings and improvements, net                                                                                                                          |       | 338,513            |       | 287,237               |       |
| Real estate under development                                                                                                                            |       | 70,900             |       | 75,729                |       |
| **Total real estate**                                                                                                                                    |       | 517,195            |       | 470,394               |       |
|                                                                                                                                                     |       |               |       |                  |       |
| Condominium inventory                                                                                                                                    |       | 84,413             |       | 75,547                |       |
| Cash and cash equivalents                                                                                                                                |       | 47,081             |       | 78,498                |       |
| Restricted cash                                                                                                                                          |       | 4,539              |       | 4,731                 |       |
| Accounts receivable, net                                                                                                                                 |       | 9,893              |       | 7,736                 |       |
| Prepaid expenses and other assets                                                                                                                        |       | 3,341              |       | 3,493                 |       |
| Leasehold interests, net                                                                                                                                 |       | 40,837             |       | 41,543                |       |
| Investments in unconsolidated joint  ventures                                                                                                            |       | 36,001             |       | 36,445                |       |
| Furniture, fixtures and equipment, net                                                                                                                   |       | 9,754              |       | 9,173                 |       |
| Deferred financing fees, net                                                                                                                             |       | 5,138              |       | 3,755                 |       |
| Notes receivable                                                                                                                                         |       | 16,050             |       | 9,560                 |       |
| Lease intangibles, net                                                                                                                                   |       | 31,566             |       | 27,096                |       |
| Other intangibles, net                                                                                                                                   |       | 10,469             |       | 10,651                |       |
| Receivables from related parties                                                                                                                         |       | 94                 |       | 73                    |       |
| **Total assets**                                                                                                                                         |       | $                  | 816,371    |                  | $          | 778,695 |   |
|                                                                                                                                                     |       |               |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                            |       |               |       |                  |       |
| Notes payable                                                                                                                                            |       | $                  | 293,538    |                  | $          | 243,902 |   |
| Accounts payable                                                                                                                                         |       | 7,086              |       | 9,300                 |       |
| Payables to related parties                                                                                                                              |       | 879                |       | 901                   |       |
| Acquired below-market leases, net                                                                                                                        |       | 20,945             |       | 18,851                |       |
| Distributions payable                                                                                                                                    |       | 1,385              |       | 1,373                 |       |
| Accrued liabilities                                                                                                                                      |       | 14,383             |       | 21,750                |       |
| Other liabilities                                                                                                                                        |       | 3,767              |       | 1,223                 |       |
| **Total liabilities**                                                                                                                                    |       | 341,983            |       | 297,300               |       |
|                                                                                                                                                     |       |               |       |                  |       |
| **Commitments and contingencies**                                                                                                                        |       |               |       |                  |       |
|                                                                                                                                                     |       |               |       |                  |       |
| **Minority interest**                                                                                                                                    |       | 14,239             |       | 15,335                |       |
|                                                                                                                                                     |       |               |       |                  |       |
| **Stockholders’ Equity**                                                                                                                            |       |               |       |                  |       |
| Preferred stock, $.0001 par value per  share;                                                                                                            |       |               |       |                  |       |
| 50,000,000 shares authorized, none  outstanding                                                                                                          |       | —             |       | —                |       |
| Convertible stock, $.0001 par value per  share;                                                                                                          |       |               |       |                  |       |
| 1,000 shares authorized, 1,000 shares  issued and outstanding                                                                                            |       | —             |       | —                |       |
| Common stock, $.0001 par value per share;                                                                                                                |       |               |       |                  |       |
| 350,000,000 shares authorized, 54,326,477  and 54,056,354 shares issued and outstanding at March 31, 2008 and  December 31, 2007, respectively |       | 5                  |       | 5                     |       |
| Additional paid-in capital                                                                                                                               |       | 484,108            |       | 481,521               |       |
| Accumulated distributions in excess of net  loss                                                                                                         |       | (21,216            | )          | (14,982               | )          |
| Accumulated other comprehensive loss                                                                                                                     |       | (2,748             | )          | (484                  | )          |
| **Total stockholders’ equity**                                                                                                                      |       | 460,149            |       | 466,060               |       |
|                                                                                                                                                     |       |               |       |                  |       |
| **Total liabilities and stockholders’ equity**                                                                                                      |       | $                  | 816,371    |                  | $          | 778,695 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

3

----

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Consolidated Statements of Operations**

**(inthousands, except share and per share amounts)**

(Unaudited)

 
| ** **                                                                                              | ** ** | **Three months**        | ** ** | **Three months**        | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                              | ** ** | **ended**                    | ** ** | **ended**                    | ** ** |
| ** **                                                                                              | ** ** | **March 31, 2008** | ** ** | **March 31, 2007** | ** ** |
|                                                                                                    |       |                         |       |                         |       |
| **Revenues**                                                                                            |       |                         |       |                         |       |
| Rental revenue                                                                                          |       | $                            | 12,213     |                         | $          | 5,209 |   |
| Hotel revenue                                                                                           |       | 1,961                        |       | —                       |       |
|                                                                                                    |       |                         |       |                         |       |
| **Total revenues**                                                                                      |       | 14,174                       |       | 5,209                        |       |
|                                                                                                    |       |                         |       |                         |       |
| **Expenses**                                                                                            |       |                         |       |                         |       |
| Property operating expenses                                                                             |       | 5,526                        |       | 1,375                        |       |
| Interest expense                                                                                        |       | 2,271                        |       | 929                          |       |
| Real estate taxes                                                                                       |       | 1,545                        |       | 560                          |       |
| Property management fees                                                                                |       | 514                          |       | 127                          |       |
| Asset management fees                                                                                   |       | 932                          |       | 323                          |       |
| General and administrative                                                                              |       | 917                          |       | 307                          |       |
| Advertising costs                                                                                       |       | 515                          |       | 465                          |       |
| Depreciation and amortization                                                                           |       | 5,655                        |       | 1,949                        |       |
|                                                                                                    |       |                         |       |                         |       |
| **Total expenses**                                                                                      |       | 17,875                       |       | 6,035                        |       |
|                                                                                                    |       |                         |       |                         |       |
| Interest income                                                                                         |       | 981                          |       | 770                          |       |
|                                                                                                    |       |                         |       |                         |       |
| **Loss before income taxes, minority interest  and  equity in losses of unconsolidated joint ventures** |       | (2,720                       | )          | (56                          | )          |
|                                                                                                    |       |                         |       |                         |       |
| Provision for income taxes                                                                              |       | (47                          | )          | —                       |       |
| Equity in losses of unconsolidated joint  ventures                                                      |       | (860                         | )          | —                       |       |
| Minority interest                                                                                       |       | 1,450                        |       | (137                         | )          |
|                                                                                                    |       |                         |       |                         |       |
| **Net loss**                                                                                            |       | $                            | (2,177     | )                            | $          | (193 | ) |
|                                                                                                    |       |                         |       |                         |       |
| **Weighted average shares outstanding:**                                                                |       |                         |       |                         |       |
| Basic and diluted                                                                                       |       | 54,212,856                   |       | 20,700,400                   |       |
|                                                                                                    |       |                         |       |                         |       |
| **Loss per share:**                                                                                     |       |                         |       |                         |       |
| Basic and diluted                                                                                       |       | $                            | (0.04      | )                            | $          | (0.01 | ) |

 

*See Notesto Consolidated Financial Statements.*

 

4

----

 

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

**Consolidated Statements of Stockholders’ Equity andComprehensive Loss**

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

(Unaudited)

 
| ** **                                                    | ** ** | ** **                 | ** ** | ** **            | ** ** | ** **         | ** ** | ** **        | ** ** | ** **  | ** ** | **Accumulated**            | ** ** | **Accumulated**   | ** ** | ** **             | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|--------------------|------------|-------------------|------------|-------------|------------|----------------------------|------------|-------------------|------------|------------------------|------------|
| ** **                                                    | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | **Distributions** | ** ** | **Other**   | ** ** | **Total**                  | ** ** |
| ** **                                                    | ** ** | **Number of**         | ** ** | **Par**               | ** ** | **Number of** | ** ** | **Par**           | ** ** | **Paid-In** | ** ** | **in Excess of** | ** ** | **Comprehensive** | ** ** | **Stockholders’** | ** ** |
| ** **                                                    | ** ** | **Shares**                 | ** ** | **Value**             | ** ** | **Shares**         | ** ** | **Value**         | ** ** | **Capital** | ** ** | **Net loss**          | ** ** | **Loss**          | ** ** | **Equity**             | ** ** |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Balance at January 1, 2007                               |       | 1,000                      |       | $                     | —     |               | 18,202,576 |              | $          | 2           |       | $                          | 159,906    |              | $          | (461                   | )          | $ | — |   | $ | 159,447 |   |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Issuance of common stock, net                                 |       | —                     |       | —                |       | 35,081,049         |       | 3                 |       | 314,226     |       | —                     |       | —            |       | 314,229                |       |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Redemption of common stock                                    |       | —                     |       | —                |       | (148,951           | )          | —            |       | (1,366      | )          | —                     |       | —            |       | (1,366                 | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Distributions declared on common stock                        |       | —                     |       | —                |       | —             |       | —            |       | —      |       | (10,665                    | )          | —            |       | (10,665                | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Shares issued pursuant to Distribution Reinvestment Plan, net |       | —                     |       | —                |       | 921,680            |       | —            |       | 8,755       |       | —                     |       | —            |       | 8,755                  |       |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Comprehensive loss:                                           |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Net loss                                                      |       | —                     |       | —                |       | —             |       | —            |       | —      |       | (3,856                     | )          | —            |       | (3,856                 | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Other comprehensive loss:                                     |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Foreign currency translation loss                             |       | —                     |       | —                |       | —             |       | —            |       | —      |       | —                     |       | (121              | )          | (121                   | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Unrealized losses on interest rate derivatives                |       | —                     |       | —                |       | —             |       | —            |       | —      |       | —                     |       | (363              | )          | (363                   | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Total comprehensive loss                                      |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       | (4,340                 | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Balance at December 31, 2007                             |       | 1,000                      |       | —                |       | 54,056,354         |       | 5                 |       | 481,521     |       | (14,982                    | )          | (484              | )          | 466,060                |       |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Redemption of common stock                                    |       | —                     |       | —                |       | (54,021            | )          | —            |       | (490        | )          | —                     |       | —            |       | (490                   | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Distributions declared on common stock                        |       | —                     |       | —                |       | —             |       | —            |       | —      |       | (4,057                     | )          | —            |       | (4,057                 | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Shares issued pursuant to Distribution Reinvestment Plan, net |       | —                     |       | —                |       | 324,144            |       | —            |       | 3,077       |       | —                     |       | —            |       | 3,077                  |       |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Comprehensive loss:                                           |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Net loss                                                      |       | —                     |       | —                |       | —             |       | —            |       | —      |       | (2,177                     | )          | —            |       | (2,177                 | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Other comprehensive:                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Foreign currency translation gain                             |       | —                     |       | —                |       | —             |       | —            |       | —      |       | —                     |       | 24                |       | 24                     |       |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Unrealized losses on interest rate derivatives                |       | —                     |       | —                |       | —             |       | —            |       | —      |       | —                     |       | (2,288            | )          | (2,288                 | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Total comprehensive loss                                      |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       | (4,441                 | )          |
|                                                          |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Balance at March 31, 2008                                |       | 1,000                      |       | $                     | —     |               | 54,326,477 |              | $          | 5           |       | $                          | 484,108    |              | $          | (21,216                | )          | $ | (2,748 | ) | $ | 460,149 |   |

 

*See Notes to Consolidated Financial Statements.*

 

5

----

 

