Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND 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 June 30, 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**

 

**Behringer Harvard 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   No o

 

Indicate by check mark whether the Registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company.  See thedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (check one):

 

| Large accelerated filer o |   | Accelerated  filer o |   | Non-accelerated  filer x |   | Smaller  reporting company o |
|---------------------------|--------|---------------------------|--------|--------------------------|--------|-----------------------------------|

 

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

 

Asof August 1, 2008, the Registrant had 54,703,636 shares of common stockoutstanding.

 

 

 

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Tableof Contents

 

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

**FORM 10-Q**

**Quarter Ended June 30, 2008**

 
| ** **            | ** **                                                                                                                                                          | **Page**   |
|-----------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                  |                                                                                                                                                                |       |
|                  | **PART I**                                                                                                                                                     |       |
|                  | **FINANCIAL  INFORMATION**                                                                                                                                          |       |
|                  | ** **                                                                                                                                                          |       |
| **Item 1.**           | **Financial  Statements (Unaudited)**                                                                                                                               |       |
| ** **            | ** **                                                                                                                                                          |       |
|                  | Consolidated Balance Sheets as of  June 30, 2008 and December 31, 2007                                                                                    | 3          |   |
|                  |                                                                                                                                                                |       |
|                  | Consolidated Statements of  Operations for the Three and Six Months Ended June 30, 2008 and 2007                                                               | 4          |   |
|                  |                                                                                                                                                                |       |
|                  | Consolidated Statements of  Stockholders’ Equity and Comprehensive Loss for the Year Ended  December 31, 2007 and the Six Months Ended June 30, 2008 | 5          |   |
|                  |                                                                                                                                                                |       |
|                  | Consolidated Statements of  Cash Flows for the Six Months Ended June 30, 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**                                                                                                     | **32**     | ** ** |
| ** **            | ** **                                                                                                                                                          | ** ** |
| **Item 4T.**          | **Controls and  Procedures**                                                                                                                                        | **32**     | ** ** |
|                  |                                                                                                                                                                |       |
| **PART II**      |                                                                                                                                                                |
| **OTHER INFORMATION** |                                                                                                                                                                |
|                  | ** **                                                                                                                                                          |       |   |
| **Item 1.**           | **Legal Proceedings**                                                                                                                                               | 34         |   |
|                  |                                                                                                                                                                |       |
| **Item 1A.**          | **Risk Factors**                                                                                                                                                    | 34         |   |
|                  |                                                                                                                                                                |       |
| **Item 2.**           | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                                    | 34         |   |
|                  |                                                                                                                                                                |       |
| **Item 3.**           | **Defaults  Upon Senior Securities**                                                                                                                                | 35         |   |
|                  |                                                                                                                                                                |       |
| **Item 4.**           | **Submission  of Matters to a Vote of Security Holders**                                                                                                            | 35         |   |
| ** **            | ** **                                                                                                                                                          |       |
| **Item 5.**           | **Other Information**                                                                                                                                               | 36         |   |
|                  |                                                                                                                                                                |       |
| **Item 6.**           | **Exhibits**                                                                                                                                                        | 36         |   |
|                  |                                                                                                                                                                |       |   |
| **Signature**         | 37                                                                                                                                                                  |       |

 

2

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Tableof Contents

 

**PART I**

**FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

** **

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

**ConsolidatedBalance Sheets**

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

(Unaudited)

 
| ** **                                                                                                                                                                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                        | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| **Assets**                                                                                                                                                                                        |       |              |       |                  |       |
| **Real estate**                                                                                                                                                                                   |       |              |       |                  |       |
| Land and improvements, net                                                                                                                                                                        |       | $                 | 132,828    |                  | $          | 107,428 |   |
| Buildings and improvements, net                                                                                                                                                                   |       | 385,698           |       | 287,237               |       |
| Real estate under development                                                                                                                                                                     |       | 45,106            |       | 75,729                |       |
| **Total real estate**                                                                                                                                                                             |       | 563,632           |       | 470,394               |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| Condominium inventory                                                                                                                                                                             |       | 92,439            |       | 75,547                |       |
| Cash and cash equivalents                                                                                                                                                                         |       | 24,655            |       | 78,498                |       |
| Restricted cash                                                                                                                                                                                   |       | 8,489             |       | 4,731                 |       |
| Accounts receivable, net                                                                                                                                                                          |       | 10,621            |       | 7,736                 |       |
| Prepaid expenses and other assets                                                                                                                                                                 |       | 3,411             |       | 3,493                 |       |
| Leasehold interests, net                                                                                                                                                                          |       | 40,660            |       | 41,543                |       |
| Investments in unconsolidated joint  ventures                                                                                                                                                     |       | 35,730            |       | 36,445                |       |
| Furniture, fixtures and equipment, net                                                                                                                                                            |       | 13,337            |       | 9,173                 |       |
| Deferred financing fees, net                                                                                                                                                                      |       | 5,914             |       | 3,755                 |       |
| Notes receivable                                                                                                                                                                                  |       | 1,944             |       | 1,719                 |       |
| Notes receivable from related parties                                                                                                                                                             |       | 19,298            |       | 7,841                 |       |
| Lease intangibles, net                                                                                                                                                                            |       | 31,700            |       | 27,096                |       |
| Other intangibles, net                                                                                                                                                                            |       | 10,288            |       | 10,651                |       |
| Receivables from related parties                                                                                                                                                                  |       | 1,229             |       | 73                    |       |
| **Total assets**                                                                                                                                                                                  |       | $                 | 863,347    |                  | $          | 778,695 |   |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Liabilities and Stockholders’ Equity**                                                                                                                                                     |       |              |       |                  |       |
| Notes payable                                                                                                                                                                                     |       | $                 | 342,252    |                  | $          | 243,902 |   |
| Accounts payable                                                                                                                                                                                  |       | 8,191             |       | 9,300                 |       |
| Payables to related parties                                                                                                                                                                       |       | 1,022             |       | 901                   |       |
| Acquired below-market leases, net                                                                                                                                                                 |       | 20,399            |       | 18,851                |       |
| Distributions payable                                                                                                                                                                             |       | 1,345             |       | 1,373                 |       |
| Accrued liabilities                                                                                                                                                                               |       | 18,031            |       | 21,750                |       |
| Other liabilities                                                                                                                                                                                 |       | 1,689             |       | 1,223                 |       |
| **Total liabilities**                                                                                                                                                                             |       | 392,929           |       | 297,300               |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                 |       |              |       |                  |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Minority interest**                                                                                                                                                                             |       | 13,361            |       | 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, 54,489,957 and 54,056,354 shares issued and outstanding at  June 30, 2008 and December 31, 2007, respectively |       | 5                 |       | 5                     |       |
| Additional paid-in capital                                                                                                                                                                        |       | 485,714           |       | 481,521               |       |
| Accumulated distributions in excess of net  loss                                                                                                                                                  |       | (28,213           | )          | (14,982               | )          |
| Accumulated other comprehensive loss                                                                                                                                                              |       | (449              | )          | (484                  | )          |
| **Total stockholders’ equity**                                                                                                                                                               |       | 457,057           |       | 466,060               |       |
|                                                                                                                                                                                              |       |              |       |                  |       |
| **Total liabilities and stockholders’ equity**                                                                                                                                               |       | $                 | 863,347    |                  | $          | 778,695 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

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

**ConsolidatedStatements of Operations**

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

(Unaudited)

 
| ** **                                                                                             | ** ** | **Three months**       | ** ** | **Three months**       | ** ** | **Six months**         | ** ** | **Six months**         | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                             | ** ** | **ended**                   | ** ** | **ended**                   | ** ** | **ended**                   | ** ** | **ended**                   | ** ** |
| ** **                                                                                             | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
|                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |
| **Revenues**                                                                                           |       |                        |       |                        |       |                        |       |                        |       |
| Rental revenue                                                                                         |       | $                           | 14,172     |                        | $          | 6,112                       |       | $                           | 26,385     |   | $ | 11,321 |   |
| Hotel revenue                                                                                          |       | 1,234                       |       | 618                         |       | 3,195                       |       | 618                         |       |
|                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |
| **Total revenues**                                                                                     |       | 15,406                      |       | 6,730                       |       | 29,580                      |       | 11,939                      |       |
|                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |
| **Expenses**                                                                                           |       |                        |       |                        |       |                        |       |                        |       |
| Property operating expenses                                                                            |       | 5,823                       |       | 2,009                       |       | 11,349                      |       | 3,384                       |       |
| Interest expense                                                                                       |       | 2,676                       |       | 1,373                       |       | 4,947                       |       | 2,303                       |       |
| Real estate taxes                                                                                      |       | 1,786                       |       | 673                         |       | 3,331                       |       | 1,233                       |       |
| Property management fees                                                                               |       | 684                         |       | 152                         |       | 1,198                       |       | 279                         |       |
| Asset management fees                                                                                  |       | 1,011                       |       | 471                         |       | 1,943                       |       | 794                         |       |
| General and administrative                                                                             |       | 905                         |       | 401                         |       | 1,822                       |       | 708                         |       |
| Advertising costs                                                                                      |       | 630                         |       | 159                         |       | 1,145                       |       | 623                         |       |
| Depreciation and amortization                                                                          |       | 6,112                       |       | 2,399                       |       | 11,767                      |       | 4,349                       |       |
|                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |
| **Total expenses**                                                                                     |       | 19,627                      |       | 7,637                       |       | 37,502                      |       | 13,673                      |       |
|                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |
| Interest income                                                                                        |       | 554                         |       | 804                         |       | 1,535                       |       | 1,574                       |       |
|                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |
| **Loss before income taxes, minority interest  and equity in losses of unconsolidated joint ventures** |       | (3,667                      | )          | (103                        | )          | (6,387                      | )          | (160                        | )          |
|                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |
| Provision for income taxes                                                                             |       | (52                         | )          | (25                         | )          | (99                         | )          | (25                         | )          |
| Equity in losses of unconsolidated joint  ventures                                                     |       | (671                        | )          | (68                         | )          | (1,531                      | )          | (68                         | )          |
| Minority interest                                                                                      |       | 1,466                       |       | (219                        | )          | 2,916                       |       | (355                        | )          |
|                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |
| **Net loss**                                                                                           |       | $                           | (2,924     | )                           | $          | (415                        | )          | $                           | (5,101     | ) | $ | (608 | ) |
|                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |
| **Weighted average shares outstanding:**                                                               |       |                        |       |                        |       |                        |       |                        |       |
| Basic and diluted                                                                                      |       | 54,474,279                  |       | 30,023,233                  |       | 54,343,568                  |       | 25,387,830                  |       |
|                                                                                                   |       |                        |       |                        |       |                        |       |                        |       |
| **Loss per share:**                                                                                    |       |                        |       |                        |       |                        |       |                        |       |
| Basic and diluted                                                                                      |       | $                           | (0.05      | )                           | $          | (0.01                       | )          | $                           | (0.09      | ) | $ | (0.02 | ) |

 

*See Notes to Consolidated FinancialStatements.*

 

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

**ConsolidatedStatements of Stockholders’ Equity and Comprehensive 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                                    |       | —                     |       | —                |       | (219,660           | )          | —            |       | (2,011      | )          | —                     |       | —            |       | (2,011                 | )          |
| Distributions  declared on common stock                        |       | —                     |       | —                |       | —             |       | —            |       | —      |       | (8,130                     | )          | —            |       | (8,130                 | )          |
| Shares issued  pursuant to Distribution Reinvestment Plan, net |       | —                     |       | —                |       | 653,263            |       | —            |       | 6,204       |       | —                     |       | —            |       | 6,204                  |       |
| Comprehensive  loss:                                           |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Net loss                                                       |       | —                     |       | —                |       | —             |       | —            |       | —      |       | (5,101                     | )          | —            |       | (5,101                 | )          |
| Other  comprehensive loss:                                     |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Foreign currency  translation loss                             |       | —                     |       | —                |       | —             |       | —            |       | —      |       | —                     |       | (140              | )          | (140                   | )          |
| Unrealized gains  on interest rate derivatives                 |       | —                     |       | —                |       | —             |       | —            |       | —      |       | —                     |       | 175               |       | 175                    |       |
| Total  comprehensive loss                                      |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       | (5,066                 | )          |
|                                                           |       |                       |       |                  |       |               |       |              |       |        |       |                       |       |              |       |                   |       |
| Balance at  June 30, 2008                                 |       | 1,000                      |       | $                     | —     |               | 54,489,957 |              | $          | 5           |       | $                          | 485,714    |              | $          | (28,213                | )          | $ | (449 | ) | $ | 457,057 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