**BehringerHarvard Opportunity REIT I, Inc.**

**Consolidated Statements of Cash Flows**

**(inthousands)**

(Unaudited)

 
| ** **                                                                                       | ** ** | **Three months**        | ** ** | **Three months**        | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                       | ** ** | **ended**                    | ** ** | **ended**                    | ** ** |
| ** **                                                                                       | ** ** | **March 31, 2008** | ** ** | **March 31, 2007** | ** ** |
| **Cash flows from operating activities:**                                                        |       |                         |       |                         |       |
| Net loss                                                                                         |       | $                            | (2,177     | )                            | $          | (193 | ) |
| Adjustments to reconcile net loss to net cash  flows (used in) provided by operating activities: |       |                         |       |                         |       |
| Depreciation and amortization                                                                    |       | 4,569                        |       | 1,703                        |       |
| Amortization of deferred financing fees                                                          |       | 330                          |       | 244                          |       |
| Minority interest                                                                                |       | (1,456                       | )          | 137                          |       |
| Equity in losses of unconsolidated joint  ventures                                               |       | 860                          |       | —                       |       |
| Unrealized losses on derivatives                                                                 |       | (2,264                       | )          | —                       |       |
| Change in accounts receivable                                                                    |       | (2,132                       | )          | (1,655                       | )          |
| Change in inventory                                                                              |       | (9,442                       | )          | —                       |       |
| Change in prepaid expenses and other assets                                                      |       | (884                         | )          | (239                         | )          |
| Change in accounts payable                                                                       |       | (80                          | )          | 462                          |       |
| Change in other liabilities                                                                      |       | 2,544                        |       | (23                          | )          |
| Change in accrued liabilities                                                                    |       | (6,174                       | )          | 561                          |       |
| Change in payables to related parties                                                            |       | (42                          | )          | 198                          |       |
| Addition of lease intangibles                                                                    |       | (514                         | )          | —                       |       |
| **Cash (used in) provided by operating  activities**                                             |       | (16,862                      | )          | 1,195                        |       |
|                                                                                             |       |                         |       |                         |       |
| **Cash flows from investing activities:**                                                        |       |                         |       |                         |       |
| Escrow deposits and pre-acquisition costs on  real estate to be acquired                         |       | 1,063                        |       | (4,137                       | )          |
| Purchases of real estate properties                                                              |       | (12,441                      | )          | (885                         | )          |
| Acquisition of interest in unconsolidated  joint ventures                                        |       | (469                         | )          | —                       |       |
| Capital expenditures for real estate under  development                                          |       | (12,316                      | )          | (1,300                       | )          |
| Capital expenditures for real estate under  development of consolidated borrowers                |       | (7,739                       | )          | (5,424                       | )          |
| Additions of property and equipment                                                              |       | (741                         | )          | (5,565                       | )          |
| Change in restricted cash                                                                        |       | 192                          |       | (127                         | )          |
| Investment in notes receivable                                                                   |       | (6,490                       | )          | (14,165                      | )          |
| Fees paid to related party for mezzanine loan  arrangements                                      |       | (1,448                       | )          | (545                         | )          |
| **Cash used in investing activities**                                                            |       | (40,389                      | )          | (32,148                      | )          |
|                                                                                             |       |                         |       |                         |       |
| **Cash flows from financing activities:**                                                        |       |                         |       |                         |       |
| Financing costs                                                                                  |       | (317                         | )          | —                       |       |
| Proceeds from notes payable                                                                      |       | 16,392                       |       | —                       |       |
| Proceeds from mortgages of consolidated  borrowers                                               |       | 11,065                       |       | 3,015                        |       |
| Payments on notes payable                                                                        |       | (79                          | )          | —                       |       |
| Issuance of common stock                                                                         |       | —                       |       | 58,664                       |       |
| Redemptions of common stock                                                                      |       | (490                         | )          | (155                         | )          |
| Offering costs                                                                                   |       | —                       |       | (5,874                       | )          |
| Distributions                                                                                    |       | (965                         | )          | (553                         | )          |
| Contributions from minority interest holders                                                     |       | 415                          |       | 685                          |       |
| Distributions to minority interest holders                                                       |       | (171                         | )          | —                       |       |
| Change in subscriptions for common stock                                                         |       | —                       |       | 939                          |       |
| Change in subscription cash received                                                             |       | —                       |       | (969                         | )          |
| Change in payables to related parties                                                            |       | —                       |       | (74                          | )          |
| **Cash provided by financing activities**                                                        |       | 25,850                       |       | 55,678                       |       |
| Effect of exchange rate changes on cash and  cash equivalents                                    |       | (16                          | )          | —                       |       |
| Net change in cash and cash equivalents                                                          |       | (31,417                      | )          | 24,725                       |       |
| Cash and cash equivalents at beginning of  year                                                  |       | 78,498                       |       | 54,639                       |       |
| Cash and cash equivalents at end of year                                                         |       | $                            | 47,081     |                         | $          | 79,364 |   |

 

*See Notesto Consolidated Financial Statements.*

 

6

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

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

 

***Organization***

 

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

 

Weinvest in and operate real estate or real estate-related assets on anopportunistic basis.  In particular, wefocus on acquiring properties with significant possibilities for short-termcapital appreciation, such as those requiring development, redevelopment orrepositioning, or those located in markets and submarkets with higher volatility,lower barriers to entry, and high growth potential.   We may acquire a wide variety of properties,including office, industrial, retail, hospitality, recreation and leisure,multifamily, and other properties.  Wemay purchase existing or newly constructed properties or properties underdevelopment or construction, including multifamily properties for conversioninto condominiums.  Further, we mayinvest in real estate-related securities, including securities issued by otherreal estate companies, either for investment or in change of controltransactions completed on a negotiated basis or otherwise.  We also may invest in collateralizedmortgage-backed securities, mortgage, bridge or mezzanine loans, and Section 1031tenant-in-common interests, or in entities that make investments similar to theforegoing.

 

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

 

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

 

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

 

**2.****         Interim UnauditedFinancial Information**

 

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

 

Theresults for the interim periods shown in this report are not necessarilyindicative of future financial results. The accompanying consolidated balance sheet and consolidated statementof stockholders’ equity as of March 31, 2008 and consolidated statementsof operations and cash flows for the periods ended March 31, 2008 and 2007have not been audited by our independent registered public accountingfirm.  In the opinion of management, theaccompanying unaudited consolidated financial statements include alladjustments necessary to present fairly our consolidated financial position asof March 31, 2008 and December 31, 2007 and our consolidated resultsof operations and cash flows for the periods ended March 31, 2008 and2007.  Such adjustments are of a normalrecurring nature.

 

**3.****         Summary of SignificantAccounting Policies**

 

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

 

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

 

7

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

date of the financial statements and thereported amounts of revenues and expenses during the reporting period.  These estimates include such items aspurchase 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 ofPresentation***

 

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

 

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

 

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

 

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

 

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

 

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

 

Thefair value of any tangible assets acquired, expected to consist of land, landimprovements, buildings, building improvements, and furniture, fixtures andequipment, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to the tangible assets. Land values are derived from appraisals, and building and landimprovement values are calculated as replacement cost less depreciation ormanagement’s estimates of the relative fair value of these assets usingdiscounted cash flow analyses or similar methods.  Furniture, fixtures, and equipment values aredetermined based on current reproduction or replacement cost less depreciationand other estimated allowances based on physical, functional, or economicfactors.  The values of the buildings aredepreciated over their respective estimated useful lives ranging from 25 yearsfor commercial office property to 39 years for hotel/mixed-use property usingthe straight-line method.  Landimprovements are depreciated over the estimated useful life of 15 years, andfurniture, fixtures, and equipment are depreciated over estimated useful livesranging from five to seven years using the straight-line method.  Our leasehold interest is depreciated overits remaining contractual life, or approximately 101 years.

 

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

 

8

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

Thetotal value of identified real estate intangible assets that we may acquire inthe future is further allocated to in-place lease values and tenant relationshipsbased on our evaluation of the specific characteristics of each tenant’s leaseand our overall relationship with that respective tenant.  The aggregate value of in-place leasesacquired and tenant relationships is determined by applying a fair valuemodel.  The estimates of fair value ofin-place leases include an estimate of carrying costs during the expectedlease-up periods for the respective spaces considering current marketconditions.  In estimating fair value ofin-place leases, we consider items such as real estate taxes, insurance andother operating expenses as well as lost rental revenue during the expectedlease-up period and carrying costs that would have otherwise been incurred hadthe leases not been in place, including tenant improvements andcommissions.  The estimates of the fairvalue of tenant relationships also include costs to execute similar leasesincluding leasing commissions, legal costs, and tenant improvements as well asan estimate of the likelihood of renewal as determined by management on atenant-by-tenant basis.

 

Weamortize the value of in-place leases acquired in the future to expense overthe term of the respective leases.  Thevalue of tenant relationship intangibles is amortized to expense over theinitial term and any anticipated renewal periods, but in no event does theamortization period for intangible assets exceed the remaining depreciable lifeof the building.  Should a tenantterminate their lease, the unamortized portion of the in-place lease value andtenant relationship intangibles would be charged to expense.  As of March 31, 2008, the estimatedremaining useful lives for acquired lease intangibles range from approximatelyone year to 13 years.

 

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

 

Anticipatedamortization expense associated with the acquired lease intangibles andacquired other intangible assets as of March 31, 2008 is as follows(amounts in thousands):

 

| ** **                                                                                                                                                                                                                                                                                           | ** ** | **Lease / Other  Intangibles** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| April 1, 2008 - December 31, 2008                                                                                                                                                                                                                                                          |       | $                                        | 2,623      |   |
|                                                 2009 |       | 3,268                                    |       |
|                                                 2010 |       | 2,050                                    |       |
|                                                 2011 |       | 1,717                                    |       |
|                                                 2012 |       | 1,580                                    |       |
|                                                                                                                                                                                                                                                                                                      |            |                                          |            |  |

 

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

 
| ** **                                   | ** ** | ** **             | ** ** | ** **        | ** ** | ** **      | ** ** | **Acquired**     | ** ** | ** **    | ** ** | ** **      | ** ** |
|----------------------------------------------|------------|------------------------|------------|-------------------|------------|-----------------|------------|------------------|------------|---------------|------------|-----------------|------------|
| ** **                                   | ** ** | **Buildings and** | ** ** | **Land and** | ** ** | **Lease**       | ** ** | **Below-Market** | ** ** | **Leasehold** | ** ** | **Other**       | ** ** |
| **As of March 31, 2008** | ** ** | **Improvements**       | ** ** | **Improvements**  | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** | **Interest**  | ** ** | **Intangibles** | ** ** |
| Cost                                         |       | $                      | 348,187    |              | $          | 107,893         |       | $                | 38,150     |          | $          | (25,765         | )          | $ | 40,975 |   | $ | 11,339 |   |
| Less: depreciation and amortization          |       | (9,674                 | )          | (111              | )          | (6,584          | )          | 4,820            |       | (138          | )          | (870            | )          |
| Net                                          |       | $                      | 338,513    |              | $          | 107,782         |       | $                | 31,566     |          | $          | (20,945         | )          | $ | 40,837 |   | $ | 10,469 |   |

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

 

9

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

***Condominium Inventory***

 

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

 

Forcondominium inventory, at each reporting date, management compares theestimated fair value less costs to sell to the carrying value.  An impairment charge is recorded to theextent that the fair value less costs to sell is less than the carrying value.  We determine the estimated fair value ofcondominiums based on comparable sales in the normal course of business underexisting and anticipated market conditions. This evaluation takes into consideration estimated future sellingprices, costs spent to date, estimated additional future costs, and management’splans for the property.  There were noimpairment charges for the three months ended March 31, 2008 or 2007.

 

***Cash and Cash Equivalents***

 

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

 

***Restricted Cash***

 

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

 

***Accounts Receivable***

 

Accountsreceivable primarily consist of receivables from our hotel operators andtenants related to our other consolidated properties.  The allowance for doubtful accounts was $0.2million and $0.1 million as of March 31, 2008 and December 31, 2007,respectively.

 

***Prepaid Expenses and Other Assets***

 

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

 

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

 

Furniture, fixtures, and equipmentare recorded at cost and are depreciated using the straight-line method overtheir estimated useful lives of five to seven years.  Maintenance and repairs are charged tooperations as incurred while renewals or improvements to such assets are capitalized.  Accumulated depreciation associated with ourfurniture, fixtures, and equipment was $1.8 million and $1.4 million as of March 31,2008 and December 31, 2007, respectively.

 

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

 

Forreal estate we wholly-own, our management monitors events and changes incircumstances indicating that the carrying amounts of the real estate assetsmay not be recoverable.  When such eventsor changes in circumstances occur, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset and from its eventual disposition, to the carryingamount of the asset.  In the event thatthe carrying amount exceeds the estimated future undiscounted operating cashflows, we recognize an impairment loss to adjust the carrying amount of theasset to estimated fair value.  Therewere no impairment charges for the three months ended March 31, 2008 and2007.

 

Forreal estate we own through an investment in a limited partnership, jointventure, tenant-in-common interest, or other similar investment structure, ateach reporting date, management compares 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.  Therewere no impairment charges for the three months ended March 31, 2008 or2007.

 

***Notes Receivable***

 

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

 

10

----

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

of the collateral securing such note.  There were no impairment charges for thethree months ended March 31, 2008 or 2007.

 

***Deferred Financing Fees***

 

Deferredfinancing fees are recorded at cost and are amortized to interest income fornotes receivable and interest expense for notes payable using a straight-linemethod that approximates the effective interest method over the life of therelated debt.  Accumulated amortizationof deferred financing fees was $1.5 million and $1.2 million as of March 31,2008 and December 31, 2007, respectively.

 

***Derivative Financial Instruments***

 

SFASNo. 133, “Accounting for Derivative Instruments and Hedging Activities,”as amended and interpreted, establishes accounting and reporting standards forderivative instruments, including certain derivative instruments embedded inother contracts, and for hedging activities. Our objective in using derivatives is to add stability to interestexpense and to manage our exposure to interest rate movements or otheridentified risks and to minimize the variability caused by foreign currencytranslation risk related to our net investment in foreign real estate.  To accomplish these objectives, we usevarious types of derivative instruments to manage fluctuations in cash flows resultingfrom interest rate risk attributable to changes in the benchmark interest rateof LIBOR.  These instruments includeLIBOR-based interest rate swaps and caps. For our net investment in a foreign real estate property, we use foreigncurrency forward exchange contracts to eliminate the impact of foreign currencyexchange movements on our financial position.

 

Wemeasure our derivative instruments and hedging activities at fair value andrecord them as an asset or liability, depending on our rights or obligationsunder the applicable derivative contract. For derivatives designated as fair value hedges, the changes in the fairvalue of both the derivative instrument and the hedged items are recorded inearnings.  Derivatives used to hedge theexposure to variability in expected future cash flows, or other types offorecasted transactions, are considered cash flow hedges.  For derivatives designated as cash flowhedges, the effective portions of changes in fair value of the derivatives arereported in other comprehensive income and are subsequently reclassified intoearnings when the hedged item affects earnings. For derivatives designated as net investment hedges, changes in fairvalue are reported in other comprehensive income as part of the foreign currencytranslation gain or loss.  Changes infair value of derivative instruments not designated as hedges and ineffectiveportions of hedges are recognized in earnings in the affected period.  We assess the effectiveness of each hedgingrelationship by comparing the changes in fair value or cash flows of thederivative hedging instrument with the changes in fair value or cash flows ofthe designated hedged item or transaction.