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**BehringerHarvard Opportunity REIT I, Inc.**

**ConsolidatedStatements of Cash Flows**

**(inthousands)**

(Unaudited)

 
| ** **                                                                                       | ** ** | **Six months**         | ** ** | **Six months**         | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                       | ** ** | **ended**                   | ** ** | **ended**                   | ** ** |
| ** **                                                                                       | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| **Cash flows from operating activities:**                                                        |       |                        |       |                        |       |
| Net loss                                                                                         |       | $                           | (5,101     | )                           | $          | (608 | ) |
| Adjustments to reconcile net loss to net cash  flows (used in) provided by operating activities: |       |                        |       |                        |       |
| Depreciation and amortization                                                                    |       | 9,438                       |       | 3,532                       |       |
| Amortization of deferred financing fees                                                          |       | 797                         |       | 605                         |       |
| Minority interest                                                                                |       | (2,916                      | )          | 355                         |       |
| Equity in losses of unconsolidated joint  ventures                                               |       | 1,531                       |       | —                      |       |
| Unrealized losses on derivatives                                                                 |       | 91                          |       | —                      |       |
| Change in accounts receivable                                                                    |       | (2,864                      | )          | (3,057                      | )          |
| Change in condominium inventory                                                                  |       | (16,408                     | )          | (6                          | )          |
| Change in prepaid expenses and other assets                                                      |       | (700                        | )          | 507                         |       |
| Change in accounts payable                                                                       |       | 309                         |       | 1,485                       |       |
| Change in other liabilities                                                                      |       | 468                         |       | (206                        | )          |
| Change in accrued liabilities                                                                    |       | 2,116                       |       | 1,142                       |       |
| Change in payables to related parties                                                            |       | (568                        | )          | 487                         |       |
| Addition of lease intangibles                                                                    |       | (1,060                      | )          | —                      |       |
| **Cash (used in) provided by operating  activities**                                             |       | (14,867                     | )          | 4,236                       |       |
|                                                                                             |       |                        |       |                        |       |
| **Cash flows from investing activities:**                                                        |       |                        |       |                        |       |
| Escrow deposits and pre-acquisition costs on  real estate to be acquired                         |       | (857                        | )          | (8                          | )          |
| Purchases of real estate properties                                                              |       | (45,708                     | )          | (136,016                    | )          |
| Acquisition of interest in unconsolidated  joint ventures                                        |       | (1,594                      | )          | (22,158                     | )          |
| Capital expenditures for real estate under  development                                          |       | (20,934                     | )          | (18,730                     | )          |
| Capital expenditures for real estate under  development of consolidated borrowers                |       | (21,239                     | )          | (12,746                     | )          |
| Additions of property and equipment                                                              |       | (3,333                      | )          | (2,122                      | )          |
| Purchase of interest rate cap                                                                    |       | —                      |       | (155                        | )          |
| Change in restricted cash                                                                        |       | (3,757                      | )          | (4,174                      | )          |
| Investment in notes receivable                                                                   |       | (11,682                     | )          | (14,290                     | )          |
| Distributions from unconsolidated joint  venture                                                 |       | 696                         |       | —                      |       |
| Receivable from investment property                                                              |       | —                      |       | (820                        | )          |
| Fees paid to related party for mezzanine  loan arrangements                                      |       | (1,795                      | )          | (545                        | )          |
| **Cash used in investing activities**                                                            |       | (110,203                    | )          | (211,764                    | )          |
|                                                                                             |       |                        |       |                        |       |
| **Cash flows from financing activities:**                                                        |       |                        |       |                        |       |
| Financing costs                                                                                  |       | (1,456                      | )          | (1,227                      | )          |
| Proceeds from notes payable                                                                      |       | 57,811                      |       | 52,115                      |       |
| Proceeds from mortgages of consolidated  borrowers                                               |       | 18,415                      |       | 8,306                       |       |
| Payments on notes payable                                                                        |       | (79                         | )          | —                      |       |
| Issuance of common stock                                                                         |       | —                      |       | 182,924                     |       |
| Redemptions of common stock                                                                      |       | (2,011                      | )          | (352                        | )          |
| Offering costs                                                                                   |       | —                      |       | (18,231                     | )          |
| Distributions                                                                                    |       | (1,955                      | )          | (984                        | )          |
| Contributions from minority interest  holders                                                    |       | 1,024                       |       | 3,141                       |       |
| Distributions to minority interest holders                                                       |       | (176                        | )          | —                      |       |
| Change in subscriptions for common stock                                                         |       | —                      |       | 1,236                       |       |
| Change in subscription cash received                                                             |       | —                      |       | (1,207                      | )          |
| Change in payables to related parties                                                            |       | (328                        | )          | (1,180                      | )          |
| **Cash provided by financing activities**                                                        |       | 71,245                      |       | 224,541                     |       |
|                                                                                             |       |                        |       |                        |       |
| Effect of exchange rate changes on cash and  cash equivalents                                    |       | (18                         | )          | —                      |       |
|                                                                                             |       |                        |       |                        |       |
| Net change in cash and cash equivalents                                                          |       | (53,843                     | )          | 17,013                      |       |
| Cash and cash equivalents at beginning of  year                                                  |       | 78,498                      |       | 54,639                      |       |
|                                                                                             |       |                        |       |                        |       |
| Cash and cash equivalents at end of year                                                         |       | $                           | 24,655     |                        | $          | 71,652 |   |

 

*See Notes to Consolidated FinancialStatements.*

 

6

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Table of Contents

** **

**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 highervolatility, 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. We may purchase existing or newlyconstructed properties or properties under development or construction,including multifamily properties for conversion into condominiums.  Further, we may invest in real estate-relatedsecurities, including securities issued by other real estate companies, eitherfor investment or in change of control transactions completed on a negotiatedbasis or otherwise.  We also may investin collateralized mortgage-backed securities, mortgage, bridge or mezzanineloans, and Section 1031 tenant-in-common interests, or in entities thatmake investments similar to the foregoing.

 

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.         InterimUnaudited Financial Information**

 

Theaccompanying consolidated financial statements should be read in conjunctionwith the consolidated financial statements and notes thereto included in ourAnnual Report on Form 10-K for the year ended December 31, 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 June 30, 2008 and consolidated statements ofoperations and cash flows for the periods ended June 30, 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 June 30, 2008 and December 31, 2007 and our consolidated resultsof operations and cash flows for the periods ended June 30, 2008 and2007.  Such adjustments are of a normalrecurring nature.

 

**3.         Summaryof Significant Accounting Policies**

*** ***

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

 

Thepreparation of financial statements in conformity with 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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Table of Contents

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

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

 

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

 

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

 

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 intangibleassets acquired.

 

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 values arecalculated as replacement cost less depreciation or management’s estimates ofthe relative fair value of these assets using discounted cash flow analyses orsimilar methods.  Furniture, fixtures,and equipment values are determined based on current reproduction orreplacement cost less depreciation and other estimated allowances based onphysical, functional, or economic factors. The values of the buildings are depreciated over their respectiveestimated useful lives ranging from 25 years for commercial office property to39 years for hotel/mixed-use property using the straight-line method.  Land improvements are depreciated over theestimated useful life of 15 years, and furniture, fixtures, and equipment aredepreciated over estimated useful lives ranging from five to seven years usingthe straight-line method.  Our leaseholdinterest is depreciated over its remaining contractual life, or approximately101 years.

 

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

 

8

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

**Notes toConsolidated 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 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 leases not beenin place, including tenant improvements and commissions.  The estimates of the fair value of tenantrelationships also include costs to execute similar leases including leasingcommissions, legal costs, and tenant improvements as well as an estimate of thelikelihood of renewal as determined by management on a tenant-by-tenant basis.

 

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 June 30, 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 June 30, 2008 is as follows(amounts in thousands):

 
| ** **                                 | ** ** | **Lease /  Other  Intangibles** | ** ** |
|--------------------------------------------|------------|--------------------------------------|------------|
| July 1, 2008 - December 31, 2008 |       | $                                    | 1,816      |   |
|                                       | 2009       |                                 | 3,403      |   |
|                                       | 2010       |                                 | 2,185      |   |
|                                       | 2011       |                                 | 1,852      |   |
|                                       | 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 June 30, 2008** | ** ** | **Improvements**       | ** ** | **Improvements**  | ** ** | **Intangibles** | ** ** | **Leases**       | ** ** | **Interest**  | ** ** | **Intangibles** | ** ** |
| Cost                                        |       | $                      | 398,735    |              | $          | 132,979         |       | $                | 40,043     |          | $          | (26,489         | )          | $ | 40,898 |   | $ | 11,339 |   |
| Less: depreciation and amortization         |       | (13,037                | )          | (151              | )          | (8,343          | )          | 6,090            |       | (238          | )          | (1,051          | )          |
|                                        |       |                   |       |              |       |            |       |             |       |          |       |            |       |
| Net                                         |       | $                      | 385,698    |              | $          | 132,828         |       | $                | 31,700     |          | $          | (20,399         | )          | $ | 40,660 |   | $ | 10,288 |   |

 
| ** **                                      | ** ** | ** **             | ** ** | ** **        | ** ** | ** **      | ** ** | **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 toConsolidated 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 carryingvalue.  We determine the estimated fairvalue of condominiums based on comparable sales in the normal course ofbusiness under existing and anticipated market conditions.  This evaluation takes into considerationestimated future selling prices, costs spent to date, estimated additionalfuture costs, and management’s plans for the property.  There were no impairment charges for the sixmonths ended June 30, 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 June 30, 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, andequipment are recorded at cost and are depreciated using the straight-linemethod over their estimated useful lives of five to seven years.  Maintenance and repairs are charged tooperations as incurred while renewals or improvements to such assets arecapitalized.  Accumulated depreciationassociated with our furniture, fixtures, and equipment was $2.3 million and$1.4 million as of June 30, 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 six months ended June 30, 2008 or 2007.

 

Forreal estate we own through an investment in a limited partnership, jointventure, 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 temporarydecline.  There were no impairmentcharges for the six months ended June 30, 2008 or 2007.

*** ***

***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 

 

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** **

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

impairmentcharge is recorded to the extent that the investment in the note exceedsmanagement’s estimate of the fair value of the collateral securing such note.  There were no impairment charges for the sixmonths ended June 30, 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 $2.2 million and $1.2 million as of June 30,2008 and December 31, 2007, respectively.

*** ***

***Derivative Financial Instruments***

 

Ourobjective in using derivatives is to add stability to interest expense and tomanage our exposure to interest rate movements or other identified risks and tominimize the variability caused by foreign currency translation risk related toour net investment in foreign real estate. To accomplish these objectives, we use various types of derivativeinstruments to manage fluctuations in cash flows resulting from interest raterisk attributable to changes in the benchmark interest rate of LIBOR.  These instruments include LIBOR-basedinterest rate swaps and caps.  For ournet investment in a foreign real estate property, we use foreign currencyforward exchange contracts to eliminate the impact of foreign currency exchangemovements 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 foreigncurrency translation gain or loss. Changes in fair value of derivative instruments not designated as hedgesand ineffective portions of hedges are recognized in earnings in the affectedperiod.  We assess the effectiveness ofeach hedging relationship by comparing the changes in fair value or cash flowsof the derivative hedging instrument with the changes in fair value or cashflows of the designated hedged item or transaction.

 

Asof June 30, 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 acquired properties, we may incur future costsfor the abatement of regulated materials, primarily asbestos-containingmaterials, as required under environmental regulations.  Our estimate of the fair value of theliabilities is based on future anticipated costs to be incurred for the legalremoval or remediation of the regulated materials.  We completed the remediation of the regulatedmaterials in our current portfolio during the second quarter of 2008 resultingin no asset retirement obligation as of June 30, 2008 and $0.2 million asof December 31, 2007, which 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 eachreporting period.  Contributed capital istranslated using the historical rate of exchange when capital iscontributed.  Income statement items for thisinvestment are translated at the average exchange rate during the reportingperiod.  We maintain Euro-denominated bank accountsthat are translated into U.S. dollars at the current exchange rate at eachreporting period.  The resultingtranslation adjustments are recorded as a separate component of accumulatedother comprehensive loss in our consolidated statement of stockholders’equity.  The cumulative foreign currencytranslation adjustment was $0.1 million for both the six months ended June 30,2008 and the year ended December 31, 2007.

 

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** **

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

**Notes toConsolidated 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 other comprehensiveloss consist of foreign currency translation gains and losses and unrealizedgains 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 $2.3 million and $1.9 million was recognized in rental revenuesfor the six months ended June 30, 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.

 

For the six monthsended June 30, 2008 and 2007, we recognized a current and deferred tax provisionof approximately $0.1 million and less than $0.1 million, respectively, relatedto 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 six months ended June 30, 2008and 2007, we had no significant compensation cost related to our incentiveaward plan.

*** ***

***Concentration of Credit Risk***

 

AtJune 30, 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 noncontrolling ownership interest’sproportionate share of the equity in our consolidated real estate investmentsconsisting of the 5%, 10%, 10%, 30%, and 20% unaffiliated partners’ share ofthe equity in Chase Park Plaza, The Lodge & Spa at Cordillera, RioSalado Business Center, Frisco Square, and Becket House, respectively, as wellas 100% of the equity of the two properties we consolidate under FIN 46R as alender and primary beneficiary.  Incomeand losses are allocated to minority interest holders based on their ownershippercentage.  During the second quarter of2008, we amended our partnership agreement 

 

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** **

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

withour noncontrolling interest partner on The Lodge & Spa at Cordillera,such that we increased our equity interest from 85% to 90%.

 

***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 one reportablesegment, with activities related to the ownership, development and managementof real estate assets.  Our incomeproducing properties generated 100% of our consolidated revenues for the sixmonths ended June 30, 2008 and 2007. Our chief operating decision maker evaluates operating performance on anindividual property level.  Therefore,our properties are aggregated into one reportable segment for the three and sixmonths ended June 30, 2008 and 2007.

*** ***

***Loss per Share***

 

Lossper share is calculated based on the weighted average number of sharesoutstanding during each period.  As of June 30,2008 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 and six months ended June 30,2008 and 2007 because the effect would be anti-dilutive.

# ** **

# **4.         New Accounting Pronouncements**

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements.”  SFAS No. 157 establishes a single authoritativedefinition of fair value, sets out a framework for measuring fair value, andrequires additional disclosures about fair value measurements.  SFAS No. 157applies only to fair value measurements that are already required or permittedby other accounting standards.  Our adoption of SFAS No. 157, on January 1,2008, did not have a material effect on our consolidated results of operationsor financial position.

 

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 delayedthe effective date of SFAS No. 157 for non-financial assets andnon-financial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually).  We are currently assessingthe effect FSP SFAS No. 157-2 may have on our disclosures in our financialstatements.

 

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 fair value option established bySFAS No. 159 permits all entities to choose to measure eligible itemsat fair value at specified election dates.  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.  We adoptedthis standard effective January 1, 2008 but have not elected the fairvalue measurement option for any financial assets or liabilities at the presenttime; however, we may elect to measure future eligible financial assets orliabilities at fair value.

 

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 No. 141(R) applies the same method of accounting(the acquisition method) to all transactions and other events in which oneentity obtains control over one or more other businesses.  This Statementalso makes certain other modifications to Statement 141, including a broaderdefinition of a business and the requirement that acquisition related costs areexpensed as incurred.  This Statement applies to business combinationsoccurring on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008.  Early adoption is notallowed.  We expect SFAS 141(R) will have a material effect on ouraccounting for future acquisitions of properties if they fall under thedefinition of a business combination.

 

InDecember 2007, the FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements - An amendment of ARB No. 51.” This Statement amends Accounting Research Bulletin No. 51 to establishaccounting and reporting standards for the noncontrolling interest in asubsidiary and for the deconsolidation of a subsidiary.  It clarifies thata noncontrolling interest in a subsidiary, which is sometimes referred to asminority interest, is an ownership interest in the consolidated entity thatshould be reported as equity in the consolidated financial statements. Among other requirements, this Statement requires consolidated net income to bereported at amounts that include the amounts attributable to both the parentand the noncontrolling interest.  It also requires disclosure, on the faceof the

 

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** **

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

consolidatedincome statement, of the amounts of consolidated net income attributable to theparent and to the noncontrolling interest.  This Statement is effectivefor fiscal years, and interim periods within those fiscal years, beginning onor after December 15, 2008.  Earlier adoption is prohibited. This Statement shall be applied prospectively as of the beginning of the fiscalyear in which this Statement is initially applied, except for the presentationand disclosure requirements.  The presentation and disclosure requirementsshall be applied retrospectively for all periods presented.

 

InMarch 2008, the FASB issued SFAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.”  SFASNo. 161 requires entities to provide greater transparency about how andwhy the entity uses derivative instruments, how the instruments and relatedhedged items are accounted for under SFAS 133, and how the instruments andrelated hedged items affect the financial position, results of operations, andcash flows of the entity.  SFAS No. 161 is effective for fiscalyears and interim periods beginning after November 15,2008.  The principal impact to us will be to expand our disclosuresregarding derivative instruments.

 

**5.         Assetsand Liabilities Measured 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 (otherthan quoted prices), such as interest rates, foreign exchange rates, and yieldcurves 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 analysis reflectsthe contractual terms of the derivatives, including the period to maturity, anduses observable market-based inputs, including interest rate curves, impliedvolatilities, 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 of June 30, 2008, we have assessed the significance of the impact ofthe credit valuation adjustments on the overall valuation of our derivativepositions and have determined that the credit valuation adjustments are notsignificant to the overall valuation of our derivatives.  As a result, we have determined that ourderivative valuations in their entirety are classified in Level 2 of the fairvalue hierarchy.

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

The following fair value hierarchy table presents information about ourassets and liabilities measured at fair value on a recurring basis as of June 30,2008 (amounts in thousands):

 
| ** **                       | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total**  | ** ** |
|----------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------|------------|
| **Assets**                       | ** ** | ** **       | ** ** | ** **       | ** ** | ** **       | ** ** | ** ** | ** ** |
| Derivative financial instruments |       | $                | —     |             | $          | 977              |       | $          | —     |   | $ | 977 |   |
|                             |       |             |       |             |       |             |       |       |       |
| **Liabilities**                  |       |             |       |             |       |             |       |       |       |
| Derivative financial instruments |       | $                | —     |             | $          | 645              |       | $          | —     |   | $ | 645 |   |

 

Derivative financial instruments classified as assets are included inother assets on the balance sheet while derivative financial instrumentsclassified as liabilities are included in other liabilities.

 

**6.         Acquisitions**

*** ***

***Real Estate Asset Acquisitions***

 

OnJune 25, 2008, we acquired a multi-tenant office building known asCrossroads Office Park, located in San Diego, CA (“Crossroads”).  Crossroads is a seven-story office buildingcontaining approximately 139,700 rentable square feet, located on approximatelyfive acres of land.  The total contractpurchase price for Crossroads, exclusive of closing costs, was $34.2 million.  We used proceeds from our offering of commonstock to the public plus debt totaling $28.6 million to acquire Crossroads.

 

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 acquiredintangible assets and liabilities will be amortized over the remaining terms ofthe acquired leases which range from 17 months to 9 years.

 

OnMay 27, 2008, we acquired an approximate 16% equity interest as a limitedpartner in the Rock House Hotel (“Royal Island – Rock House”) for $0.7million.   Royal Island – Rock House is a10-room boutique hotel located on Harbour Island in The Commonwealth of TheBahamas.

 

**7.         Real Estate Investments**

 

Asof June 30, 2008, we wholly-owned eleven 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 June 30, 2008.  In addition, we have noncontrolling,unconsolidated ownership interests in four 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 June 30,2008 and December 31, 2007 (amounts in thousands):

 
| ** **                   | ** ** | ** **              | ** ** | **Carrying Value of Investment** | ** ** |
|------------------------------|------------|-------------------------|------------|-------------------------------------------------|------------|
| **Property Name**       | ** ** | **Ownership  Interest** | ** ** | **June 30,  2008**                         | ** ** | **December 31,  2007** | ** ** |
| Royal Island                 |       | 31%                     |       | $                                               | 22,317     |   | $ | 22,801 |   |
| Royal Island - Rock House    |       | 16%                     |       | 681                                             |       | — |   |
| GrandMarc at Westberry Place |       | 50%                     |       | 7,369                                           |       | 7,765 |   |
| GrandMarc at the Corner      |       | 50%                     |       | 5,363                                           |       | 5,879 |   |
| Total                        |       |                    |       | $                                               | 35,730     |   | $ | 36,445 |   |

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

Our investments in unconsolidated joint ventures asof June 30, 2008 and December 31, 2007 consisted of our proportionateshare of the combined assets and liabilities of our investment properties asfollows (amounts in thousands):

 
| ** **                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                   | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| Real estate assets, net      |       | $                 | 205,659    |                  | $          | 167,188 |   |
| Cash and cash equivalents    |       | 19,887            |       | 1,985                 |       |
| Other assets                 |       | 2,730             |       | 3,290                 |       |
| Total assets                 |       | $                 | 228,276    |                  | $          | 172,463 |   |
|                         |       |              |       |                  |       |
| Notes payable                |       | $                 | 120,727    |                  | $          | 75,838 |   |
| Other liabilities            |       | 17,974            |       | 4,536                 |       |
| Total liabilities            |       | 138,701           |       | 80,374                |       |
|                         |       |              |       |                  |       |
| Equity                       |       | 89,575            |       | 92,089                |       |
| Total liabilities and equity |       | $                 | 228,276    |                  | $          | 172,463 |   |

 

For the three and six months ended June 30,2008, we recognized $0.7 million and $1.5 million, respectively, of equity inlosses as compared to losses of $0.1 million for the three and six months endedJune 30, 2007.  Our equity in lossesfrom these investments is our proportionate share of the combined losses of ourunconsolidated joint ventures for the three and six months ended June 30,2008 and 2007 as follows (amounts in thousands):

 
| ** **                       | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                       | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Revenue                          |       | $                                                   | 2,146      |                                              | $          | — |   | $ | 4,315 |   | $ | — |   |
|                             |       |                                                |       |                                              |       |   |   |   |   |
| Operating expenses:              |       |                                                |       |                                              |       |   |   |   |   |
| Operating expenses               |       | 1,681                                               |       | 222                                               |       | 2,327 |   | 222 |   |
| Property taxes                   |       | 222                                                 |       | —                                            |       | 443 |   | — |   |
| Total operating expenses         |       | 1,903                                               |       | 222                                               |       | 2,770 |   | 222 |   |
|                             |       |                                                |       |                                              |       |   |   |   |   |
| Operating income (loss)          |       | 243                                                 |       | (222                                              | )          | 1,545 |   | (222 | ) |
|                             |       |                                                |       |                                              |       |   |   |   |   |
| Non-operating expenses:          |       |                                                |       |                                              |       |   |   |   |   |
| Depreciation and amortization    |       | 1,119                                               |       | 5                                                 |       | 2,134 |   | 5 |   |
| Interest and other, net          |       | 630                                                 |       | —                                            |       | 2,922 |   | — |   |
| Total non-operating expenses     |       | 1,749                                               |       | 5                                                 |       | 5,056 |   | 5 |   |
|                             |       |                                                |       |                                              |       |   |   |   |   |
| Net loss                         |       | $                                                   | (1,506     | )                                                 | $          | (227 | ) | $ | (3,511 | ) | $ | (227 | ) |
|                             |       |                                                |       |                                              |       |   |   |   |   |
| Company’s share of net loss |       | $                                                   | (671       | )                                                 | $          | (68 | ) | $ | (1,531 | ) | $ | (68 | ) |

 

**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.  Alexan Black Mountain is fully operational asof June 30, 2008, however, the notice to exercise our option to purchasean ownership interest in the property has not yet been provided as prescribedin the option agreement.