 

Asof March 31, 2008, we do not have any derivatives designated as fair valuehedges, nor are derivatives being used for trading or speculative purposes.

 

***Asset Retirement Obligations***

 

Werecord the fair value of any conditional asset retirement obligations inaccordance with FIN 47, “Accounting for Conditional Asset RetirementObligations.”  As part of the anticipatedrenovation and redevelopment of an acquired property, we will incur futurecosts for the abatement of regulated materials, primarily asbestos-containingmaterials, as required under environmental regulations.  Our estimate of the fair value of theliability is based on future anticipated costs to be incurred for the legalremoval or remediation of the regulated materials.  The balance of the asset retirementobligation was $0.2 million as of both March 31, 2008 and December 31,2007, and was included in other liabilities.

 

***Foreign Currency Translation***

 

SFAS No. 52, “Foreign Currency Translation,”establishes standards requiring the financial results of our internationalinvestment to be properly measured and reported in U.S. dollars, our reportingcurrency.  The primary currency in whichour international investment conducts business is the British pound.  All asset and liability accounts for ourinternational investment are translated at the current exchange rate at each reportingperiod.  Contributed capital istranslated using the historical rate of exchange when capital iscontributed.  Income statement items forthis investment are translated at the average exchange rate during thereporting period.  We maintainEuro-denominated bank accounts that are translated into U.S. dollars at thecurrent exchange rate at each reporting period. The resulting translation adjustments are recorded as a separatecomponent of accumulated other comprehensive loss in our consolidated statementof stockholders’ equity.  The cumulativeforeign currency translation adjustment was less than $0.1 million and $0.1million as of March 31, 2008 and December 31, 2007, respectively.

 

11

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

***Accumulated Other Comprehensive Loss***

 

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

 

***Revenue Recognition***

 

We recognizerental income generated from leases on real estate assets on a straight-linebasis over the terms of the respective leases, including the effect of rentholidays, if any.  Straight-line rentalrevenue of $1.4 million and $0.9 million was recognized in rental revenuesfor the three months ended March 31, 2008 and 2007, respectively.  Hotel revenue is derived from the operationsof The Lodge & Spa at Cordillera and consists of guest room, food andbeverage, and other revenue, and is recognized as the services are rendered.

 

***Advertising Costs***

 

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

 

***Income Taxes***

 

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

 

On May 18,2006, the State of Texas enacted a new law which replaced the existing statefranchise tax with a “margin tax,” effective January 1, 2007.  For the three months ended March 31,2008, we recognized a provision for current tax expense of less than $0.1million and a provision for deferred tax expense of less than $0.1 millionrelated to the Texas margin tax.  For thethree months ended March 31, 2007, we had no significant tax liability orbenefit related to the Texas margin tax.

 

***Stock-Based Compensation***

 

Wehave a stock-based incentive award plan for our directors and consultants andfor employees, directors, and consultants of our affiliates.  We account for our incentive award plan inaccordance with SFAS No. 123R, “Share-Based Payment.”  Awards are granted at the fair market valueon the date of grant with fair value estimated using the Black-Scholes-Mertonoption valuation model, which incorporates assumptions surrounding volatility,dividend yield, the risk-free interest rate, expected life, and the exerciseprice as compared to the underlying stock price on the grant date.  SFAS No. 123R also requires the taxbenefits associated with these share-based payments to be classified asfinancing activities in the consolidated statement of cash flows, rather thanas operating cash flows as required under previous regulations.  For the three months ended March 31,2008 and 2007, we had no significant compensation cost related to our incentiveaward plan.

 

***Concentration of Credit Risk***

 

AtMarch 31, 2008, we had cash and cash equivalents and restricted cash ondeposit in financial institutions in excess of federally insured levels.  We regularly monitor the financial stabilityof the financial institutions and believe that we are not exposed to anysignificant credit risk.

 

***Minority Interest***

 

Wehold a primary beneficiary interest as a lender in two variable interestentities that own real estate properties and thus, we consolidate theiraccounts with and into our accounts. Minority interest represents the non-controlling ownership interest’sproportionate share of the equity in our consolidated real estate investmentsconsisting of the 5%, 15%, 10%, 30%, and 20% unaffiliated partners’ share ofthe equity in Chase Park Plaza, The Lodge & Spa at Cordillera, Rio 

 

12

----

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

Salado Business Center, Frisco Square, andBecket House, respectively, as well as 100% of the equity of the two propertieswe consolidate under FIN 46R as a lender and primary beneficiary.  Income and losses are allocated to minorityinterest holders based on their ownership percentage.

 

***Reportable Segments***

 

SFASNo. 131, “Disclosures about Segments of an Enterprise and RelatedInformation,” establishes standards for reporting financial and descriptiveinformation about an enterprise’s reportable segments.  We have determined that we have onereportable segment, with activities related to the ownership, development andmanagement of real estate assets.  Our incomeproducing properties generated 100% of our consolidated revenues for the threemonths ended March 31, 2007 and 2008. Our chief operating decision maker evaluates operating performance on anindividual property level.  Therefore,our properties are aggregated into one reportable segment for the three monthsended March 31, 2008 and 2007.

 

***Loss per Share***

 

Lossper share is calculated based on the weighted average number of sharesoutstanding during each period.  As of March 31,2008 and 2007, we had options to purchase 39,583 and 26,250 shares of commonstock outstanding, respectively, both at a weighted average exercise price of$9.10.  These options are excluded fromthe calculation of earnings per share for the three months ended March 31,2008 and 2007 because the effect would be anti-dilutive.  The weighted average shares outstanding usedto calculate both basic and diluted income per share were the same for thethree months ended March 31, 2008 and 2007, respectively.

 

# **4.**         RecentlyAnnounced Accounting Pronouncements

# ** **

InSeptember 2006, the FASB issued Statement No. 157, “Fair ValueMeasurements” (“SFAS 157”).  SFAS 157defines fair value, establishes a framework for measuring fair value ingenerally accepted accounting principles, and expands disclosures about fairvalue measurements.  We adopted theprovisions of SFAS 157 effective January 1, 2008.  See Footnote No. 5, “Assets andLiabilities Measured at Fair Value,” for additional information.

 

InFebruary 2008, the FASB staff issued Staff Position No. 157-2, “EffectiveDate of FASB Statement No. 157” (“FSP SFAS 157-2”).  FSP SFAS 157-2 delayed the effective date ofSFAS 157 for nonfinancial assets and nonfinancial liabilities, except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually).  Theprovisions of FSP SFAS 157-2 are effective for the Company’s fiscal yearbeginning January 1, 2009.  We arecurrently assessing the effect FSP SFAS 157-2 may have on our consolidatedresults of operations and financial position.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities — Including an Amendment ofFASB Statement No. 115.”  The fairvalue option established by SFAS No. 159 permits all entities tochoose to measure eligible items at fair value at specified electiondates.  A business entity will reportunrealized gains and losses on items for which the fair value option has beenelected in earnings (or another performance indicator if the business entitydoes not report earnings) at each subsequent reporting date.  SFAS No. 159 is effective for fiscalyears beginning after November 15, 2007. We have not elected the fair value measurement option for any financialassets or liabilities at the present time.

 

InDecember 2007, the FASB issued SFAS No. 141(R), “BusinessCombinations.”  This Statement replaces SFAS No. 141, “BusinessCombinations,” but retains the fundamental requirement that the acquisitionmethod of accounting, or purchase method, be used for all business combinationsand for an acquirer to be identified for each business combination.  ThisStatement is broader in scope than that of Statement 141, which applied only tobusiness combinations in which control was obtained by transferringconsideration.  SFAS 141R applies thesame method of accounting (the acquisition method) to all transactions andother events in which one entity obtains control over one or more otherbusinesses.  This Statement also makes certain other modifications toStatement 141, including a broader definition of a business and the requirementthat acquisition related costs are expensed as incurred.  This Statementapplies to business combinations occurring on or after the beginning of thefirst annual reporting period beginning on or after December 15,2008.  Early adoption is notallowed.  We are currently assessing theeffect SFAS No. 141(R) may have on our consolidated results ofoperations and financial position.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements - An amendmentof ARB No. 51.”  This Statement amends Accounting Research Bulletin No. 51to establish accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interestin a subsidiary, which is sometimes referred to as minority interest, is

 

13

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an ownership interest in the consolidatedentity that should be reported as equity in the consolidated financialstatements.  Among other requirements, this Statement requiresconsolidated net income to be reported at amounts that include the amountsattributable to both the parent and the noncontrolling interest.  It also requires disclosure, on the face ofthe consolidated income statement, of the amounts of consolidated net incomeattributable to the parent and to the noncontrolling interest.  ThisStatement is effective for fiscal years, and interim periods within those fiscalyears, beginning on or after December 15, 2008 (that is, January 1,2009, for entities with calendar year-ends). Earlier adoption is prohibited. This Statement shall be applied prospectively as of the beginning of thefiscal year in which this Statement is initially applied, except for thepresentation and disclosure requirements. The presentation and disclosure requirements shall be appliedretrospectively for all periods presented.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosuresabout Derivative Instruments and Hedging Activities, an amendment of FASBStatement No. 133.”* *SFAS No. 161 requiresenhanced disclosures about a company’s derivative and hedging activities. Theseenhanced disclosures will discuss (a) how and why a company uses derivativeinstruments, (b) how derivative instruments and related hedged items areaccounted for under FASB Statement No. 133 and its related interpretationsand (c) how derivative instruments and related hedged items affect acompany’s financial position, results of operations and cash flows.  SFAS No. 161 is effective forfiscal years beginning on or after November 15, 2008, with earlieradoption allowed.  The principal impactto us will be to expand our disclosures regarding derivative instruments and hedgingactivities.

 

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

 

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

 

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

 

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

 

*Derivative financial instruments*

 

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

 

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

 

14

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

of March 31, 2008, wehave assessed the significance of the impact of the credit valuation adjustmentson the overall valuation of our derivative positions and have determined thatthe credit valuation adjustments are not significant to the overall valuationof our derivatives.  As a result, we havedetermined that our derivative valuations in their entirety are classified inLevel 2 of the fair value hierarchy.

 

The following fair value hierarchy table presents information about ourassets and liabilities measured at fair value on a recurring basis (amounts inthousands):

 
| ** **                       | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** |
|----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| **Assets**                       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| Derivative financial instruments |       | $                | —     |             | $          | 672              |       | $          | —     |   | $ | 672 |   |
|                             |       |             |       |             |       |             |       |       |       |
| **Liabilities**                  |       |             |       |             |       |             |       |       |       |
| Derivative financial instruments |       | $                | —     |             | $          | 2,716            |       | $          | —     |   | $ | 2,716 |   |

 

**6.****        ****Acquisitions**

 

***Real Estate Asset Acquisitions***

 

OnFebruary 26, 2008, we acquired a single-tenant office building known asNorthborough Tower, located in Houston, Texas (“Northborough Tower”).  Northborough Tower is a 14-story officebuilding containing approximately 206,500 rentable square feet, with a four-levelattached parking garage, located on approximately 5.4 acres of land.  The total contract purchase price forNorthborough Tower, exclusive of closing costs, was $32.9 million.  We used proceeds from our offering of commonstock to the public plus assumed debt totaling $21 million to acquireNorthborough Tower.

 

Thepurchase price has been allocated among the assets acquired and liabilitiesassumed, which is subject to change, no later than twelve months from theacquisition date.   The acquired intangibleassets and liabilities are amortized over the term of the acquired lease ofapproximately ten years.  The assumeddebt has been adjusted to its estimated fair market value based on currentrates offered to us for debt with similar terms and the resulting premium isbeing amortized over the note’s remaining term to maturity of January 11,2016.