 

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

 

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** **

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

entities, including therelated real estate assets and third-party construction financing.  As of June 30, 2008, there was $86.8million of related real estate assets and real estate under development relatedto Alexan Voss and Alexan Black Mountain, which collateralizes the outstandingprincipal balance of the construction and mezzanine loans of $80.6million.  The third-party constructionlenders have no recourse to the general credit of us as the primarybeneficiary, but their loans are guaranteed by the owners of the variableinterest entities.  As of June 30,2008, 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 The 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 $19.3 million wasoutstanding to us at June 30, 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 June 30,2008, there was approximately $104.6 million of related real estate assets andreal estate under development related to Royal Island.

** **

**9.         Notes Receivable**

 

We lease the hotel portionof the Chase Park Plaza property to the hotel operator, an unaffiliated entitythat owns the remaining 5% of Chase Park Plaza. In conjunction with the lease agreement, we made a working capital andinventory loan of up to $1.9 million to the hotel operator in December 2006.  The interest rate under the note is fixed at5% per annum.  The term of the note isthe earlier of December 31, 2016 or the termination of the related hotellease agreement.  Annual payments ofinterest only are required each December with any remaining balancepayable at the maturity date.  Inaccordance with the hotel lease agreement, the tenant will receive a reductionin its base rental payment due in January in the amount of the interestpaid on the promissory note in the previous December.  This reduction in the lease payment isreflected as a straight-line adjustment to base rental revenue. At June 30,2008, the note receivable balance was $1.9 million.

 

In December 2007, weparticipated in a bridge loan financing arrangement for the continuingdevelopment and construction of Royal Island. The aggregate principal amountavailable under the bridge loan is $60 million, of which we are makingavailable up to $40 million.  The loan accruesinterest at the one-month LIBOR rate plus 8% per annum and monthly payments ofinterest only are required with any remaining balance payable at the maturitydate, December 20, 2008.  At June 30,2008, the loan balance owed to us was $19.3 million, with an annual interestrate of 10.5%.  In addition, $1.1 millionof accrued interest and fees is included in receivables from related parties atJune 30, 2008.

** **

**10.      Capitalized Costs**

 

Wecapitalize interest, property taxes, insurance, and construction costs to realestate under development.  During the sixmonths ended June 30, 2008, we capitalized $36.3 million of such costsassociated with real estate under development and certain investments accountedfor by the equity method, including $7.6 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 our consolidatedbalance sheet at June 30, 2008. During the six months ended June 30, 2008, we capitalized a totalof $17.1 million of such costs associated with the condominium redevelopment atChase Park Plaza and The Lodge & Spa at Cordillera, including $3.4million of interest and deferred financing costs.

 

Duringthe second quarter of 2008, $14.2 million in costs were transferred from realestate under development to land on our balance sheet.  Also, during the second quarter of 2008,$25.3 million and $4 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 $342.3 million at June 30, 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 notes payable

 

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** **

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

of our mezzanine borrowers we consolidate under FIN46R.  Each of our mortgage loans is collateralized by one or more of ourproperties.  At June 30, 2008, our notes payable interest ratesranged from 4.07% to 8.00%, with a weighted average interest rate ofapproximately 4.89%.  Of our $342.3 million in notes payable at June 30,2008, $302.2 million represented debt subject to variable interest rates. At June 30, 2008, our notes payable have maturity dates that range from September 2008to November 2016.  Our loan agreements generally stipulate that wecomply with certain reporting and financial covenants.  These covenantsinclude among other things, notifying the lender of any change in managementand maintaining minimum debt service coverage ratios.  At June 30,2008, we are not aware of any non-compliance with our debt covenants under ourloan agreements.

 

OnFebruary 13, 2008, we entered into a senior secured revolving creditfacility providing for up to $75 million of secured borrowings.  The initial credit facility allows us toborrow up to $75 million in revolving loans, of which up to $20 million is availablefor issuing letters of credit.  Loansunder the credit facility bear interest at an annual rate that is equal to or acombination of (1) the LIBOR plus an applicable margin that, dependingupon the debt service coverage ratio, may vary from 1.5% to 1.7%, or (2) theprime rate plus an applicable margin that, depending upon the debt servicecoverage ratio, may vary from 0% to 0.2%. The credit facility matures on February 13, 2011.  The credit facility is secured by a firstlien on certain real property assets.

 

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.  There were no borrowings under the creditfacility as of June 30, 2008.  SeeNote 17 – Subsequent Events.

 

Aspart of our acquisition of Crossroads on June 25, 2008, we entered into a$28.6 million note payable to a financial institution to pay a portion of thepurchase price.  The interest rate underthe note is a variable rate, adjusted monthly, equal to 2.85% per annum inexcess of the LIBOR rate with minimum monthly payments of interest required tothe maturity date, June 30, 2011, at which time the unpaid principalbalance is due.  Crossroads is held ascollateral for the note.

 

Thefollowing table summarizes our contractual obligations for principal paymentsas of June 30, 2008 (amounts in thousands):

 

| **Principal Payments Due:**       | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| July 1,  2008 - December 31, 2008 |       | $          | 29,736     |   |
| 2009                                        |       | 64,051     |       |
| 2010                                        |       | 179,924    |       |
| 2011                                        |       | 29,240     |       |
| 2012                                        |       | 1,660      |       |
| Thereafter                                  |       | 36,439     |       |
| Unamortized  premium                        |       | 1,202      |       |
|                                        |       |       |       |
|                                        |       | $          | 342,252    |   |

 

**12.      Derivative Instruments and HedgingActivities**

 

InJune 2007, we entered into two interest rate cap agreements associatedwith our Santa Clara Tech Center property. In November 2007, we entered into a foreign currency forwardcontract 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.

 

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.

 

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** **

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

Thefollowing table summarizes the notional values of our derivative financialinstruments as of June 30, 2008. The notional values provide an indication of the extent of ourinvolvement in these instruments at June 30, 2008, but do not representexposure to credit, interest rate, or market risks (amounts in thousands).

 
| ** **                                      | ** ** | **Notional** | ** ** | **Interest Rate/** | ** ** | ** **   | ** **             |
|-------------------------------------------------|------------|--------------|------------|-------------------------|------------|--------------|------------------------|
| **Hedge Type/Description**                 | ** ** | **Value**    | ** ** | **Strike Rate**    | ** ** | **Maturity** | ** **             |
| Cash Flow Hedges                                |       |         |       |                    |       |         |                   |
| Interest rate cap - Santa Clara Tech Center     |       | $            | 35,115     |                    | 6.00%      |         | June 15, 2010     |   |
| Interest rate cap - Santa Clara Tech Center     |       | $            | 17,000     |                    | 6.00%      |         | June 15, 2010     |   |
| Interest rate cap - Chase - Private  Residences |       | $            | 30,000     |                    | 6.00%      |         | December 15, 2009 |   |
| Interest rate swap - Chase Park Plaza Hotel     |       | $            | 72,260     |                    | 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. At the date of issuance of theshares of convertible stock, management determined the fair value under GAAPwas less than the nominal value paid for the shares; therefore, the differenceis not material.** **Conversionof the convertible stock may be limited by our board of directors if itdetermines that full conversion may jeopardize our qualification as aREIT.  Our board of directors mayauthorize additional shares of capital stock and their characteristics withoutobtaining stockholder approval.

*** ***

***Share Redemption Program***

 

Ourboard of directors has authorized and adopted a share redemption program thatenables our stockholders to sell their shares to us in limited circumstancesafter they have held them for at least one year.  The purchase price for the redeemed shares isset forth in the prospectus for the primary offering of our common stock, assupplemented.  Our board of directorsreserves the right in its sole discretion at any time, and from time to time,to (1) waive the one-year holding period in the event of the death,disability or bankruptcy of a stockholder or other exigent circumstances, (2) rejectany request for redemption, (3) change the purchase price for redemptions,or (4) terminate, suspend or amend the share redemption program.  Under the terms of the plan, during anycalendar year, we will not redeem in excess of 5% of the weighted averagenumber of shares outstanding during the twelve-month period immediately prior tothe date of redemption.  In addition, ourboard of directors will determine whether we have sufficient cash fromoperations to repurchase shares, and such purchases will generally be limitedto proceeds of our distribution reinvestment plan plus 1% of operating cashflow for the previous fiscal year (to the extent positive).  We redeemed 219,660 shares of common stockfor $2 million during the six months ended June 30, 2008, for an aggregatetotal of 376,393 shares of common stock redeemed since inception.

*** ***

***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 June 30, 2008, options to purchase39,583 shares of stock were outstanding, of which 36,250 are fully vested, at aweighted average exercise price of $9.10.

## *** ***

## ***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

 

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** **

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

of a 2.5% annualized rate of return, calculated on adaily record basis of $0.0006849 per share. In March 2007, our board of directors declared distributions to bepaid in the second quarter of 2007 in the amount of a 3% annualized rate ofreturn, 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 declared by quarter for the six months ended June 30,2008 and 2007 (amounts in thousands):

 
| **2008**    | ** ** | **Total  Distributions  Declared** | ** ** | **Cash  Declared** | ** ** | **DRIP  Declared** | ** ** |
|-------------|------------|------------------------------------|------------|--------------------|------------|--------------------|------------|
|        |       |                               |       |               |       |               |       |
| 2nd Quarter |       | $                                  | 4,076      |               | $          | 978                |       | $ | 3,098 |   |
| 1st Quarter |       | 4,055                              |       | 969                |       | 3,086              |       |
|        |       | $                                  | 8,131      |               | $          | 1,947              |       | $ | 6,184 |   |

 
| **2007**    | ** ** | **Total  Distributions  Declared** | ** ** | **Cash  Declared** | ** ** | **DRIP  Declared** | ** ** |
|-------------|------------|------------------------------------|------------|--------------------|------------|--------------------|------------|
|        |       |                               |       |               |       |               |       |
| 2nd Quarter |       | $                                  | 2,254      |               | $          | 523                |       | $ | 1,731 |   |
| 1st Quarter |       | 1,279                              |       | 272                |       | 1,007              |       |
|        |       | $                                  | 3,533      |               | $          | 795                |       | $ | 2,738 |   |

 

**14.      Related Party Arrangements**

 

Behringer OpportunityAdvisors and certain of its affiliates receive fees and compensation inconnection with our offering of common stock to the public, and in connectionwith the acquisition, management, and sale of our assets.  We terminated our initial public offering on December 28,2007 and currently are offering shares of our common stock only 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 Behringer Securitiesas a dealer manager fee; provided that Behringer Securities did not and doesnot receive dealer manager fees for purchases pursuant to our DRIP or SecondaryDRIP.  Behringer Securities was permittedto reallow all or a portion of its dealer manager fees in an aggregate amountup to 2% of gross offering proceeds to broker-dealers participating in thepublic offering; provided, however, that Behringer Securities was permitted toreallow, in the aggregate, no more than 1.5% of gross offering proceeds formarketing fees and expenses, conference fees and non-itemized, non-invoiced duediligence efforts, and no more than 0.5% of gross offering proceeds for actualout-of-pocket and bona fide, separately invoiced due diligence expensesincurred as fees, costs or other expenses from third parties.  From inception through the termination dateof the public offering on December 28, 2007, Behringer Securities’commissions and dealer manager fees totaled $35.6 million and $10.7 million,respectively, and were recorded as a reduction to additional paid-incapital.  In the six months ended June 30,2008, Behringer Securities did not receive any commissions or dealer managerfees associated with our offering of common stock to the public as the initialpublic 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

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

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 recorded asa reduction of additional paid-in capital. Behringer Opportunity Advisors I, or its affiliates, determines theamount of organization and offering expenses owed based on specific invoiceidentification as well as an allocation of costs to us and other BehringerHarvard programs, based on respective equity offering results of those entitiesin 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 ofacquisition expenses up to 0.5% of the contract purchase price of each asset,or with respect to a loan, up to 0.5% of the funds advanced.  Behringer Opportunity Advisors I or itspredecessor-in-interest earned $1.7 million in acquisition and advisory feesand $0.3 million in acquisition expense reimbursements for our investments madeduring the six months ended June 30, 2008. In the six months ended June 30, 2007, our advisor earned $8.9million in acquisition and advisory fees and $1.8 million in acquisitionexpense reimbursements.  For propertyacquisitions, we capitalize these fees as part of our real estate, 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 $1.2 million and $0.8 million ofdebt financing fees during the six months ended June 30, 2008 and 2007,respectively.

 

Wepay HPT Management Services LP, Behringer Harvard Real Estate Services, LLC, orBehringer Harvard Opportunity Management Services, LLC (collectively, “BHProperty Management”), affiliates of our advisor and our property managers,fees for management and leasing of our properties, which may be subcontractedto unaffiliated third parties.  Such feesare equal to 4.5% of gross revenues plus leasing commissions based upon thecustomary leasing commission applicable to the same geographic location of therespective property.  In the event thatwe contract directly with a non-affiliated third-party property manager inrespect of a property, we will pay BH Property Management an oversight feeequal to 1% of gross revenues of the property managed.  In no event will we pay both a propertymanagement fee and an oversight fee to BH Property Management with respect toany particular property.  We incurred andexpensed such fees totaling $0.5 million and $0.3 million in the six monthsended June 30, 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 six monthsended June 30, 2008, we expensed $1.9 million of asset management fees andcapitalized $0.1 million of asset management fees to real estate. For the sixmonths ended June 30, 2007, we expensed $0.8 million of asset managementfees and capitalized $0.1 million of asset management fees.

 

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, including direct expenses and the costs of salaries and benefitsof persons employed by those entities and performing services for us, subjectto the limitation that we will not reimburse for any amount by which ouradvisor’s operating expenses (including the asset management fee) at the end ofthe four fiscal quarters immediately preceding the date reimbursement is soughtexceeds the greater of:  (1) 2% ofour average invested assets or (2) 25% of our net income for that fourquarter period other than any additions to reserves for depreciation, bad debtsor other similar non-cash reserves and any gain from the sale of our assets forthat period.  For the six months ended June 30,2008, we incurred and expensed costs for administrative services totaling $0.2million.

 

AtJune 30, 2008, we had a net payable to our advisor and its affiliates of$0.9 million. This balance consists primarily of asset management fees andadministrative service expenses payable to Behringer Opportunity Advisors I,management fees payable to BH Property Management, and other miscellaneouspayables.

 

Weare dependent on Behringer Opportunity Advisors I and BH Property Managementfor certain services that are essential to us, including asset acquisition anddisposition decisions, property management and leasing services, and othergeneral administrative responsibilities. In the event that these companies were unable to provide us with therespective services, we would be required to obtain such services from othersources.

** **

**15.      Stock-Based Compensation**

 

TheIncentive Award Plan was approved by our board of directors on July 19,2005 and by our stockholders on July 25, 2005, and provides for equityawards to our directors and consultants and to employees, directors andconsultants of our affiliates.  On February 17,2006, we issued options to purchase 5,000 shares of our common stock at $9.10per share to each of two of our three independent directors and issued optionsto purchase 1,250 shares of our common stock at $9.10

 

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

**Notes toConsolidated Financial Statements**

**(Unaudited)**

 

pershare to our other independent director pursuant to the Incentive AwardPlan.  We issued additional options topurchase 5,000 shares of our common stock at $9.10 per share to each of ourthree independent directors on June 29, 2006 pursuant to the IncentiveAward Plan.  On June 21, 2007, weissued options to purchase an additional 5,000 shares of our common stock at$9.10 per share to each of our three independent directors pursuant to theIncentive Award Plan; however, one of our independent directors forfeited hisoptions to purchase 5,000 shares of our common stock upon his resignation as adirector.  On September 24, 2007, weissued options to purchase 3,333 shares of our common stock at $9.10 per shareto a newly appointed independent director pursuant to the Incentive AwardPlan.  The options issued pursuant to theIncentive Award Plan become exercisable one year after the date of grant.  As of June 30, 2008, options to purchase39,583 shares of stock were outstanding, of which 36,250 are fully vested, at aweighted average exercise price of $9.10. The remaining contractual life of the outstanding options is 8.25years.  Compensation expense associatedwith our Incentive Award Plan was not material for the six months ended June 30,2008 and 2007.

** **

**16.      Supplemental Cash FlowInformation**

 

Supplemental cash flowinformation is summarized below (amounts in thousands).

 
| ** **                                                                                                                    | ** ** | **Six months**         | ** ** | **Six months**         | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                    | ** ** | **ended**                   | ** ** | **ended**                   | ** ** |
| ** **                                                                                                                    | ** ** | **June 30, 2008** | ** ** | **June 30, 2007** | ** ** |
| **Supplemental disclosure:**                                                                                                  |       |                        |       |                        |       |
| Interest paid, net of amounts capitalized                                                                                     |       | $                           | 4,639      |                        | $          | 2,014 |   |
| Income taxes paid                                                                                                             |       | $                           | 76         |                        | $          | — |   |
|                                                                                                                          |       |                        |       |                        |       |
| **Non-cash investing activities:**                                                                                            |       |                        |       |                        |       |
| Property and equipment additions and  purchases of real estate in accrued liabilities                                         |       | $                           | 42         |                        | $          | 128 |   |
| Capital expenditures for real estate under development  in accounts payable and accrued liabilities                           |       | $                           | 7,272      |                        | $          | 4,878 |   |
| Capital expenditures for real estate under development  of consolidated borrowers in accounts payable and accrued liabilities |       | $                           | 3,138      |                        | $          | 765 |   |
| Amortization of deferred financing fees in  properties under development                                                      |       | $                           | 261        |                        | $          | — |   |
| Amortization of deferred financing fees in  properties under development of consolidated borrowers                            |       | $                           | 34         |                        | $          | — |   |
|                                                                                                                          |       |                        |       |                        |       |
| **Non-cash financing activities:**                                                                                            |       |                        |       |                        |       |
| Common stock issued in distribution reinvestment  plan                                                                        |       | $                           | 6,204      |                        | $          | 3,419 |   |
| Assumed debt on acquisition of real estate  investment                                                                        |       | $                           | 22,229     |                        | $          | — |   |

 

**17.****                  ****Subsequent Events**

 

BetweenJuly 29, 2008 and August 6, 2008, we acquired a 50% interest in a portfolio of19 properties located in four Central European countries through a jointventure (“Central Europe Portfolio”). The purchase price for our 50% interest was  €14.5 million (approximately $22.8 million),excluding closing and acquisition costs. We used proceeds from our offering of common stock to the public andborrowings from our senior secured revolving credit facility to acquire theCentral Europe Portfolio.

 

On July 30,2008, the existing debt of Frisco Square was replaced with a new $57.8 millioncredit agreement (“Frisco Square Loan”) with two banks.  The Frisco Square Loan consists of fiveseparate tranches with varying payment terms and bears interest at annual ratesbased on LIBOR plus applicable margins ranging from 1.8% to 2.5%.  The Frisco Square Loan is secured by FriscoSquare and matures on July 30, 2011, except for a $25.8 million tranchewhich matures July 30, 2009.  Wehave unconditionally guaranteed payment of the Frisco Square Loan.

 

In July 2008,we borrowed $25 million under our senior secured revolving creditfacility.  The proceeds were used to fundongoing costs at our development properties, to fund a portion of ouracquisition of the Central Europe Portfolio, and for general corporatepurposes.

 

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**Item2.                Management’s Discussionand Analysis of Financial Condition and Results of Operations.**

** **

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

 

### **Forward-LookingStatements**

### ** **

This section containsforward-looking statements, including discussion and analysis of the financialcondition of us and our subsidiaries, including entities we consolidate underFIN 46R, our anticipated capital expenditures required to complete projects,amounts of anticipated cash distributions to our stockholders in the future andother matters.  These forward-lookingstatements are not historical facts but are the intent, belief or currentexpectations of our management based on their knowledge and understanding ofour business and industry.  Words such as“may,” “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,”“would,” “could,” “should” and variations of these words and similarexpressions are intended to identify forward-looking statements.  These statements are not guarantees of futureperformance and are subject to risks, uncertainties and other factors, some ofwhich are beyond our control, are difficult to predict and could cause actualresults to differ materially from those expressed or forecasted in theforward-looking statements.

 

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

### ** **

**CautionaryNote**

 

The representations,warranties, and covenants made by us in any agreement filed as an exhibit tothis report on Form 10-Q are made solely for the benefit of the parties tothe agreement, including, in some cases, for the purpose of allocating riskamong the parties to the agreement, and should not be deemed to berepresentations, warranties or covenants to or with any other parties.  Moreover, these representations, warrantiesor covenants should not be relied upon as accurately describing or reflectingthe current state of our affairs.

 

**CriticalAccounting Policies and Estimates**

 

Management’s discussionand analysis of financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the United States ofAmerica.  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. Below is a discussion of the accounting policies that weconsider to be critical in that they may require complex judgment in theirapplication or require estimates about matters that are inherently uncertain.

 

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

 

Our consolidatedfinancial statements include our accounts, the accounts of VIEs in which we arethe primary beneficiary and the accounts of other subsidiaries over which wehave control.  All inter-companytransactions, 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,” and Emerging Issues Task Force04-5, “Determining Whether a GeneralPartner, or the General Partners as a Group, Controls a Limited Partnership orSimilar Entity When the Limited Partners Have Certain Rights.”

 

There are judgments andestimates involved in determining if an entity in which we have made aninvestment is a VIE and if so, if we are the primary beneficiary.  The entity is evaluated to determine if it isa VIE by, among other things, 

 

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calculating thepercentage 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 Intangible Assets***

 

Upon the acquisition ofreal estate properties, we allocate the purchase price of those properties tothe tangible assets acquired, consisting of land, inclusive of associatedrights, land improvements, buildings, building improvements, furniture, fixturesand equipment, identified intangible assets, asset retirement obligations, andassumed liabilities based on their relative fair values in accordance with SFASNo. 142*,*“Goodwill and OtherIntangible Assets.”  Identifiedintangible assets consist of the fair value of above-market and below-marketleases, in-place leases, in-place tenant improvements, in-place leasingcommissions, and tenant relationships.

 

Upon the completion of abusiness combination, we record the tangible assets acquired, consisting ofland and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their fair values in accordance with SFAS No. 141,“Business Combinations.”  Identifiedintangible assets consist of the fair value of above-market and below-marketleases, in-place leases, in-place tenant improvements and tenantrelationships.  Any amount paid in excessof the fair value of the assets and liabilities acquired is recorded asgoodwill.  If the value of the assets andliabilities exceeds the total purchase price, then the resulting negativegoodwill is allocated to the tangible and intangible assets acquired.

 

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

 

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

 

The fair value of anytangible assets acquired, expected to consist of land, land improvements, buildings,building improvements, and furniture, fixtures and equipment, is determined byvaluing the property as if it were vacant, and the “as-if-vacant” value is thenallocated to the tangible assets.  Landvalues are derived from appraisals and building values are calculated asreplacement cost less depreciation or management’s estimates of the relativefair value of these assets using discounted cash flow analyses or similarmethods.  Furniture, fixtures, andequipment values are determined based on current reproduction or replacementcost less depreciation and other estimated allowances based on physical,functional, or economic factors.  Thevalue of buildings is depreciated over the estimated useful lives ranging from25 years for commercial office property to 39 years for hotel/mixed-useproperty using the straight-line method. Land improvements are depreciated over the estimated useful life of 15years, and furniture, fixtures, and equipment are depreciated over estimateduseful lives ranging from five to seven years using the straight-line method.