 

**7.****        ****Real Estate Investments**

 

Asof March 31, 2008, we wholly-owned ten properties and consolidated fiveproperties through investments in joint ventures.  In addition, we are the mezzanine lender fortwo multi-family properties that we consolidate under FIN 46R, one underdevelopment and the other fully operational as of March 31, 2008.  In addition, we have non-controlling,unconsolidated ownership interests in three properties that are accounted forusing the equity method.  Capitalcontributions, distributions, and profits and losses of these properties areallocated in accordance with the terms of the applicable partnershipagreement.  The following table presentscertain information about our unconsolidated properties as of March 31,2008 and December 31, 2007 (amounts in thousands):

 
| ** **                   | ** ** | ** **              | ** ** | **Carrying Value of Investment** | ** ** |
|------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|
| **Property Name**       | ** ** | **Ownership  Interest** | ** ** | **March 31,  2008**                        | ** ** | **December 31,  2007** | ** ** |
| Royal Island                 |       | 31%                     |       | $                                               | 22,830     |   | $ | 22,801 |   |
| GrandMarc at Westberry Place |       | 50%                     |       | 7,561                                           |       | 7,765 |   |
| GrandMarc at the Corner      |       | 50%                     |       | 5,610                                           |       | 5,879 |   |
| Total                        |       |                    |       | $                                               | 36,001     |   | $ | 36,445 |   |

 

15

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

** **

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

 
| ** **                   | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| Real estate assets, net      |       | $                  | 181,026    |                  | $          | 167,188 |   |
| Cash and cash equivalents    |       | 20,326             |       | 1,985                 |       |
| Other assets                 |       | 2,816              |       | 3,290                 |       |
| Total assets                 |       | $                  | 204,168    |                  | $          | 172,463 |   |
|                         |       |               |       |                  |       |
| Notes payable                |       | $                  | 106,194    |                  | $          | 75,838 |   |
| Other liabilities            |       | 7,027              |       | 4,536                 |       |
| Total liabilities            |       | 113,221            |       | 80,374                |       |
|                         |       |               |       |                  |       |
| Equity                       |       | 90,947             |       | 92,089                |       |
| Total liabilities and equity |       | $                  | 204,168    |                  | $          | 172,463 |   |

 

For the three months ended March 31, 2008, werecognized $0.9 million of equity in losses. We did not have any investments in unconsolidated joint ventures duringthe three months ended March 31, 2007. Our equity in losses from these investments is our proportionate shareof the combined losses of our unconsolidated joint ventures for the threemonths ended March 31, 2008 as follows (amounts in thousands):

 
| ** **                       | ** ** | **March 31,** | ** ** |
|----------------------------------|------------|--------------------|------------|
| ** **                       | ** ** | **2008**           | ** ** |
| Revenue                          |       | $                  | 2,169      |   |
|                             |       |               |       |
| Operating expenses:              |       |               |       |
| Operating expenses               |       | 646                |       |
| Property taxes                   |       | 221                |       |
| Total operating expenses         |       | 867                |       |
|                             |       |               |       |
| Operating income                 |       | 1,302              |       |
|                             |       |               |       |
| Non-operating (income) expenses: |       |               |       |
| Depreciation and amortization    |       | 1,015              |       |
| Interest and other, net          |       | 2,292              |       |
| Total non-operating expenses     |       | 3,307              |       |
| Net loss                         |       | $                  | (2,005     | ) |
| Company’s share of net loss |       | $                  | (860       | ) |

 

**8.         Variable InterestEntities**

 

In2006, we agreed to provide secured mezzanine financing with an aggregateprincipal amount of up to $22.7 million to unaffiliated third-partyentities that own apartment communities under development (the “Alexan Voss” inHouston, Texas and “Alexan Black Mountain” in Henderson, Nevada properties,respectively).  These entities also havesecured construction loans with third-party lenders, with an aggregateprincipal amount of up to $68.6 million. Our mezzanine loans are subordinate to the construction loans.  In addition, we have entered into optionagreements allowing us to purchase the ownership interests in Alexan Voss andAlexan Black Mountain after each project’s substantial completion.

 

Based on ourevaluation, we have determined that these entities meet the criteria ofvariable interest entities under FIN 46R and that we are the primarybeneficiary of these variable interest entities.  Therefore, we have consolidated the entities,including the related real estate assets and third-party constructionfinancing.  As of March 31, 2008,there was $77.8 million of related real estate assets and real estate underdevelopment related to Alexan Voss and Alexan Black

 

16

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

Mountain, whichcollateralizes the outstanding principal balance of the construction andmezzanine loans of $73.3 million.  Thethird-party construction lenders have no recourse to the general credit of usas the primary beneficiary, but their loans are guaranteed by the owners of thevariable interest entities.  As of March 31,2008, the outstanding principal balance under our mezzanine loans was $22.7million, which is eliminated, along with accrued interest and loan originationfees, upon consolidation.

 

InMay 2007, for an initial cash investment of $20 million, we acquired anapproximate 31% equity interest as a limited partner in the development andconstruction of a resort hotel, spa, golf course, marina, and residences onthree islands located in the Commonwealth of Bahamas (“Royal Island”).  In December 2007, we committed up to $40million as a bridge loan to the Royal Island entity for the continuingconstruction and development of the property, of which $14.3 million wasoutstanding to us at March 31, 2008. Based on our evaluation, we have determined that the entity meets thecriteria of a variable interest entity under FIN 46R but that we are not theprimary beneficiary.  Accordingly, we donot consolidate the Royal Island entity and instead account for it under theequity method of accounting in accordance with Statement of Position 78-9, asamended and interpreted.  At March 31,2008, there was approximately $106.7 million of related real estate assets and real estate under development related toRoyal Island.

** **

**9.         Notes Receivable**

 

Welease the hotel portion of the Chase Park Plaza property to the hotel operator,an unaffiliated entity that owns the remaining 5% of Chase Park Plaza.  In conjunction with the lease agreement, wemade a working capital and inventory loan of up to $1.9 million to the hoteloperator in December 2006.  Theinterest rate under the note is fixed at 5% per annum.  The term of the note is the earlier of December 31,2016 or the termination of the related hotel lease agreement.  Annual payments of interest only are requiredeach December with any remaining balance payable at the maturity date.  In accordance with the hotel lease agreement,the tenant will receive a reduction in its base rental payment due in January inthe amount of the interest paid on the promissory note in the previousDecember.  This reduction in the leasepayment is reflected as a straight-line adjustment to base rental revenue.  At March 31, 2008, the note receivablebalance was $1.7 million.

 

InDecember 2007, we participated in a bridge loan financing arrangement forthe continuing development and construction of the Royal Island resort hotel,spa, golf course, marina, and residences. We own an approximately 31% interest as a limited partner in the RoyalIsland property.  The aggregate principalamount available under the bridge loan is $60 million, of which we are makingavailable up to $40 million.  The loanaccrues interest at the one-month LIBOR rate plus 8% per annum and monthlypayments of interest only are required with any remaining balance payable atthe maturity date, December 20, 2008. At March 31, 2008, the loan balance owed to us was $14.3 millionwith an interest rate of 10.7%.

 

**10.      Capitalized Costs**

 

Wecapitalize interest, property taxes, insurance, and construction costs to realestate under development.  During thethree months ended March 31, 2008, we capitalized $17.9 million of suchcosts associated with real estate under development and certain investmentsaccounted for by the equity method including $7.2 million and $0.2 million,respectively, in interest and deferred financing costs.

 

Certainredevelopment costs including interest, property taxes, insurance, andconstruction costs associated with Chase Park Plaza and The Lodge &Spa at Cordillera have been capitalized to condominium inventory on ourconsolidated balance sheet at March 31, 2008.  During the three months ended March 31,2008, we capitalized a total of $9.1 million of such costs associated with thecondominium redevelopment at Chase Park Plaza and The Lodge & Spa atCordillera, including $2.3 million of interest and deferred financing costs.

 

Duringthe first quarter of 2008, $1 million in costs were transferred from land toreal estate under development on our balance sheet.  Also, during the first quarter of 2008, $22million and $0.8 million of real estate under development costs weretransferred to building and improvements and to furniture, fixtures, andequipment, respectively, on our balance sheet.

 

# **11.      Notes Payable**

# ** **

Ournotes payable balance was $293.5 million at March 31, 2008, as compared to$243.9 million at December 31, 2007, and consists of borrowings andassumptions of debt related to our property acquisitions as well as the notespayable of our mezzanine borrowers we consolidate under FIN 46R.  Each ofour mortgage loans is collateralized by one or more of

 

17

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

our properties.  At March 31, 2008, ournotes payable interest rates ranged from 4.30% to 8.25%, with a weightedaverage interest rate of approximately 5.14%.  Of our $293.5 million innotes payable at March 31, 2008, $253.3 million represented debt subjectto variable interest rates.  At March 31, 2008, our notes payablehave maturity dates that range from May 2008 to January 2016. Our loan agreements generally stipulate that we comply with certain reportingand financial covenants.  These covenants include among other things,notifying the lender of any change in management and maintaining minimum debtservice coverage ratios.  At March 31, 2008, we were in compliancewith each of the debt covenants under our loan agreements.

 

OnFebruary 13, 2008, we entered into a senior secured revolving creditfacility providing for up to $75 million of secured borrowings with Bank of America,as lender and administrative agent, and other lending institutions to become aparty to the credit agreement.  Theinitial credit facility allows us to borrow up to $75 million in revolvingloans, of which up to $20 million is available for issuing letters ofcredit.  Loans under the credit facilitybear interest at an annual rate that is equal to or a combination of (1) theLIBOR plus an applicable margin that, depending upon the debt service coverageratio, may vary from 1.5% to 1.7%, or (2) the prime rate plus anapplicable margin that, depending upon the debt service coverage ratio, mayvary from 0% to 0.2%.  The creditfacility matures on February 13, 2011. The credit facility is secured by a first lien on all real propertyassets in a collateral pool consisting of:

 

·                  RegencyCenter, Houston, TX

·                  12600Whitewater, Minnetonka, MN

·                  5000S. Bowen Road, Arlington, TX

·                  2603Augusta, Houston, TX

·                  NorthpointCentral, Houston, TX

·                  BentTree Green, Dallas, TX

·                  LasColinas Commons, Irving, TX

 

The creditfacility may be increased to up to $150 million upon satisfaction of certainconditions including additions to the collateral pool.  We have unconditionally guaranteed payment ofthe $75 million senior secured revolving credit facility.  There were no borrowings under the creditfacility as of March 31, 2008.

 

Aspart of our acquisition of Northborough Tower on February 26, 2008, weassumed a $21 million note payable to a financial institution to pay a portionof the purchase price.  The interest rateunder the note is fixed at 5.67% with minimum monthly payments of principal andinterest required to the maturity date, January 11, 2016, at which timeany unpaid principal balance is due. Northborough Tower is held as collateral for the note.

 

Thefollowing table summarizes our contractual obligations for principal paymentsas of March 31, 2008 (amounts in thousands):

 
| **Principal Payments Due:**       | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| April 1, 2008 - December 31, 2008 |       | $          | 29,547     |   |
| 2009                                        |       | 63,505     |       |
| 2010                                        |       | 160,509    |       |
| 2011                                        |       | 640        |       |
| 2012                                        |       | 1,660      |       |
| Thereafter                                  |       | 36,440     |       |
| Unamortized premium                         |       | 1,237      |       |
|                                        |       | $          | 293,538    |   |

 

**12.      Derivative Instruments and HedgingActivities**

 

Weaccount for our derivatives and hedging activities under SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” as amended andinterpreted.  In June 2007, we entered into two interest ratecap agreements associated with our Santa Clara Tech Center property.  In November 2007, we entered into aforeign currency forward contract to hedge our net investment in Becket House.  In December 2007, we entered intointerest rate swap and interest rate cap agreements associated with Chase ParkPlaza and Becket House.   The swap andcap agreements related to Becket House were not designated a hedge until December 31,2007.  Accordingly, the change in theirfair value through December 31, 2007 was reported in our consolidatedstatement of operations as a component of interest expense.

 

18

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

Wemay be exposed to the risk associated with variability of interest rates thatmight impact our cash flows and the results of operations.  Thehedging strategy of entering into interest rate caps and swaps, therefore, isto eliminate or reduce, to the extent possible, the volatility of cashflows.  In addition, we may be exposed to foreign currency exchangerisk related to our net investment in the Becket House leasehold interest.  Accordingly, our hedging strategy is toprotect our net investment in a British-pound-denominated entity against therisk of adverse changes in British pound to U.S. dollar exchange rates.

 

Thefollowing table summarizes the notional values of our derivative financialinstruments as of March 31, 2008. The notional values provide an indication of the extent of ourinvolvement in these instruments at March 31, 2008, but do not representexposure to credit, interest rate, or market risks (amounts in thousands).

 
| **Hedge Type / Description**     | ** ** | **Notional  Value** | ** ** | **Interest Rate/  Strike Rate** | ** ** | **Maturity** | ** ** |
|-------------------------------------------------|------------|---------------------|------------|-------------------------------------------|------------|--------------|------------|
| Cash Flow Hedges                                | ** ** | ** **          | ** ** | ** **                                | ** ** | ** **   | ** ** |
| Interest rate cap - Santa Clara Tech Center     |       | $                   | 35,115     |                                      | 6          | %            |       | June 15, 2010 |   |
| Interest rate cap - Santa Clara Tech Center     |       | $                   | 17,000     |                                      | 6          | %            |       | June 15, 2010 |   |
| Interest rate cap - Chase - Private  Residences |       | $                   | 30,000     |                                      | 6          | %            |       | December 15, 2009 |   |
| Interest rate swap - Chase Park Plaza Hotel     |       | $                   | 63,777     |                                      | 3.82       | %            |       | November 15, 2010 |   |
| Interest rate cap - Becket House                |       | £              | 12,700     |                                      | 5.75       | %            |       | November 21, 2010 |   |
| Interest rate swap - Becket House               |       | £              | 12,700     |                                      | 5.50       | %            |       | November 21, 2009 |   |
|                                            |       |                |       |                                      |       |         |       |   |
| Net Investment Hedges                           |       |                |       |                                      |       |         |       |   |
| Foreign currency forward - Becket House         |       | £              | 6,120      |                                      | 1.9644     |         |       | November 23, 2011 |   |

 

**13.      Stockholders’ Equity**

 

On November 23, 2004 (date of inception), we sold 1,000 shares ofconvertible stock and 21,739 shares of common stock to Behringer HarvardHoldings, LLC (“Behringer Harvard Holdings”) for $201,000 in cash.  Pursuant to its terms, the convertible stockgenerally is convertible into shares of our common stock with a value equal to15% of the amount by which (1) our enterprise value, including the totalamount of distributions paid to our stockholders, exceeds (2) the sum ofthe aggregate capital invested by our stockholders plus a 10% cumulative, non-compounded,annual return on such capital. Conversion of the convertible stock may be limited by our board ofdirectors if it determines that full conversion may jeopardize ourqualification as a REIT.  Our board ofdirectors may authorize additional shares of capital stock and theircharacteristics without obtaining stockholder approval.