 

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

 

The total value ofidentified real estate intangible assets that we may acquire in the future isfurther allocated to in-place lease values and tenant relationships based onour evaluation of the specific characteristics of each tenant’s lease and ouroverall relationship with that respective tenant.  The aggregate value of in-place leasesacquired and tenant relationships is determined by applying a fair 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

 

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lost rental revenueduring the expected lease-up period and carrying costs that would haveotherwise been incurred had the leases not been in place, including tenantimprovements and commissions.  Theestimates of the fair value of tenant relationships also include costs toexecute similar leases including leasing commissions, legal costs and tenantimprovements as well as an estimate of the likelihood of renewal as determinedby management on a tenant-by-tenant basis.

 

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

 

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

 

For real estate we whollyown, our management monitors events and changes in circumstances indicatingthat the carrying amounts of the real estate assets may not berecoverable.  When such events or changesin circumstances are present, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset and from its eventual disposition to the carryingamount of the asset.  In the event thatthe carrying amount exceeds the estimated future undiscounted operating cashflows, we recognize an impairment loss to adjust the carrying amount of theasset to estimated fair value.

 

For real estate we ownthrough an investment in a joint venture, tenant-in-common interest or other similarinvestment structure, at each reporting date, management compares the estimatedfair value of our investment to the carrying value.  An impairment charge is recorded to theextent the fair value of our investment is less than the carrying amount and thedecline in value is determined to be other than a temporary decline.

 

In evaluating ourinvestments for impairment, management makes several estimates and assumptions,including, but not limited to, the projected date of disposition of theproperties, the estimated future cash flows of the properties during ourownership and the projected sales price of each of the properties.  A change in these estimates and assumptionscould result in understating or overstating the book value of our investments,which could be material to our financial statements.

 

***Notes Receivable***

 

For notes receivable,management reviews the terms and conditions underlying the outstanding notesreceivable.  If management determinesthat it is probable that all amounts due under the terms of the note will notbe collected, an impairment charge is recorded to the extent that theinvestment in the note exceeds management’s estimate of the fair value of thecollateral securing such note.

 

**Overview**

 

We were formed primarilyto invest 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 with higher volatility, lowerbarriers to entry, and high growth potential. We may acquire office, industrial, retail, hospitality, multi-family andother real properties, including existing or newly constructed properties orproperties under development or construction. Further, we may invest in real estate related securities, includingsecurities issued by other real estate companies, either for investment or inchange of control transactions completed on a negotiated basis orotherwise.  We also may invest incollateralized mortgage-backed securities, mortgage, bridge or mezzanine loans,and Section 1031 tenant-in-common interests, or in entities that makeinvestments 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 reallocated theshares of common stock in the Offering to provide $532.7 million, or 53,270,000shares, for sale in the primary offering and $9.2 million, or 965,331 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 June 30, 2008, we had 54,489,957 shares of our common stockoutstanding, 1,000 shares of convertible stock issued and outstanding, and hadno shares of preferred stock issued or outstanding.

 

**Results of Operations**

 

As of June 30, 2008,we had invested in 22 properties:  elevenconsolidated wholly-owned properties; five properties consolidated throughinvestments in joint ventures including two mixed-use hotel and residential properties;two investments in an island development accounted for under the equity method;two investments in student housing projects in Texas and Virginia, alsoaccounted for under the equity method; and two apartment development propertiesas a mezzanine lender consolidated under FIN 46R.  Our investment properties are located inArizona, California, Colorado, Massachusetts, Minnesota, Missouri, Nevada,Texas, the Commonwealth of The Bahamas, and London, England.

 

As of June 30, 2007,we had invested in 14 properties, including six wholly-owned properties, threeconsolidated properties acquired through investments in limited liabilitycompanies including two mixed-use hotel and residential properties, and oneinvestment in an island development accounted for under the equity method.  We also consolidated two apartmentdevelopment properties as a mezzanine lender under FIN 46R. We had also madetwo mezzanine loans to student housing projects in Texas and Virginia that wedid not consolidate.

 

Accordingly, our resultsof operations presented for the six months ended June 30, 2008 compared tothe six months ended June 30, 2007 reflect significant increases in mostcategories due to the growth of our portfolio of properties.  Management expects increases in mostcategories in the future as we purchase additional real estate properties andas we begin to realize the full impact of our prior acquisitions.

 

*Three months ended June 30, 2008 as comparedto three months ended June 30, 2007*

 

*Revenues.*Our total revenues increased by $8.7 million to $15.4 million for the threemonths ended June 30, 2008 as compared to the three months ended June 30,2007, primarily due to increased rental revenue resulting from the acquisitionof new properties from which we receive rent. Hotel revenues for the three months ended June 30, 2008 totaled$1.2 million, an increase of $0.6 million as compared to the three months endedJune 30, 2007 and consisted of revenues generated by the operations of TheLodge & Spa at Cordillera, a resort and spa property acquired in June 2007.  We expect increases in rental revenue in thefuture as we purchase additional real estate properties and we completeconstruction of real estate under development.

 

*PropertyOperating Expenses.* Property operating expenses for the threemonths ended June 30, 2008 were $5.8 million as compared to $2.0million for the three months ended June 30, 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 propertiesacquired.  We expect increases inproperty operating expenses in the future as we purchase additional real estateproperties and we complete construction of real estate under development.

 

*InterestExpense.*Interest expense, net of amounts capitalized, forthe three months ended June 30, 2008 was $2.7 million as compared to $1.4million for the three months ended June 30, 2007, and was primarily due tothe increase in notes payable balances related to our acquisition of realestate properties.  Our total notespayable at June 30, 2008 was $342.3 million as compared to $149.6 millionat June 30, 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 June 30, 2008 were $1.8 million as compared to$0.7 million for the three months ended June 30, 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 estate properties.  We expect increases in real estate taxes inthe future as we purchase additional real estate properties and we completeconstruction of real estate under development.

 

*Property/ Asset Management Fees.*Property and asset management feesfor the three months ended June 30, 2008 totaled $1.7 million as comparedto $0.6 million for the three months ended June 30, 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 June 30, 2008 were $0.9 million ascompared to $0.4 million for the three months ended June 30, 2007 and werecomprised of corporate general and administrative expenses including directors’and officers’ insurance premiums, auditing fees, legal fees, and otheradministrative expenses.  The increase isdue to increased corporate activity as our portfolio has grown to 22investments in real estate properties as of June 30, 2008 as compared toonly 14 investments at June 30, 2007. We expect increases in general and administrative expenses in the futureas we invest in additional real estate properties.

 

*AdvertisingCosts.* Advertising costs were $0.6 million for the three monthsended June 30, 2008 as compared to $0.2 million for the three months endedJune 30, 2007.  Advertising costswere comprised primarily of advertising and marketing costs to promote the saleof condominiums to be developed at Chase Park Plaza and The Lodge and Spa atCordillera.  We do not expect significantchanges in our future advertising costs related to the condominium sales.

 

*Depreciation and Amortization Expense.*Depreciationand amortization expense for the three months ended June 30, 2008 was $6.1million as compared to $2.4 million for the three months ended June 30,2007 and was comprised of depreciation and amortization expense from each ofour consolidated operational properties. For the three months ended June 30, 2007, depreciation and amortizationexpense resulted from only seven operating properties versus 14 properties asof June 30, 2008.  We expectincreases in depreciation and amortization expense in the future as we purchaseadditional real estate properties and as properties under development becomeoperational.

 

*Equity in Losses of Unconsolidated Joint Ventures*.  Equity in losses of unconsolidated jointventures totaled $0.7 million for the three months ended June 30,2008 and consisted of net losses of our four noncontrolling interests in RoyalIsland, GrandMarc at Westberry Place, GrandMarc at the Corner, and Royal Island- Rock House, as compared to only Royal Island for the three months ended June 30,2007.

 

*MinorityInterest*.  Minorityinterest for the three months ended June 30, 2008 was $1.5 million, areduction of our net loss for the period. For the three months ended June 30, 2007, minority interest was$0.2 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 June 30,2008, minority interest consisted of the results of eight investments, whereasit consisted of the results of only four investments for the three months endedJune 30, 2007.

 

*Six months ended June 30, 2008 as compared tosix months ended June 30, 2007*

 

*Revenues.*Our total revenues increased by $17.7 million to $29.6 million for the sixmonths ended June 30, 2008 as compared to the six months ended June 30,2007, primarily due to increased rental revenue resulting from the acquisitionof new properties from which we receive rent. Hotel revenues for the six months ended June 30, 2008 totaled $3.2million as compared to $0.6 million for the six months ended June 30, 2007and consisted of revenues generated by the operations of The Lodge &Spa at Cordillera, a resort and spa property acquired in June 2007. Weexpect increases in rental revenue in the future as we purchase additional realestate properties and we complete construction of real estate underdevelopment.

 

*PropertyOperating Expenses.* Property operating expenses for the sixmonths ended June 30, 2008 were $11.3 million as compared to $3.4million for the six months ended June 30, 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 propertiesacquired.  We expect increases inproperty operating expenses in the future as we purchase additional real estateproperties and we complete construction of real estate under development.

 

*InterestExpense.*Interest expense, net of amounts capitalized, forthe six months ended June 30, 2008 was $4.9 million as compared to $2.3million for the six months ended June 30, 2007, and was primarily due tothe increase in notes payable balances related to our acquisition of realestate properties.

 

*RealEstate Taxes.*Real estate taxes, net of amounts capitalized,for the six months ended June 30, 2008 were $3.3 million as compared to$1.2 million for the six months ended June 30, 2007 and were comprised ofreal estate taxes from each of our consolidated properties.  The increase in real estate taxes isprimarily due to our increased number of consolidated real estate properties.  We expect increases in real estate taxes inthe future as we purchase additional real estate properties and we completeconstruction of real estate under development.

 

*Property/ Asset Management Fees.*Property and asset management feesfor the six months ended June 30, 2008 totaled $3.1 million as compared to$1.1 million for the six months ended June 30, 2007 and were comprised offees incurred by our consolidated properties. Property and asset management fees increased due to the additional propertiesacquired.  We expect increases inproperty and asset management fees in the future as we invest in additionalreal estate properties.

 

*Generaland Administrative Expenses.* General and administrativeexpenses for the six months ended June 30, 2008 were $1.8 million ascompared to $0.7 million for the six months ended June 30, 2007 and werecomprised of corporate general and administrative expenses including directors’and officers’ insurance premiums, auditing fees, legal

 

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fees, and other administrative expenses. The increaseis due to increased corporate activity as our portfolio has grown to 22investments in real estate properties as of June 30, 2008 as compared toonly 14 investments at June 30, 2007. We expect increases in general and administrative expenses in the futureas we invest in additional real estate properties.

 

*AdvertisingCosts.*  Advertisingcosts for the six months ended June 30, 2008 were $1.1 million as comparedto $0.6 million for the six months ended June 30, 2007. Advertising costswere comprised primarily of advertising and marketing costs to promote the saleof condominiums to be developed at Chase Park Plaza and The Lodge and Spa atCordillera.  We do not expect significantchanges in our future advertising costs related to the condominium sales.

 

*Depreciation and Amortization Expense.*Depreciationand amortization expense for the six months ended June 30, 2008 was $11.8million as compared to $4.3 million for the six months ended June 30, 2007and was comprised of depreciation and amortization expense from each of ourconsolidated operational properties.  Forthe six months ended June 30, 2007, depreciation and amortization expenseresulted from only seven operating properties versus 14 properties as of June 30,2008.  We expect increases indepreciation and amortization expense in the future as we purchase additionalreal estate properties and as properties under development become operational.

 

*InterestIncome*. Interest income was $1.5 million and $1.6 million forthe six months ended June 30, 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 six months ended June 30, 2008 ascompared to the six months ended June 30, 2007.

 

*Equity in Losses of Unconsolidated Joint Ventures*.  Equity in losses of unconsolidated jointventures totaled $1.5 million for the six months ended June 30, 2008as compared to $0.1 million for the six months ended June 30, 2007  and consisted of net losses of our fournoncontrolling interests in Royal Island, GrandMarc at Westberry Place,GrandMarc at the Corner, and Royal Island - Rock House as of June 30,2008, as compared to only Royal Island for the six months ended June 30,2007.

 

*MinorityInterest*.  Minorityinterest for the six months ended June 30, 2008 was $2.9 million, areduction of our net loss for the period. For the six months ended June 30, 2007, minority interest was $0.4million 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 six months ended June 30, 2008,minority interest consisted of the results of eight investments, whereas itconsisted of the results of only four investments for the six months ended June 30,2007.

 

**Cash Flow Analysis**

 

Cash flows used inoperating activities for the six months ended June 30, 2008 were $14.9million and were comprised primarily of an increase in condominium inventory of$16.4 million, a net loss of $5.1 million, adjusted for depreciation andamortization expense of $9.4 million, and an increase in accrued liabilities of$2.1 million.  During the six monthsended June 30, 2007, cash flows provided by operating activities were $4.2million and were comprised primarily of the net loss of $0.6 million, adjustedfor depreciation and amortization expense of $3.5 million, amortization ofdeferred financing fees of $0.6 million, and net changes in working capital of$0.4 million.

 

Cash flows used in investingactivities for the six months ended June 30, 2008 were $110.2 million andprimarily represented the acquisition of real estate totaling $45.7 million,capital expenditures for real estate under development, including capitalexpenditures of consolidated borrowers totaling $42.2 million, and investmentin notes receivable of $11.7 million. During the six months ended June 30, 2007, cash flows frominvesting activities were $211.8 million and primarily represented acquisitionsof real estate totaling $136 million, capital expenditures for real estateunder development including capital expenditures of consolidated borrowerstotaling $31.5 million, acquisition of an interest in an unconsolidated jointventure of $22.2 million, and investment in notes receivable of $14.3 million.

 

Cash flows provided byfinancing activities for the six months ended June 30, 2008 were $71.3million and were comprised primarily of proceeds from notes payable of $57.8million and proceeds from mortgages of our consolidated borrowers of $18.4million.  During the six months ended June 30,2007, cash flows provided by financing activities were $224.5 million and werecomprised primarily of funds received from the issuance of stock, net ofoffering costs, of $164.7 million, proceeds from a bridge note of $52.1 millionrelated to our acquisition of Santa Clara Tech Center, and proceeds frommortgages of consolidated borrowers related to our VIEs consolidated under FIN46R totaling $8.3 million.

 

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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 $342.3 million at June 30, 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 June 30, 2008, our notes payableinterest rates ranged from 4.07% to 8.00%, with a weighted average interestrate of approximately 4.89%.  Of our $342.3 million in notes payable at June 30,2008, $302.2 million represented debt subject to variable interest rates. At June 30, 2008, our notes payable have maturity dates that range from September 2008to November 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 June 30,2008, we are not aware of any noncompliance with our debt covenants under ourloan agreements.

 

Recently, the U.S. creditmarkets and the sub-prime residential mortgage market have experienced severedislocations and liquidity disruptions. Sub-prime mortgage loans haveexperienced increasing rates of delinquency, foreclosure, and loss. These andother related events have had a significant impact on the capital marketsassociated 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*

 

On February 13,2008, we entered into a senior secured revolving credit facility (the “CreditAgreement”) providing for up to $75 million of secured borrowings with Bank ofAmerica, as lender and administrative agent, and other lending institutions tobecome a party to the Credit Agreement. The facility under this Credit Agreement allows us to borrow up to $75million of revolving loans including up to $20 million available for issuingletters of credit.  Loans under thecredit facility bear interest at an annual rate that is equal to or acombination of (1) the LIBOR plus an applicable margin that, dependingupon the debt service coverage ratio, may vary from 1.5% to 1.7%, or (2) theprime rate plus an applicable margin that, depending upon the debt servicecoverage ratio, may vary from 0% to 0.2%. The credit facility matures on February 13, 2011.  The credit facility is secured by a firstlien on all real property assets in a collateral pool consisting of sevenwholly-owned properties.

 

The credit facility maybe increased to up to $150 million upon satisfaction of certain conditionsincluding additions to the collateral pool. We have unconditionally guaranteed payment of the $75 million seniorsecured revolving credit facility.  Weare subject to customary affirmative, negative, and financial covenants,representations, warranties, and borrowing conditions.

 

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In July 2008, we madeour initial borrowing of $25 million from our senior secured revolving creditfacility.  The proceeds were used to fundongoing costs at our development properties, to fund a portion of ouracquisition of the Central Europe Portfolio, and for general corporatepurposes.

 

**Funds from Operations**

 

Funds from operations (“FFO”)is a non-GAAP financial measure that is widely recognized as a measure of REIToperating performance.  FFO is defined bythe National Association of Real Estate Investment Trusts as net income (loss),computed in accordance with GAAP, excluding extraordinary items, as defined byGAAP, and gains (or losses) from sales of property, plus depreciation andamortization on real estate assets, and after adjustments for unconsolidatedpartnerships, joint ventures, and subsidiaries. We believe that FFO is helpful to investors and our management as ameasure of operating performance of our operating assets because it excludesdepreciation and amortization, gains and losses from property dispositions, andextraordinary items, and as a result, when compared year to year, reflects theimpact on operations from trends in occupancy rates, rental rates, operatingcosts, development activities, general and administrative expenses, andinterest costs, which is not immediately apparent from net income.  Historical cost accounting for real estateassets in accordance with GAAP implicitly assumes that the value of real estatediminishes predictably over time.  Sincereal estate values have historically risen or fallen with market conditions,many industry investors and analysts have considered the presentation ofoperating results for real estate companies that use historical cost accountingalone to be insufficient.  As a result,our management 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 and sixmonths ended June 30, 2008 and 2007 is presented below (amounts inthousands):

 
| ** **                    | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                    | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                          |       |                                            |       |                                          |       |   |   |   |   |
| Net loss                      |       | $                                               | (2,924     | )                                             | $          | (415 | ) | $ | (5,101 | ) | $ | (608 | ) |
|                          |       |                                            |       |                                          |       |   |   |   |   |
| Real estate depreciation (1)  |       | 3,512                                           |       | 1,423                                         |       | 6,669 |   | 2,559 |   |
| Real estate amortization (1)  |       | 2,105                                           |       | 960                                           |       | 4,100 |   | 1,733 |   |
| Funds from operations (FFO)   |       | $                                               | 2,693      |                                          | $          | 1,968 |   | $ | 5,668 |   | $ | 3,684 |   |
|                          |       |                                            |       |                                          |       |   |   |   |   |
| GAAP weighted average shares: |       |                                            |       |                                          |       |   |   |   |   |
| Basic and diluted             |       | 54,474                                          |       | 30,023                                        |       | 54,344 |   | 25,388 |   |

 

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(1)          Thisrepresents the depreciation and amortization expense of the properties wewholly own and our share of depreciation and amortization expense of the otherreal estate investment properties we consolidate.

 

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

 

·                  Straight-line rental revenue of $0.9million and $2.3 million was recognized for the three and six months ended June 30,2008, respectively, and $0.9 million and $1.9 million was recognized forthe three and six months ended June 30, 2007, respectively;

 

·                  Amortization of intangible leaseassets and liabilities was recognized as a net increase to rental revenues of$1.2 million and $2.4 million for the three and six months ended June 30,2008, respectively, and $0.6 million and $1 million for the three and sixmonths ended June 30, 2007, respectively;

 

·                  Amortization of intangible propertytax abatement assets was recognized as an increase to real estate tax expenseof $0.1 million and $0.2 million for the three and six months ended June 30,2008, respectively.  Amortization ofintangible property tax abatement assets was recognized as an increase to realestate tax expense of $0.1 million and $0.2 million for the three and sixmonths ended June 30, 2007, respectively;

 

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·                  Bad debt expense of $0.1 million and$0.2 million was recognized for the three and six months ended June 30,2008, respectively.  Bad debt expense of$5,000 and $10,000 was recognized for the three and six months ended June 30,2007, respectively; and

 

·                  Amortization of deferred financingcosts of $0.5 million and $0.8 million was recognized as interest expense formortgages and notes payable for the three and six months ended June 30,2008, respectively, and $0.1 million and $0.2 million was recognized as areduction of interest income for notes receivable for the three and six monthsended June 30, 2008.  Amortizationof deferred financing costs of $0.1 million and $0.2 million was recognized asinterest expense for mortgages and notes payable for the three and six monthsended June 30, 2007, respectively, and $0.2 million and $0.4 million wasrecognized as a reduction of interest income for notes receivable for the threeand six months ended June 30, 2007.

 

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.

 

During the three and sixmonths ended June 30, 2008, we declared and paid a significant portion ofdistributions from FFO and expect to continue to do so, except to the extent ofdistributions 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.

** **

**Net Operating Income**

 

Net operating income (“NOI”)is a non-GAAP financial measure that is defined as net income (loss), computedin accordance with GAAP, generated from properties before interest expense,asset management fees, interest income, general and administrative expenses,depreciation, amortization, equity in unconsolidated joint ventures, minorityinterest, income taxes, and the gain or loss on the sale of assets.  We believe that NOI provides an accuratemeasure of the operating performance of our operating assets because NOIexcludes certain items that are not associated with management of theproperties.  To facilitate understandingof this financial measure, a reconciliation of NOI to net loss in accordancewith GAAP for the three and six months ended June 30, 2008 and 2007 isprovided below (amounts in thousands).

 
| ** **                             | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|----------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                             | ** ** | **2008**                                        | ** ** | **2007**                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Revenues                               |       | $                                               | 15,406     |                                          | $          | 6,730 |   | $ | 29,580 |   | $ | 11,939 |   |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Operating expenses:                    |       |                                            |       |                                          |       |   |   |   |   |
| Property operating expenses            |       | 5,823                                           |       | 2,009                                         |       | 11,349 |   | 3,384 |   |
| Real estate taxes                      |       | 1,786                                           |       | 673                                           |       | 3,331 |   | 1,233 |   |
| Property management fees               |       | 684                                             |       | 152                                           |       | 1,198 |   | 279 |   |
| Total operating expenses               |       | 8,293                                           |       | 2,834                                         |       | 15,878 |   | 4,896 |   |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Net operating income                   |       | $                                               | 7,113      |                                          | $          | 3,896 |   | $ | 13,702 |   | $ | 7,043 |   |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Reconciliation to Net Loss             |       |                                            |       |                                          |       |   |   |   |   |
| Net operating income                   |       | $                                               | 7,113      |                                          | $          | 3,896 |   | $ | 13,702 |   | $ | 7,043 |   |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Less:                                  |       |                                            |       |                                          |       |   |   |   |   |
| Depreciation and amortization          |       | (6,112                                          | )          | (2,399                                        | )          | (11,767 | ) | (4,349 | ) |
| General and administrative expense     |       | (905                                            | )          | (401                                          | )          | (1,822 | ) | (708 | ) |
| Interest expense                       |       | (2,676                                          | )          | (1,373                                        | )          | (4,947 | ) | (2,303 | ) |
| Asset management fees                  |       | (1,011                                          | )          | (471                                          | )          | (1,943 | ) | (794 | ) |
| Advertising costs                      |       | (630                                            | )          | (159                                          | )          | (1,145 | ) | (623 | ) |
| Provision for income tax               |       | (52                                             | )          | (25                                           | )          | (99 | ) | (25 | ) |
| Equity in losses on unconsolidated JVs |       | (671                                            | )          | (68                                           | )          | (1,531 | ) | (68 | ) |
| Add:                                   |       |                                            |       |                                          |       |   |   |   |   |
| Interest income                        |       | 554                                             |       | 804                                           |       | 1,535 |   | 1,574 |   |
| Minority interest                      |       | 1,466                                           |       | (219                                          | )          | 2,916 |   | (355 | ) |
|                                   |       |                                            |       |                                          |       |   |   |   |   |
| Net loss                               |       | $                                               | (2,924     | )                                             | $          | (415 | ) | $ | (5,101 | ) | $ | (608 | ) |

 

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**Off-Balance Sheet Arrangements**

 

We have no off-balancesheet arrangements that are reasonably likely to have a current or futurematerial effect on our financial condition, changes in financial condition,revenues or expenses, results of operations, liquidity, capital expenditures orcapital resources.