 

***Share Redemption Program***

 

Our board of directorshas authorized and adopted a share redemption program that enables ourstockholders to sell their shares to us in limited circumstances after theyhave held them for at least one year. The purchase price for the redeemed shares is set forth in theprospectus for the primary offering of our common stock, as supplemented.  Our board of directors reserves the right inits sole discretion at any time, and from time to time, to (1) waive theone-year holding period in the event of the death, disability or bankruptcy ofa stockholder or other exigent circumstances, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program. Under the terms of the plan, during any calendar year, we will notredeem in excess of 5% of the weighted average number of shares outstandingduring the twelve-month period immediately prior to the date ofredemption.  In addition, our board ofdirectors will determine whether we have sufficient cash from operations torepurchase shares, and such purchases will generally be limited to proceeds ofour distribution reinvestment plan plus 1% of operating cash flow for theprevious fiscal year (to the extent positive). We redeemed 54,021 shares of common stock during the three months ended March 31,2008 for an aggregate total of 210,754 shares of common stock redeemed sinceinception.

 

***Incentive Award Plan***

 

TheBehringer Harvard Opportunity REIT I, Inc. Amended and Restated 2004Incentive Award Plan (“Incentive Award Plan”) was approved by our board ofdirectors on July 19, 2005 and by our stockholders on July 25, 2005,and provides for equity awards to our directors and consultants and toemployees, directors, and consultants of our affiliates.  A total of 11,000,000 shares have beenauthorized and reserved for issuance under our Incentive Award Plan.  As of March 31, 2008, options topurchase 39,583 shares of stock were outstanding, of which 26,250 are fullyvested, at a weighted average exercise price of $9.10.

 

19

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

## ***Distributions***

## *** ***

Weinitiated the payment of monthly distributions in August 2006 in theamount of a 2% annualized rate of return, based on an investment in our commonstock of $10.00 per share and calculated on a daily record basis of $0.0005479per share.  In December 2006, ourboard of directors declared distributions to be paid in the first quarter of2007 in the amount of a 2.5% annualized rate of return, calculated on a dailyrecord basis of $0.0006849 per share.  InMarch 2007, our board of directors declared distributions to be paid inthe second quarter of 2007 in the amount of a 3% annualized rate of return,calculated on a daily record basis of $0.0008219 per share.  The distribution rate has remained at3%.  Pursuant to our Second Amended andRestated Distribution Reinvestment Plan (“Secondary DRIP”), stockholders mayelect to reinvest any cash distribution in additional shares of commonstock.  We record all distributions whendeclared, except that the stock issued through our distribution reinvestmentplan (the “DRIP”) and Secondary DRIP is recorded when the shares are actuallyissued.

 

Thefollowing are the distributions paid and declared by quarter for the threemonths ended March 31, 2008 and 2007 (amounts in thousands):

 
| ** **         | ** ** | **Distributions  Paid** | ** ** | **Distributions  Declared** | ** ** | **Cash  Declared** | ** ** | **DRIP  Declared** | ** ** |
|--------------------|------------|-------------------------|------------|-----------------------------|------------|--------------------|------------|--------------------|------------|
| 1st Quarter - 2008 |       | $                       | 2,671      |                        | $          | 4,056              |       | $                  | 637        |   | $ | 3,419 |   |
|               |       |                    |       |                        |       |               |       |               |       |
| 1st Quarter - 2007 |       | $                       | 2,491      | (1)                         | $          | 1,279              |       | $                  | 272        |   | $ | 1,007 |   |

 

----

(1) Includes a special distribution of approximately $1.4 milliondeclared by our board of directors on December 19, 2006 to all commonstockholders of record as of December 31, 2006.

 

**14.      Related Party Arrangements**

 

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

 

Behringer Securities LP (“Behringer Securities”), an affiliate of ouradvisor and the dealer manager for the public offering, received commissions ofup to 7% of gross offering proceeds before reallowance of commissions earned byparticipating broker-dealers; provided that Behringer Securities received 1% ofthe gross proceeds of purchases pursuant to our DRIP and does not receive anycommissions for purchases pursuant to our Secondary DRIP.  Behringer Securities reallowed 100% of thecommissions earned to participating broker-dealers.  In addition, up to 2% of gross proceedsbefore reallowance to participating broker-dealers was paid to BehringerSecurities as a dealer manager fee; provided that Behringer Securities did notand does not receive dealer manager fees for purchases pursuant to our DRIP orSecondary DRIP.  Behringer Securities waspermitted to reallow all or a portion of its dealer manager fees in anaggregate amount up to 2% of gross offering proceeds to broker-dealersparticipating in the public offering; provided, however, that BehringerSecurities was permitted to reallow, in the aggregate, no more than 1.5% ofgross offering proceeds for marketing fees and expenses, conference fees andnon-itemized, non-invoiced due diligence efforts, and no more than 0.5% ofgross offering proceeds for actual out-of-pocket and bona fide, separatelyinvoiced due diligence expenses incurred as fees, costs or other expenses fromthird parties.  From inception throughthe termination date of the public offering on December 28, 2007,Behringer Securities’ commissions and dealer manager fees totaled $35.6 millionand $10.7 million, respectively, and were recorded as a reduction to additionalpaid-in capital.  In the three monthsended March 31, 2008, Behringer Securities did not receive any commissionsor dealer manager fees associated with our offering of common stock to thepublic as the initial public offering terminated on December 28, 2007.

 

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

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

offeringexpenses owed based on specific invoice identification as well as an allocationof costs to us and other Behringer Harvard programs, based on respective equityoffering results of those entities in offering.

 

Behringer Opportunity Advisors I, or its affiliates, receivesacquisition and advisory fees of 2.5% of the contract purchase price of eachasset for the acquisition, development or construction of real property or 2.5%of the funds advanced in respect of a loan. Our advisor or its affiliates also receives reimbursement of acquisitionexpenses up to 0.5% of the contract purchase price of each asset, or withrespect to a loan, up to 0.5% of the funds advanced.  Behringer Opportunity Advisors I or itspredecessor in interest earned $0.8 million in acquisition and advisory feesand $0.2 million in acquisition expense reimbursements for our investments madeduring the three months ended March 31, 2008.  In the three months ended March 31,2007, our advisor earned $0.4 million in acquisition and advisory fees and $0.1million in acquisition expense reimbursements. For property acquisitions, we capitalize these fees as part of our realestate, and for loans, we defer these fees to be amortized over the loan term.

 

We pay Behringer Opportunity Advisors I or its affiliates a debtfinancing fee equal to 1% of the amount of any debt made available to us.  We incurred $0.2 million of debt financingfees during the three months ended March 31, 2008.  We incurred no such debt financing fees inthe three months ended March 31, 2007.

 

Wepay HPT Management Services LP (“HPT Management”), an affiliate of our advisorand our property manager, fees for management and leasing of our properties,which may be subcontracted to unaffiliated third parties.  Such fees are equal to 4.5% of gross revenuesplus leasing commissions based upon the customary leasing commission applicableto the same geographic location of the respective property.  In the event that we contract directly with anon-affiliated third-party property manager in respect of a property, we willpay HPT Management an oversight fee equal to 1% of gross revenues of theproperty managed.  In no event will wepay both a property management fee and an oversight fee to HPT Management withrespect to any particular property.  Weincurred and expensed such fees totaling $0.3 million and $0.1 million in thethree months ended March 31, 2008 and 2007, respectively.

 

Wepay Behringer Opportunity Advisors I an annual asset management fee of 0.75% ofthe aggregate asset value of acquired real estate.  The fee is payable monthly in an amount equalto one-twelfth of 0.75% of the aggregate asset value as of the last day of thepreceding month.  For the three monthsended March 31, 2008, we expensed $0.9 million of asset management feesand capitalized $0.1 million of asset management fees to real estate. For thethree months ended March 31, 2007, we expensed $0.3 million of assetmanagement fees and capitalized less than $0.1 million of asset management feesto real estate.

 

We will reimburse Behringer Opportunity Advisors I or its affiliatesfor all expenses paid or incurred by them in connection with the services theyprovide to us, subject to the limitation that we will not reimburse for anyamount by which our advisor’s operating expenses (including the assetmanagement fee) at the end of the four preceding fiscal quarters immediatelypreceding the date reimbursement is sought exceeds the greater of:  (1) 2% of our average invested assets or(2) 25% of our net income for that four quarter period other than anyadditions to reserves for depreciation, bad debts or other similar non-cashreserves and any gain from the sale of our assets for that period.  For the three months ended March 31,2008, we incurred and expensed costs for administrative services totaling $0.1million.

 

AtMarch 31, 2008, we had a payable to our advisor and its affiliates of $0.9million.  This balance consists primarilyof asset management fees and administrative service expenses payable toBehringer Opportunity Advisors I, management fees payable to HPT Management,and other miscellaneous payables.

 

Weare dependent on Behringer Opportunity Advisors I, Behringer Securities, andHPT Management for certain services that are essential to us, including thesale of shares of our common stock, asset acquisition and dispositiondecisions, property management and leasing services, and other generaladministrative responsibilities.  In theevent that these companies were unable to provide us with the respectiveservices, we would be required to obtain such services from other sources.

 

**15.      Stock-Based Compensation**

 

TheBehringer Harvard Opportunity REIT I, Inc. Amended and Restated 2004Incentive Award Plan (“Incentive Award Plan”) was approved by our board ofdirectors on July 19, 2005 and by our stockholders on July 25, 2005,and provides for equity awards to our directors and consultants and toemployees, directors and consultants of our affiliates.  On February 17, 2006, we issued optionsto purchase 5,000 shares of our common stock at $9.10 per share to each of twoof our three independent directors and issued options to purchase 1,250 sharesof our common stock at $9.10 per share to our other independent directorpursuant to the Incentive Award Plan.  Weissued additional options to purchase 5,000 shares of our common stock at $9.10per

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

shareto each of our three independent directors on June 29, 2006 pursuant tothe Incentive Award Plan.  On June 21,2007, we issued options to purchase an additional 5,000 shares of our commonstock at $9.10 per share to each of our three independent directors pursuant tothe Incentive Award Plan; however, one of our independent directors forfeitedhis options to purchase 5,000 shares of our common stock upon his resignationas a director.  On September 24,2007, we issued options to purchase 3,333 shares of our common stock at $9.10per share to a newly appointed independent director pursuant to the IncentiveAward Plan.  The options issued pursuantto the Incentive Award Plan become exercisable one year after the date ofgrant.  As of March 31, 2008,options to purchase 39,583 shares of stock were outstanding, of which 26,250are fully vested, at a weighted average exercise price of $9.10.  The remaining contractual life of theoutstanding options is 8.5 years. Compensation expense associated with our Incentive Award Plan was notmaterial for the three months ended March 31, 2008 and 2007.

 

# **16.      Commitments and Contingencies**

# ** **

Our mezzanine borrowers, which are consolidated under FIN 46R, havecontracts with construction managers to build apartment projects.  One of these contracts is a guaranteedmaximum price contract for up to $23.3 million in total construction costs, ofwhich $22.9 million had been paid as of March 31, 2008.  These contracts are commitments of ourmezzanine borrowers and are not payable by us.

 

**17.      Supplemental Cash FlowInformation**

 

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

 
| ** **                                                                                                                    | ** ** | **Three months**        | ** ** | **Three months**        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                                                    | ** ** | **ended**                    | ** ** | **ended**                    | ** ** |
| ** **                                                                                                                    | ** ** | **March 31, 2008** | ** ** | **March 31, 2007** | ** ** |
| **Supplemental disclosure:**                                                                                                  |       |                         |       |                         |       |
| Interest paid, net of amounts capitalized                                                                                     |       | $                            | 2,622      |                         | $          | 878 |   |
|                                                                                                                          |       |                         |       |                         |       |
| **Non-cash investing activities:**                                                                                            |       |                         |       |                         |       |
| Property and equipment additions and  purchases of real estate in accrued liabilities                                         |       | $                            | 575        |                         | $          | 174 |   |
| Capital expenditures for real estate under development  in accounts payable and accrued liabilities                           |       | $                            | 6,558      |                         | $          | 4,079 |   |
| Capital expenditures for real estate under development  of consolidated borrowers in accounts payable and accrued liabilities |       | $                            | 7,252      |                         | $          | 651 |   |
| Amortization of deferred financing fees in  properties under development                                                      |       | $                            | 45         |                         | $          | — |   |
| Amortization of deferred financing fees in  properties under development of consolidated borrowers                            |       | $                            | 7          |                         | $          | — |   |
|                                                                                                                          |       |                         |       |                         |       |
| **Non-cash financing activities:**                                                                                            |       |                         |       |                         |       |
| Common stock issued in distribution reinvestment  plan                                                                        |       | $                            | 3,078      |                         | $          | 1,938 |   |
| Assumed debt on acquisition of real estate  investment                                                                        |       | $                            | 22,229     |                         | $          | — |   |

 

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** **

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

** **

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

 

### **Forward-Looking Statements**

### ** **

Thissection contains forward-looking statements, including discussion and analysisof the financial condition of us and our subsidiaries, including entities weconsolidate under FIN 46R, our anticipated capital expenditures required tocomplete projects, amounts of anticipated cash distributions to ourstockholders in the future and other matters. These forward-looking statements are not historical facts but are theintent, belief or current expectations of our management based on theirknowledge and understanding of our business and industry.  Words such as “may,” “anticipates,” “expects,”“intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,” “should”and variations of these words and similar expressions are intended to identifyforward-looking statements.  Thesestatements are not guarantees of future performance and are subject to risks,uncertainties and other factors, some of which are beyond our control, aredifficult to predict and could cause actual results to differ materially fromthose expressed or forecasted in the forward-looking statements.

 

### **Forward-looking statements that were true at thetime made may ultimately prove to be incorrect or false.  We caution investors not to place unduereliance on forward-looking statements, which reflect our management’s viewonly as of the date of this report on Form 10-Q.  We undertake no obligation to update orrevise forward-looking statements to reflect changed assumptions, theoccurrence of unanticipated events or changes to future operating results.  Factors that could cause actual results todiffer materially from any forward-looking statements made in the Form 10-Qinclude changes in general economic conditions, changes in real estateconditions, construction costs that may exceed estimates, construction delays,increases in interest rates, lease-up risks, inability to obtain new tenantsupon the expiration of existing leases, and the potential need to fund tenantimprovements or other capital expenditures out of operating cash flow.  The forward-looking statements should be readin light of the risk factors identified in the “Risk Factors” section of ourAnnual Report on Form 10-K for the year ended December 31, 2007, asfiled with the SEC.**

### ** **

**Cautionary Note**

 

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

 

**Critical Accounting Policies and Estimates**

 

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

 

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

 

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

 

Ourconsolidated financial statements include our accounts, the accounts of VIEs inwhich we are the primary beneficiary and the accounts of other subsidiariesover which we have control.  Allinter-company transactions, balances and profits have been eliminated in consolidation.  Interests in entities acquired are evaluatedfor consolidation based on FIN 46R, which requires the consolidation of VIEs inwhich we are deemed to be the primary beneficiary.  If the interest in the entity is determinednot to be a VIE under FIN 46R, then the entity is evaluated for consolidationunder the American Institute of Certified Public Accountants’ Statement ofPosition 78-9, “Accounting forInvestments in Real Estate Ventures,” as amended by Emerging Issues TaskForce 04-5, “Determining Whether aGeneral Partner, or the General Partners as a Group, Controls a LimitedPartnership or Similar Entity When the Limited Partners Have Certain Rights.”

 

Thereare judgments and estimates involved in determining if an entity in which wehave made an investment is a VIE and if so, if we are the primarybeneficiary.  The entity is evaluated todetermine if it is a VIE by, among other things, 

 

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calculatingthe percentage of equity being risked compared to the total equity of theentity.  FIN 46R provides some guidelinesas to what the minimum equity at risk should be, but the percentage can varydepending upon the industry and/or the type of operations of the entity and itis up to management to determine that minimum percentage as it relates to ourbusiness and the facts surrounding each of our acquisitions.  In addition, even if the entity’s equity atrisk is a very low percentage, we are required by FIN 46R to evaluate theequity at risk compared to the entity’s expected future losses to determine ifthere could still in fact be sufficient equity at the entity.  Determining expected future losses involvesassumptions of various possibilities of the results of future operations of theentity, assigning a probability to each possibility and using a discount rateto determine the net present value of those future losses.  A change in the judgments, assumptions andestimates outlined above could result in consolidating an entity that shouldnot be consolidated or accounting for an investment on the equity method thatshould in fact be consolidated, the effects of which could be material to ourfinancial statements.

 

***Real Estate and Other IntangibleAssets***

 

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

 

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

 

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

 

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

 

Thefair value of any tangible assets acquired, expected to consist of land, landimprovements, buildings, building improvements, and furniture, fixtures andequipment, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to the tangible assets. Land values are derived from appraisals, and building and landimprovement values are calculated as replacement cost less depreciation ormanagement’s estimates of the relative fair value of these assets usingdiscounted cash flow analyses or similar methods.  Furniture, fixtures, and equipment values aredetermined based on current reproduction or replacement cost less depreciationand other estimated allowances based on physical, functional, or economicfactors.  The value of buildings isdepreciated over the estimated useful lives ranging from 25 years forcommercial office property to 39 years for hotel/mixed-use property using thestraight-line method.  Land improvementsare depreciated over the estimated useful life of 15 years, and furniture,fixtures, and equipment are depreciated over estimated useful lives rangingfrom five to seven years using the straight-line method.

 

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

 

Thetotal value of identified real estate intangible assets that we may acquire inthe future is further allocated to in-place lease values and tenantrelationships based on our evaluation of the specific characteristics of eachtenant’s lease and our overall relationship with that respective tenant.  The aggregate value of in-place leasesacquired and tenant relationships is determined by applying a fair value model.  The estimates of fair value of in-placeleases include an estimate of carrying costs during the expected lease-upperiods for the respective spaces considering current market conditions.  In estimating fair value of in-place leases,we consider items such as real estate taxes, insurance and other operatingexpenses as well as lost rental revenue during the expected lease-up period andcarrying costs that would have otherwise been incurred had the 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Inevaluating our investments and notes receivable for impairment, managementmakes several estimates and assumptions, including, but not limited to, theprojected date of disposition of the properties, the estimated future cashflows of the properties during our ownership and the projected sales price ofeach of the properties.  A change inthese estimates and assumptions could result in understating or overstating thebook value of our investments, which could be material to our financialstatements.

 

**Overview**

 

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

 

On September 20,2005, we commenced a public offering (the “Offering”) of up to 40,000,000shares of common stock at a price of $10 per share pursuant to a RegistrationStatement on Form S-11 (File No. 333-120847) declared effective bythe SEC under the Securities Act of 1933, as amended (the “Securities Act”).  On November 17, 2006, we registered anadditional 6,587,065 shares of common stock pursuant to the Offering throughthe filing of a Registration Statement on Form S-11 (File No. 333-138804)pursuant to Rule 462(b) under the Securities Act.  The Registration Statement declared effectiveas of September 20, 2005 also covered the offering of up to 8,000,000shares of common stock to be offered at a price of $9.50 per share pursuant toour DRIP.  We subsequently reallocatedthe shares of common stock in the Offering to provide $532.7 million, or53,270,000 shares, for sale in the primary offering and $9.2 million, or965,331 shares, for sale through our DRIP.

 

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On October 27,2005, the conditions of our escrow agreement with Citibank Texas, N.A. weresatisfied and as a result, operations commenced on November 9, 2005 uponacceptance of initial subscriptions.  On November 9,2005, we had received and accepted subscriptions for 441,204 shares of commonstock for gross offering proceeds of $4.4 million.  On November 16, 2007, we terminated theDRIP component of the Registration Statement declared effective as of September 20,2005 and commenced our public offering of up to 6,315,790 shares of commonstock at a price of $9.50 per share under our Secondary DRIP pursuant to aRegistration Statement on Form S-3 (File No. 333-146965).  On December 28, 2007, we terminated theprimary offering component of our Offering. As of March 31, 2008, we had 54,326,477 shares of our common stockoutstanding, 1,000 shares of convertible stock issued and outstanding, and hadno shares of preferred stock issued or outstanding.

 

**Resultsof Operations**

 

Asof March 31, 2008, we had invested in 20 properties:  ten consolidated wholly-owned properties;five properties consolidated through investments in joint ventures includingtwo mixed-use hotel and residential properties; one investment in an islanddevelopment accounted for under the equity method; two investments in studenthousing projects in Texas and Virginia, also accounted for under the equitymethod; and two apartment development properties as a mezzanine lenderconsolidated under FIN 46R.  Ourinvestment properties are located in Arizona, California, Colorado,Massachusetts, Minnesota, Missouri, Nevada, Texas, the Commonwealth of theBahamas, and London, England.

 

Asof March 31, 2007, we had invested in only nine properties:  four consolidated wholly-owned properties;one consolidated mixed-use hotel and residential property through an investmentin a joint venture; and two apartment development properties as a mezzanine lenderconsolidated under FIN 46R.  We had alsomade two mezzanine loans to student housing projects in Texas and Virginia thatwe did not consolidate.   Accordingly,our results of operations presented for the three months ended March 31,2008 compared to the three months ended March 31, 2007 reflect significantincreases in most categories due to the growth of our portfolio ofproperties.  Management expects increasesin most categories in the future as we purchase additional real estateproperties and as we begin to realize the full impact of our prioracquisitions.

 

*Three months ended March 31, 2008 as comparedto three months ended March 31, 2007*

 

*Revenues.*Our total revenues increased by $9 million to $14.2 million for the threemonths ended March 31, 2008 as compared to the three months ended March 31,2007, primarily due to increased rental revenue resulting from the acquisitionof new properties from which we receive rent. Hotel revenues for the three months ended March 31, 2008 totaled $2million and consisted of revenues generated by the operations of The Lodge &Spa at Cordillera, a resort and spa property acquired in June 2007.  We did not have any hotel revenues for thethree months ended March 31, 2007. We expect increases in rental revenue in the future as we purchaseadditional real estate properties and we complete construction of real estateunder development.

 

*PropertyOperating Expenses.* Property operating expenses for the threemonths ended March 31, 2008 were $5.5 million as compared to $1.4million for the three months ended March 31, 2007 and were comprised ofproperty operating expenses from our consolidated properties.  The increase in property operating expensesis primarily due to the increased number of real estate properties acquired.  We expect increases in property operatingexpenses in the future as we purchase additional real estate properties and wecomplete construction of real estate under development.

 

*InterestExpense.*Interest expense, net of amounts capitalized, forthe three months ended March 31, 2008 was $2.3 million as compared to $0.9million for the three months ended March 31, 2007, and was primarily dueto the increase in notes payable balances related to our acquisition of realestate properties.  Our total notespayable at March 31, 2008 was $293.5 million as compared to $92.2 millionat March 31, 2007.  We expectcontinued increases in notes payable and in the related interest expense in thefuture as we purchase and invest in additional real estate properties.

 

*RealEstate Taxes.*Real estate taxes, net of amounts capitalized,for the three months ended March 31, 2008 were $1.5 million as compared to$0.6 million for the three months ended March 31, 2007 and were comprisedof real estate taxes from each of our consolidated properties.  The increase in real estate taxes isprimarily due to our increased number of consolidated real estateproperties.  We expect increases in realestate taxes in the future as we purchase additional real estate properties andwe complete construction of real estate under development.

 

*Property/ Asset Management Fees.*Property and asset management feesfor the three months ended March 31, 2008 totaled $1.4 million as comparedto $0.5 million for the three months ended March 31, 2007 and werecomprised of fees incurred by our consolidated properties.  Property and asset management fees increaseddue to the additional properties acquired. We expect increases in property and asset management fees in the futureas we invest in additional real estate properties.

 

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* *

*Generaland Administrative Expenses.* General and administrativeexpenses for the three months ended March 31, 2008 were $0.9 million ascompared to $0.3 million for the three months ended March 31, 2007 andwere comprised of corporate general and administrative expenses includingdirectors’ and officers’ insurance premiums, auditing fees, legal fees, andother administrative expenses.  Theincrease is due to increased corporate activity as our portfolio has grown to20 investments in real estate properties as of March 31, 2008 as comparedto only nine properties at March 31, 2007. We expect increases in general and administrative expenses in the futureas we invest in additional real estate properties.

 

*AdvertisingCosts.* Advertising costs were $0.5 million for both the threemonths ended March 31, 2008 and 2007. Adverting costs were comprised primarily of advertising and marketingcosts to promote the sale of condominiums to be developed at Chase Park Plazaand The Lodge and Spa at Cordillera.  Wedo not expect significant changes in our future advertising costs related tothe condominium sales.

 

*Depreciation and AmortizationExpense.*Depreciation and amortization expense for the threemonths ended March 31, 2008 was $5.7 million as compared to $1.9 millionfor the three months ended March 31, 2007 and was comprised ofdepreciation and amortization expense from each of our consolidated operationalproperties.  For the three months ended March 31,2007, depreciation and amortization expense resulted from only fiveconsolidated properties in operation.  Weexpect increases in depreciation and amortization expense in the future as wepurchase additional real estate properties and as properties under developmentbecome operational.

 

*InterestIncome*. Interest income was $1 million and $0.8 million forthe three months ended March 31, 2008 and 2007, respectively, and wascomprised of interest income associated with our notes receivable and funds ondeposit with banks.  The increase ininterest income over the prior period is due to higher interest yields on ournotes receivable balances for the three months ended March 31, 2008 ascompared to the three months ended March 31, 2007.

 

*Equity in Losses of Unconsolidated Joint Ventures*.  Equity in losses of unconsolidated jointventures totaled $0.9 million for the three months ended March 31,2008 and consisted of net losses of our noncontrolling interests in RoyalIsland, GrandMarc at Westberry Place, and GrandMarc at the Corner of $0.3million, $0.2 million, and $0.4 million, respectively.  We did not have any investments innoncontrolling interests during the three months ended March 31, 2007.

 

*MinorityInterest*.  Minorityinterest for the three months ended March 31, 2008 was $1.5 million, areduction of our net loss for the period. For the three months ended March 31, 2007, minority interest was$0.1 million and increased our net loss. Minority interest represents the net income or loss that is notallocable to us from properties that we consolidate.  For the three months ended March 31,2008, minority interest consisted of the results of seven investments, whereasit consisted of the results of only three investments for the three monthsended March 31, 2007.

 

**CashFlow Analysis**

 

Cashflows used in operating activities for the three months ended March 31,2008 were $16.9 million and were comprised primarily of the net loss of $2.2million, adjusted for depreciation and amortization expense of $4.6 million, anincrease in condominium inventory of $9.4 million, a decrease in accruedliabilities of $6.2 million, and unrealized losses on the change in fair valueof our derivatives of $2.3 million. During the three months ended March 31, 2007, cash flows providedby operating activities were $1.2 million and were comprised of the net loss of$0.2 million, adjusted for depreciation and amortization expense of $1.7million and net changes in working capital of $0.7 million.  Cash flows used in operating activities weresignificantly higher than the three months ended March 31, 2007 due toincreased real estate investments and corporate activity.