** **

**Item3.             Quantitative andQualitative Disclosures About Market Risk.**

* *

*ForeignCurrency Exchange Risk*

 

For our net investment ina foreign real estate property, we use foreign currency forward exchangecontracts to eliminate the impact of foreign currency movements on ourfinancial position.  At June 30,2008, our foreign currency forward exchange contract was reported at its fairvalue of $0.5 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 $1.1 million decrease in fair value. A 10% decrease in the forward British pound - US dollar exchange ratewould result in a $1.1 million increase in fair value.

 

We maintain less than$0.1 million in a Euro-denominated account at a European financialinstitution.  Accordingly, we are not materiallyexposed to any significant foreign currency fluctuations related to theseaccounts.  We do not enter intoderivatives for trading or speculative purposes, nor do we maintain any marketrisk sensitive instruments for trading or speculative purposes.

* *

*InterestRate Risk*

* *

We may be exposed tointerest rate changes primarily as a result of long-term debt used to acquireproperties and make loans and other permitted investments.  Our management’s objectives, with regard tointerest rate risks, are to limit the impact of interest rate changes onearnings and cash flows and to lower overall borrowing costs.  To achieve these objectives, we will borrowprimarily at fixed rates or variable rates with the lowest margins availableand in some cases, with the ability to convert variable rates to fixedrates.  With regard to variable ratefinancing, we will assess interest rate cash flow risk by continuallyidentifying and monitoring changes in interest rate exposures that mayadversely impact expected future cash flows and by evaluating hedgingopportunities.  We may enter intoderivative financial instruments such as options, forwards, interest rateswaps, caps, or floors to mitigate our interest rate risk on a related financialinstrument or to effectively lock the interest rate portion of our variablerate debt.  Of our $342.3 million innotes payable at June 30, 2008, $302.2 million represented debt subject tovariable interest rates, which included the mortgages payable of borrowers weconsolidated under FIN 46R.  If ourvariable interest rates increased 100 basis points, we estimate that totalannual interest cost, including interest expensed, interest capitalized, andthe effects of the interest rate caps and swaps, would increase by $2.4million.

 

At June 30, 2008,interest rate caps used to mitigate our interest rate risk classified as assetswere reported at their combined fair value of approximately $0.2 million withinprepaid expenses and other assets. Interest rate swaps classified as liabilities were reported at theircombined fair values of $0.4 million in other liabilities at June 30,2008.  A 100 basis point decrease ininterest rates would result in a $2.2 million net decrease in the fair value ofour interest rate caps and swaps.  A 100basis point increase in interest rates would result in a $2.3 million netincrease in the fair value of our interest rate caps and swaps.

** **

**Item4T.           Controls and Procedures.**

* *

*Evaluation of Disclosure Controls and Procedures*

 

Asrequired by Rule 13a-15(b) and Rule 15d-15(b) under theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), ourmanagement, including our Chief Executive Officer and Chief Financial Officer,evaluated, as of June 30, 2008, the effectiveness of our disclosurecontrols and procedures as defined in Exchange Act Rule 13a-15(e) andRule 15d-15(e).  Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures, as of June 30, 2008, wereeffective for the purpose of ensuring that information required to be disclosedby us in this report is recorded, processed, summarized and reported within thetime periods specified by the rules and forms of the Exchange Act and isaccumulated and communicated to management, including the Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures.

 

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

 

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*Changes in Internal Control over Financial Reporting*

 

There has been no changein internal control over financial reporting that occurred during the quarterended June 30, 2008 that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

** **

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** **

**PART II**

**OTHER INFORMATION**

### ** **

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

 

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

### ** **

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

 

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.             Unregistered Sales of EquitySecurities and Use of Proceeds.**

** **

**Use of Proceeds from RegisteredSecurities**

 

Pursuant to aRegistration 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.

 

The above-stated numberof shares sold and the gross offering proceeds received in connection with theOffering does not include 21,739 shares of common stock purchased by BehringerHarvard Holdings in a private placement in 2004, prior to the commencement ofthe Offering.

 

From the commencement ofthe Offering through June 30, 2008, we incurred the following expenses inconnection with the issuance and distribution of the registered securitiespursuant to the Offering (amounts in thousands):

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

 

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* “Other expenses toaffiliates” includes commissions and dealer manager fees paid to BehringerSecurities, which reallowed all or a portion of the commissions and fees tosoliciting dealers.

 

From the commencement ofthe Offering through June 30, 2008, the net offering proceeds to us fromthe Offering, after deducting the total expenses incurred and described above,were approximately $481.8 million.  Fromthe commencement of the Offering through June 30, 2008, we had usedapproximately $373.1 million of such net proceeds to purchase interests in realestate and fund development for real estate, net of notes payable, andapproximately $94.8 million was invested through mezzanine loans.  Of the amount used for the purchase of theseinvestments, approximately $22.5 million was paid to Behringer OpportunityAdvisors I (or its predecessor-in-interest), as acquisition and advisory feesand acquisition expense reimbursement.

 

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**Share Redemption Program**

 

In February 2006,our board of directors adopted a share redemption program for ourinvestors.  The purchase price for theredeemed shares is set forth in the prospectus for our Offering of commonstock, as supplemented.  Our board ofdirectors reserves the right in its sole discretion at any time, and from timeto 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 June 30, 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** | ** ** |
|----------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|
| April    |       | —                                              |       | $                                                | —     |                                                                                                                         | —     |                                                                                                                   |       |   |
| May      |       | 165,639                                             |       | $                                                | 9.18       |                                                                                                                         | 165,639    |                                                                                                                   | (1)        |   |
| June     |       | —                                              |       | $                                                | —     |                                                                                                                         | —     |                                                                                                                   |       |   |
|     |       |                                                |       |                                             |       |                                                                                                                         |       |                                                                                                                   |       |
|     |       | 165,639                                             |       | $                                                | 9.18       |                                                                                                                         | 165,639    |                                                                                                                   | (1)        |   |

 

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(1)        A description of the maximum number ofshares that may be purchased under our redemption program is included in thenarrative preceding this table.

** **

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

 

None.

### ** **

### **Item 4.        Submission of Matters to a Vote ofSecurity Holders.**

 

TheAnnual Meeting of our stockholders was held on June 23, 2008.  The meeting was adjourned prior to taking avote on any matters and was reconvened on July 24, 2008 (the “ReconvenedMeeting”).  At the Reconvened Meeting,all nominees standing for election as directors were elected.  The following directors were elected to holdoffice for a term expiring at the 2009 Annual Meeting or until their successorsare elected and qualified, with the vote for each director being reflectedbelow:

 
| ** **                | ** ** | **Number of** | ** ** | **Number of** | ** ** |
|---------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                | ** ** | **Votes**          | ** ** | **Votes**          | ** ** |
| **Director Nominee** | ** ** | **For**            | ** ** | **Withheld**       | ** ** |
| Robert M. Behringer       |       | 26,381,193         |       | 4,708,166          |       |
| Robert S. Aisner          |       | 26,373,257         |       | 4,716,102          |       |
| Terry L. Gage             |       | 26,381,500         |       | 4,701,859          |       |
| Barbara C. Bufkin         |       | 26,363,461         |       | 4,725,898          |       |
| Steven J. Kaplan          |       | 26,366,692         |       | 4,722,667          |       |

 

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

 

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Inaddition, at the Reconvened Meeting, our stockholders approved our SecondArticles of Amendment and Restatement, which amended certain provisions of ourcharter.  The affirmative vote of a majority of all votes entitled to becast at the Reconvened Meeting was required to approve ourSecond Articles of Amendment and Restatement.  The aggregate number ofvotes entitled to be cast at the Reconvened Meeting was 54,380,498.  Thevote of the stockholders with respect to the approval of our SecondArticles of Amendment and Restatement is reflected below:

 
| ** **                                   | ** ** | **Number of** | ** ** | **Number of** | ** ** | **Number of** | ** ** |
|----------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                   | ** ** | **Votes**          | ** ** | **Votes**          | ** ** | **Votes**          | ** ** |
| ** **                                   | ** ** | **For**            | ** ** | **Against**        | ** ** | **Abstained**      | ** ** |
| Second Articles of Amendment and Restatement |       | 28,812,343         |       | 1,118,556          |       | 1,158,460          |       |

 

### **For additional informationregarding the revisions to our charter contained in our Second Articles ofAmendment and Restatement, please see our Current Report on Form 8-K filedwith the SEC on July 29, 2008**

### ** **

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

 

None.

### ** **

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

 

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

 

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** **

**SIGNATURE**

 

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

 

 
|                         | **Behringer  Harvard Opportunity REIT I, Inc.** |
|------------------------------|------------------------------------------------------|
|                         |                                                 |
|                         |                                                 |
| Dated: August 14,  2008 | By:                                                  |   /s/ Gary S.  Bresky |
|                         | Gary S. Bresky                                       |
|                         | Chief Financial Officer                              |
|                         | (Principal Financial Officer)                        |

 

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**Indexto Exhibits**

 
| **Exhibit Number** | ** ** | **Description** |
|-------------------------|------------|-----------------|
|                    |       |            |
| 3                       | .1         |            | Second Articles of  Amendment and Restatement of the Registrant (previously filed in and  incorporated by reference to Form 8-K filed on July 29, 2008) |
|                    |       |            |   |
| 3                       | .2         |            | Bylaws of the  Registrant (previously filed in and incorporated by reference to 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         |            | First Amendment to Amended and Restated Advisory  Management Agreement by and between the Registrant and Behringer Harvard  Opportunity Advisors I, LLC (previously filed in and incorporated by  reference to Form 8-K filed on June 26, 2008) |
|                    |       |            |   |
| 10                      | .2         |            | First Amendment to Second Amended and Restated  Property Management and Leasing Agreement by and among the Registrant,  Behringer Harvard Opportunity OP I, LP, Behringer Harvard Opportunity  Management Services, LLC, HPT Management Services LP, Behringer Harvard Real  Estate Services, LLC, Behringer Harvard Cordillera, LLC, Behringer Harvard  Whitewater, LLC, Behringer Harvard Northpoint LP, Behringer Harvard Alexan  Voss, LLC, Behringer Harvard Augusta LP, Behringer Harvard Bent Tree LP,  Behringer Harvard TCU, LLC, Behringer Harvard Bowen Road LP, Behringer  Harvard Frisco Square LP, Behringer Harvard Las Colinas LP, Behringer Harvard  Regency LP, Behringer Harvard Northborough Tower LP, Behringer Harvard Rio  Salado, LLC, Behringer Harvard Santa Clara LP, Behringer Harvard UVA, LLC,  Chase Park Plaza Hotel, LLC, The Private Residences, LLC, Behringer Harvard  Alexan Nevada, LLC, Behringer Harvard Alexan Voss, LLC, and Behringer Harvard  Ferncroft, LLC (previously filed in and incorporated by reference to  Form 8-K filed on June 26, 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 Item601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” forpurposes of Section 18 of the Exchange Act or otherwise subject to theliabilities of that section.  Suchcertifications will not be deemed incorporated by reference into any filingunder the Securities Act or the Exchange Act, except to the extent that theregistrant specifically incorporates it by reference.

 

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