 

Cashflows used in investing activities for the three months ended March 31,2008 were $40.4 million and primarily represented the acquisition of realestate totaling $12.4 million, capital expenditures for real estate underdevelopment, including capital expenditures of consolidated borrowers totaling$20.1 million, and investment in notes receivable of $6.5 million.  During the three months ended March 31,2007, cash flows from investing activities were $32.1 million andprimarily represented mezzanine loans to finance student housing projectstotaling $14.2 million, capital expenditures for real estate under developmentand costs for assets placed into service totaling $12.3 million.

 

Cashflows provided by financing activities for the three months ended March 31,2008 were $25.9 million and were comprised primarily of proceeds from notespayable of $16.4 million related to development activities at our Chase Parkand Frisco Square properties and proceeds from mortgages of our consolidatedborrowers of $11.1 million.  During thethree months ended March 31, 2007, cash flows provided by financingactivities were $55.7 million and were comprised primarily of funds receivedfrom the issuance of stock, net of offering costs, of $52.8 million.

 

27

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**Liquidity and Capital Resources**

 

Ourprincipal demands for funds will continue to be for property acquisitions,either directly or through investment interests, for mortgage loan investments,for the payment of operating expenses and distributions, and for the payment ofinterest and principal on our outstanding indebtedness.  Generally, cash needs for items other thanproperty acquisitions and mortgage loan investments are expected to be met fromoperations, and cash needs for property acquisitions are expected to be metfrom the cash on hand from our Offering which ended in December 2007 andborrowings.

 

Theamounts to be distributed to our stockholders are determined by our board ofdirectors quarterly and are dependent on a number of factors, including fundsavailable for distribution, financial condition, capital expenditurerequirements and annual distribution requirements needed to maintain our statusas a REIT under the Code.

 

Weexpect that our current properties, along with properties to be acquired in thefuture, will generate sufficient cash flow to cover operating expenses and thepayment of a monthly distribution.  Otherpotential future sources of capital include proceeds from secured or unsecuredfinancings from banks or other lenders, proceeds from the sale of properties,and undistributed funds from operations. If necessary, we may use financings or other sources of capital in theevent of unforeseen significant capital expenditures.

 

*Debt Financings*

 

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

 

Ournotes payable increased to $293.5 million at March 31, 2008, from $243.9million at December 31, 2007, primarily as a result of notes payableassociated with property acquisitions, additional borrowings related to ourdevelopment properties as well as the notes payable of our mezzanine borrowerswe consolidate under FIN 46R.  Each ofour loans is secured by one or more of our properties.  At March 31, 2008, our notes payableinterest rates ranged from 4.30% to 8.25%, with a weighted average interestrate of approximately 5.14%.  Of our $293.5 million in notes payable at March 31,2008, $253.3 million represented debt subject to variable interest rates. At March 31, 2008, our notes payable have maturity dates that range from May 2008to January 2016.  Our loan agreements generally stipulate that wecomply with certain reporting and financial covenants.  These covenants include, among other things,notifying the lender of any change in management and maintaining minimum debtservice coverage ratios.  At March 31,2008, we were in compliance with each of the debt covenants under our loanagreements.

 

Recently,the U.S. credit markets and the sub-prime residential mortgage market haveexperienced severe dislocations and liquidity disruptions. Sub-prime mortgageloans have experienced increasing rates of delinquency, foreclosure, and loss.These and other related events have had a significant impact on the capitalmarkets associated not only with sub-prime mortgage-backed securities, asset-backedsecurities, and collateralized debt obligations, but also with the U.S. creditand financial markets as a whole. Consequently, there is greater uncertainty regarding our ability toaccess the credit market in order to attract financing on reasonableterms.  Our ability to borrow funds tofinance future acquisitions or refinance current debt could be adverselyaffected by our inability to secure permanent financing on reasonable terms, ifat all.

 

*Credit Facility*

 

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

 

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

 

28

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**Fundsfrom Operations**

 

Fundsfrom operations (“FFO”) is a non-GAAP financial measure that is widelyrecognized as a measure of REIT operating performance.  FFO is defined by the National Association ofReal Estate Investment Trusts as net income (loss), computed in accordance withGAAP, excluding extraordinary items, as defined by GAAP, and gains (or losses)from sales of property, plus depreciation and amortization on real estateassets, and after adjustments for unconsolidated partnerships, joint ventures,and subsidiaries.  We believe that FFO ishelpful to investors and our management as a measure of operating performanceof our operating assets because it excludes depreciation and amortization,gains and losses from property dispositions, and extraordinary items, and as aresult, when compared year to year, reflects the impact on operations fromtrends in occupancy rates, rental rates, operating costs, developmentactivities, general and administrative expenses, and interest costs, which isnot immediately apparent from net income. Historical cost accounting for real estate assets in accordance withGAAP implicitly assumes that the value of real estate diminishes predictablyover time.  Since real estate values havehistorically risen or fallen with market conditions, many industry investorsand analysts have considered the presentation of operating results for realestate companies that use historical cost accounting alone to beinsufficient.  As a result, ourmanagement believes that the use of FFO, together with the required GAAPpresentations, provides a supplemental understanding of our performance and amore informed and appropriate basis on which to make decisions involvingoperating, financing and investing activities. Factors that impact FFO include start-up costs, fixed costs, delay inbuying assets, lower yields on cash held in accounts pending investment, incomefrom portfolio properties and other portfolio assets, interest rates onacquisition financing and operating expenses. FFO should not be considered as an alternative to net income (loss) oras an indication of our liquidity, nor is it indicative of funds available tofund our cash needs, including our ability to make distributions.  Our calculation of FFO for the three monthsended March 31, 2008 and 2007 is presented below (amounts in thousands):

 
| ** **                    | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                          |       |                                             |       |   |   |   |   |
| Net loss                      |       | $                                                | (2,177     | ) | $ | (193 | ) |
|                          |       |                                             |       |   |   |
| Real estate depreciation (1)  |       | 3,151                                            |       | 1,136 |   |
| Real estate amortization (1)  |       | 1,994                                            |       | 773 |   |
| Funds from operations (FFO)   |       | $                                                | 2,968      |   | $ | 1,716 |   |
| GAAP weighted average shares: |       |                                             |       |   |   |
| Basic and diluted             |       | 54,213                                           |       | 20,700 |   |

 

----

(1)   This represents thedepreciation and amortization expense of the properties we wholly own and ourshare of depreciation and amortization expense of the other real estateinvestment properties we consolidate.

 

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

 

·                  Straight-line rental revenue of $1.4million was recognized for the three months ended March 31, 2008 and$0.9 million was recognized for the three months ended March 31,2007;

 

·                  Amortization of intangible leaseassets and liabilities was recognized as a net increase to rental revenues of$1.2 million and $0.3 million for the three months ended March 31,2008 and 2007, respectively;

 

·                  Amortization of intangible propertytax abatement asset was recognized as an increase to real estate tax expenseof  $0.1 million for both the threemonths ended March 31, 2008 and 2007, respectively;

 

·                  Bad debt expense of $0.1 million andless than $0.1 million was recognized for the three months ended March 31,2008 and 2007, respectively; and

 

·                  Amortization of deferred financingcosts of $0.3 million and $0.1 million was recognized as interest expense formortgages and notes payable for the three months ended March 31, 2008 and2007, respectively, and $0.1 million and $0.2 million was recognized as areduction of interest income for notes receivable for the three months ended March 31,2008 and 2007, respectively.

 

29

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

 

Duringthe three months ended March 31, 2008, we declared and paid distributionsalmost entirely from FFO and expect to continue to do so, except to the extentof distributions from the sale of our assets. However, given the uncertainty arising from numerous factors, includingboth the raising and placing of capital in the current real estate environment,ultimate FFO performance cannot be predicted with certainty.  For example, if we are not able to timelyinvest net proceeds of the Offering at favorable yields, future distributionsdeclared and paid may exceed FFO.

 

**NetOperating Income**

 

Netoperating income (“NOI”) is a non-GAAP financial measure that is defined as netincome (loss), computed in accordance with GAAP, generated from propertiesbefore interest expense, asset management fees, interest income, general andadministrative expenses, depreciation, amortization, equity in unconsolidatedjoint ventures, minority interest, income taxes, and the gain or loss on thesale of assets.  We believe that NOIprovides an accurate measure of the operating performance of our operatingassets because NOI excludes certain items that are not associated withmanagement of the properties.  Tofacilitate understanding of this financial measure, a reconciliation of NOI tonet loss in accordance with GAAP for the three months ended March 31, 2008and 2007 is provided below (amounts in thousands).

 
| ** **                             | ** ** | **Three months ended  March 31,** | ** ** |
|----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
|                                   |       |                                             |       |   |   |
| Revenues                               |       | $                                                | 14,174     |   | $ | 5,209 |   |
|                                   |       |                                             |       |   |   |
| Operating expenses:                    |       |                                             |       |   |   |
| Property operating expenses            |       | 5,526                                            |       | 1,375 |   |
| Real estate taxes                      |       | 1,545                                            |       | 560 |   |
| Property management fees               |       | 514                                              |       | 127 |   |
| Total operating expenses               |       | 7,585                                            |       | 2,062 |   |
| Net operating income                   |       | $                                                | 6,589      |   | $ | 3,147 |   |
|                                   |       |                                             |       |   |   |
| Reconciliation to Net Loss             |       |                                             |       |   |   |
| Net operating income                   |       | $                                                | 6,589      |   | $ | 3,147 |   |
|                                   |       |                                             |       |   |   |
| Less:                                  |       |                                             |       |   |   |
| Depreciation and amortization          |       | (5,655                                           | )          | (1,949 | ) |
| General and administrative expense     |       | (917                                             | )          | (307 | ) |
| Interest expense                       |       | (2,271                                           | )          | (929 | ) |
| Asset management fees                  |       | (932                                             | )          | (323 | ) |
| Advertising costs                      |       | (515                                             | )          | (465 | ) |
| Provision for income tax               |       | (47                                              | )          | — |   |
| Equity in losses on unconsolidated JVs |       | (860                                             | )          | — |   |
| Add:                                   |       |                                             |       |   |   |
| Interest income                        |       | 981                                              |       | 770 |   |
| Minority interest                      |       | 1,450                                            |       | (137 | ) |
| Net loss                               |       | $                                                | (2,177     | ) | $ | (193 | ) |

 

**Off-BalanceSheet Arrangements**

 

Wehave no off-balance sheet arrangements that are reasonably likely to have acurrent or future material effect on our financial condition, changes infinancial condition, revenues or expenses, results of operations, liquidity,capital expenditures or capital resources.

 

30

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

 

*Foreign Currency Exchange Risk*

 

Forour net investment in a foreign real estate property, we use foreign currencyforward exchange contracts to eliminate the impact of foreign currencymovements on our financial position.  At March 31,2008, our foreign currency forward exchange contract was reported at its fairvalue of $0.6 million within prepaid expenses and other assets in ourconsolidated balance sheet.  A 10%increase in the forward British pound - US dollar exchange rate would result ina $0.3 million decrease in fair value. A 10% decrease in the forward British pound - US dollar exchange ratewould result in a $1.8 million increase in fair value.

 

Wemaintain less than $0.1 million in a Euro-denominated account at a Europeanfinancial institution.  Accordingly, weare not materially exposed to any significant foreign currency fluctuationsrelated to these accounts.  We do notenter into derivatives for trading or speculative purposes, nor do we maintainany market risk sensitive instruments for trading or speculative purposes.

 

*Interest Rate Risk*

 

Wemay be exposed to interest rate changes primarily as a result of long-term debtused to acquire properties and make loans and other permitted investments.  Our management’s objectives, with regard tointerest rate risks, are to limit the impact of interest rate changes onearnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrowprimarily at fixed rates or variable rates with the lowest margins availableand in some cases, with the ability to convert variable rates to fixedrates.  With regard to variable ratefinancing, we will assess interest rate cash flow risk by continuallyidentifying and monitoring changes in interest rate exposures that mayadversely impact expected future cash flows and by evaluating hedgingopportunities.  We may enter intoderivative financial instruments such as options, forwards, interest rateswaps, caps, or floors to mitigate our interest rate risk on a relatedfinancial instrument or to effectively lock the interest rate portion of ourvariable rate debt.  Of our $293.5million in notes payable at March 31, 2008, $253.3 million representeddebt subject to variable interest rates, which included the mortgages payableof borrowers we consolidated under FIN 46R. If our variable interest rates increased 100 basis points, we estimatethat total annual interest cost, including interest expensed, interestcapitalized, and the effects of the interest rate caps and swaps, wouldincrease by $2.3 million.

 

AtMarch 31, 2008, interest rate caps used to mitigate our interest rate riskclassified as assets were reported at their combined fair value of less than$0.1 million within prepaid expenses and other assets.  Interest rate swaps classified as liabilitieswere reported at their combined fair values of $2.7 million in otherliabilities at March 31, 2008.  A100 basis point decrease in interest rates would result in a $2.5 million netdecrease in the fair value of our interest rate caps and swaps.  A 100 basis point increase in interest rateswould result in a $2.4 million net increase in the fair value of our interestrate caps and swaps.

 

**Item 4T.                 Controlsand Procedures.**

** **

*Evaluation of Disclosure Controls and Procedures*

 

As required by Rule 13a-15(b) andRule 15d-15(b) under the Securities Exchange Act of 1934, as amended(the “Exchange Act”), our management, including our Chief Executive Officer andChief Financial Officer, evaluated, as of March 31, 2008, theeffectiveness of our disclosure controls and procedures as defined in ExchangeAct Rule 13a-15(e) and Rule 15d-15(e).  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures, as of March 31, 2008, were effective for the purpose ofensuring that information required to be disclosed by us in this report isrecorded, processed, summarized and reported within the time periods specifiedby the rules and forms of the Exchange Act and is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosures.

 

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

 

*Changes in Internal Control over Financial Reporting*

 

Therehas been no change in internal control over financial reporting that occurredduring the quarter ended March 31, 2008 that has materially affected, oris reasonably likely to materially affect, our internal control over financialreporting.

 

31

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**PART II**

**OTHER INFORMATION**

 

**Item 1.                    LegalProceedings.**

 

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

 

**Item 1A.                 RiskFactors.**

 

Therehave been no material changes from the risk factors set forth in our AnnualReport on Form 10-K for the year ended December 31, 2007.

 

**Item 2.                    UnregisteredSales of Equity Securities and Use of Proceeds.**

 

**Use ofProceeds from Registered Securities**

 

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

 

Theabove-stated number of shares sold and the gross offering proceeds received inconnection with the Offering does not include 21,739 shares of common stockpurchased by Behringer Harvard Holdings in a private placement in 2004, priorto the commencement of the Offering.

 

From the commencement of the Offering through March 31,2008, we incurred the following expenses in connection with the issuance anddistribution of the registered securities pursuant to the Offering (amounts inthousands):

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

 

----

*“Other expenses to affiliates” includescommissions and dealer manager fees paid to Behringer Securities, whichreallowed all or a portion of the commissions and fees to soliciting dealers.

 

Fromthe commencement of the Offering through March 31, 2008, the net offeringproceeds to us from the Offering, after deducting the total expenses incurredand described above, were approximately $481.8 million.  From the commencement of the Offering throughMarch 31, 2008, we had used approximately $347.6 million of such netproceeds to purchase interests in real estate and fund development for realestate, net of notes payable, and approximately $89.6 million was investedthrough mezzanine loans.  Of the amountused for the purchase of these investments, approximately $21.5 million waspaid to Behringer Opportunity Advisors I (or its predecessor in interest), asacquisition and advisory fees and acquisition expense reimbursement.

 

32

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**ShareRedemption Program**

 

InFebruary 2006, our board of directors adopted a share redemption programfor our investors.  The purchase pricefor the redeemed shares is set forth in the prospectus for our Offering ofcommon stock, as supplemented.  Our boardof directors reserves the right in its sole discretion at any time, and fromtime to time, to (1) waive the one-year holding period in the event of thedeath, disability or bankruptcy of a stockholder or other exigentcircumstances, (2) reject any request for redemption, (3) change thepurchase price for redemptions, or (4) terminate, suspend or amend theshare redemption program.  Under theterms of the program, during any calendar year, we will not redeem in excess of5% of the weighted average number of shares outstanding during the twelve-monthperiod immediately prior to the date of redemption.  In addition, our board of directors willdetermine whether we have sufficient cash from operations to repurchase shares,and such purchases will generally be limited to proceeds from our distributionreinvestment plan plus 1% of operating cash flow for the previous fiscal year(to the extent positive).  During thequarter ended March 31, 2008, we redeemed shares as follows:

 
| **2008** | ** ** | **Total Number of  Shares Redeemed** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of  Shares Purchased  as Part of  Publicly  Announced Plans  or Programs** | ** ** | **Maximum  Number of Shares  That May Be  Purchased Under  the Plans or  Programs** | ** ** |
|----------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| January  |       | —                                              |       | $                                                | —     |                                                                                                                         | —     |                                                                                                                   |       |   |
| February |       | 54,021                                              |       | $                                                | 9.08       |                                                                                                                         | 54,021     |                                                                                                                   | (1)        |   |
| March    |       | —                                              |       | $                                                | —     |                                                                                                                         | —     |                                                                                                                   |       |   |
|     |       |                                                |       |                                             |       |                                                                                                                         |       |                                                                                                                   |       |
|     |       | 54,021                                              |       | $                                                | 9.08       |                                                                                                                         | 54,021     |                                                                                                                   | (1)        |   |
|     |       |                                                |       |                                             |       |                                                                                                                         |       |                                                                                                                   |       |

 

----

(1)   A description of the maximum number of sharesthat may be purchased under our redemption program is included in the narrativepreceding this table.

 

**Item 3.                    DefaultsUpon Senior Securities.**

 

None.

 

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

 

None.

 

**Item 5.                    OtherInformation.**

 

None.

 

**Item 6.                    Exhibits.**

 

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

 

33

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**SIGNATURE**

 

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

 

 
| ** **                           | **Behringer Harvard Opportunity REIT I, Inc.** |
|--------------------------------------|-----------------------------------------------------|
|                                 |                                                |
|                                 |                                                |
| Dated:  May 15,  2008 | By:                                                 |   /s/  Gary S. Bresky |
|                                 | Gary  S. Bresky                                     |   |
|                                 | Chief Financial Officer                             |
|                                 | (Principal Financial Officer)                       |
|                                      |                                                     |  |  |

 

34

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 **Index to Exhibits**

 
| **Exhibit Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|-------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1                     |       | Articles of Amendment and Restatement of the Registrant (previously  filed in and incorporated by reference to Pre-Effective Amendment No. 4  to Registration Statement on Form S-11, Commission File  No. 333-120847, filed on September 12, 2005)                                                                                                                                                                                                                                          |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1(a)                  |       | Articles of Amendment to Articles of Amendment and Restatement of the  Registrant (previously filed in and incorporated by reference to  Post-Effective Amendment No. 3 to Registration Statement on  Form S-11, Commission File No. 333-120847, filed on July 6,  2006)                                                                                                                                                                                                                     |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2                     |       | Bylaws of the Registrant (previously filed in and incorporated by  reference to Registration Statement on Form S-11, Commission File  No. 333-120847, filed on November 30, 2004)                                                                                                                                                                                                                                                                                                                 |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2(a)                  |       | Amendment to Bylaws of the Registrant (previously filed in and  incorporated by reference to Form 8-K filed on February 24, 2006)                                                                                                                                                                                                                                                                                                                                                                      |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1                     |       | Form of  Subscription Agreement and Subscription Agreement Signature  Page (included as Exhibit B to the prospectus of the Registrant  filed pursuant to Rule 424(b)(3) on June 1, 2006, as  supplemented)                                                                                                                                                                                                                                                                         |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2                     |       | Amended  and Restated Distribution Reinvestment Plan, effective as of April 5, 2006  (included as Exhibit C to the prospectus of the Registrant filed  pursuant to Rule 424(b)(3) on June 1, 2006, as supplemented)                                                                                                                                                                                                                                                                     |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.2(a)                  |       | Second  Amended and Restated Distribution Reinvestment Plan (previously filed in and  incorporated by reference to Exhibit A to prospectus contained in  Registration Statement on Form S-3, Commission File No. 333-146965,  filed on October 26, 2007)                                                                                                                                                                                                                                     |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.3                     |       | Automatic  Purchase Plan of the Registrant, effective as of September 20, 2005  (included as Exhibit D to the prospectus of the Registrant filed  pursuant to Rule 424(b)(3) on June 1, 2006, as supplemented)                                                                                                                                                                                                                                                                          |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1                    |       | Credit  Agreement among Behringer Harvard Opportunity OP I, LP, Behringer Harvard  Bowen Road LP, Behringer Harvard Whitewater, LLC, Behringer Harvard Las Colinas  LP, Behringer Harvard Bent Tree LP, Behringer Harvard Augusta LP, Behringer  Harvard Northpoint LP, and Behringer Harvard Regency LP, as borrowers, and  Bank of America, N.A., as administrative agent, L/C issuer, and lender  (previously filed in and incorporated by reference to Form 8-K filed on  February 19, 2008)       |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2                    |       | Promissory  Note made between Behringer Harvard Opportunity OP I, LP, Behringer Harvard  Bowen Road LP, Behringer Harvard Whitewater, LLC, Behringer Harvard Las  Colinas LP, Behringer Harvard Bent Tree LP, Behringer Harvard Augusta LP,  Behringer Harvard Northpoint LP, and Behringer Harvard Regency LP, as  borrowers, and Bank of America, N.A., as administrative agent, L/C issuer,  and lender (previously filed in and incorporated by reference to  Form 8-K filed on February 19, 2008) |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3                    |       | Guaranty  Agreement by Behringer Harvard Opportunity REIT I, Inc., as guarantor,  in favor of Bank of America, N.A., as administrative agent and lender  (previously filed in and incorporated by reference to Form 8-K filed on  February 19, 2008)                                                                                                                                                                                                                                              |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4                    |       | Deed  of Trust, Assignment of Rents and Leases, Security Agreement, Fixture Filing  and Financing Statement by Behringer Harvard Bowen Road LP, as borrower, to  PRLAP Inc., as trustee for the benefit of Bank of America, N.A. (previously  filed in and incorporated by reference to Form 8-K filed on  February 19, 2008)                                                                                                                                                                          |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5                    |       | Mortgage,  Assignment of Rents and Leases, Security Agreement, Fixture Filing and  Financing Statement by Behringer Harvard Whitewater, LLC, as borrower, to  Bank of America, N.A. (previously filed in and incorporated by reference to  Form 8-K filed on February 19, 2008)                                                                                                                                                                                                                        |
|                    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6                    |       | Deed  of Trust, Assignment of Rents and Leases, Security Agreement, Fixture Filing  and Financing Statement by Behringer Harvard Las Colinas LP, as borrower, to  PRLAP Inc., as trustee for the                                                                                                                                                                                                                                                                                                                 |

 

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|   |   | benefit  of Bank of America, N.A. (previously filed in and incorporated by reference  to Form 8-K filed on February 19, 2008)                                                                                                                                                                                                 |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.7   |   | Deed  of Trust, Assignment of Rents and Leases, Security Agreement, Fixture Filing  and Financing Statement by Behringer Harvard Bent Tree LP, as borrower, to  PRLAP Inc., as trustee for the benefit of Bank of America, N.A. (previously  filed in and incorporated by reference to Form 8-K filed on February 19,  2008)  |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.8   |   | Deed  of Trust, Assignment of Rents and Leases, Security Agreement, Fixture Filing  and Financing Statement by Behringer Harvard Augusta LP, as borrower, to  PRLAP Inc., as trustee for the benefit of Bank of America, N.A. (previously  filed in and incorporated by reference to Form 8-K filed on  February 19, 2008)    |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.9   |   | Deed  of Trust, Assignment of Rents and Leases, Security Agreement, Fixture Filing  and Financing Statement by Behringer Harvard Northpoint LP, as borrower, to  PRLAP Inc., as trustee for the benefit of Bank of America, N.A. (previously  filed in and incorporated by reference to Form 8-K filed on  February 19, 2008) |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.10  |   | Deed  of Trust, Assignment of Rents and Leases, Security Agreement, Fixture Filing  and Financing Statement by Behringer Harvard Regency LP, as borrower, to  PRLAP Inc., as trustee for the benefit of Bank of America, N.A. (previously  filed in and incorporated by reference to Form 8-K filed on  February 19, 2008)    |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.11  |   | Assignment  of Leases and Rents by Behringer Harvard Bowen Road LP, as borrower, to Bank  of America, N.A. (previously filed in and incorporated by reference to  Form 8-K filed on February 19, 2008)                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.12  |   | Assignment  of Leases and Rents by Behringer Harvard Whitewater, LLC, as borrower, to  Bank of America, N.A. (previously filed in and incorporated by reference to  Form 8-K filed on February 19, 2008)                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.13  |   | Assignment  of Leases and Rents by Behringer Harvard Las Colinas LP, as borrower, to Bank  of America, N.A. (previously filed in and incorporated by reference to  Form 8-K filed on February 19, 2008)                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.14  |   | Assignment  of Leases and Rents by Behringer Harvard Bent Tree LP, as borrower, to Bank  of America, N.A. (previously filed in and incorporated by reference to  Form 8-K filed on February 19, 2008)                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.15  |   | Assignment of Leases and  Rents by Behringer Harvard Augusta LP, as borrower, to Bank of America, N.A.  (previously filed in and incorporated by reference to Form 8-K filed on February 19,  2008)                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.16  |   | Assignment  of Leases and Rents by Behringer Harvard Northpoint LP, as borrower, to Bank  of America, N.A. (previously filed in and incorporated by reference to  Form 8-K filed on February 19, 2008)                                                                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 10.17  |   | Assignment  of Leases and Rents by Behringer Harvard Regency LP, as borrower, to Bank of  America, N.A. (previously filed in and incorporated by reference to  Form 8-K filed on February 19, 2008)                                                                                                                           |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 31.1   |   | Rule 13a-14(a)/15d-14(a) Certification  (filed herewith)                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 31.2   |   | Rule 13a-14(a)/15d-14(a) Certification  (filed herewith)                                                                                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                    |
| 32.1*  |   | Section 1350  Certifications (furnished herewith)                                                                                                                                                                                                                                                                                  |

 

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*In accordance with Item 601(b)(32) of Regulation S-K, this Exhibit is notdeemed “filed” for purposes of Section 18 of the Exchange Act or otherwisesubject to the liabilities of that section. Such certifications will not be deemed incorporated by reference intoany filing under the Securities Act or the Exchange Act, except to the extentthat the registrant specifically incorporates it by reference.

 

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