Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**[Mark One]**

 
| **x**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|-------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                  |
| **For the  quarterly period ended September 30, 2010** |
| ** **                                                  |
| **OR**                                                      |
| ** **                                                  |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**For the transition periodfrom               to               **

 

**Commission File Number: 000-53195**

 

**BehringerHarvard Multifamily REIT I, Inc.**

(Exact Name of Registrant as Specified in Its Charter)

 

| **Maryland**                    | ** ** | **20-5383745**      |
|---------------------------------|------------|---------------------|
| (State or other Jurisdiction of |       | (I.R.S. Employer    |
| Incorporation or Organization)  |       | Identification No.) |

 

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

(Address of Principal Executive Offices) (ZIP Code)

 

**(866) 655-3600**

(Registrant’s Telephone Number, Including Area Code)

 

**None**

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicateby check mark whether the Registrant:  (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the Registrant was required to file such reports) and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x  No o

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act:

 

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

 

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

 

Asof October 31, 2010, the Registrant had 97,447,335 shares of common stockoutstanding.

 

 

 

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

**Form 10-Q**

**QuarterEnded September 30, 2010**

 
| ** **                             | ** **                                                                                                                                         | **Page**   |
|----------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** **                                                                                                                                         | ** ** |
| **PART 1  FINANCIAL INFORMATION** |
| ** **                             | ** **                                                                                                                                         | ** ** |
| **Item  1.**                           | **Financial  Statements (unaudited)**                                                                                                              | ** ** |
|                                   |                                                                                                                                               |       |
|                                   | Consolidated Balance Sheets as of September 30,  2010 and December 31, 2009                                                              | 3          |
|                                   |                                                                                                                                               |       |
|                                   | Consolidated Statements of Operations for the three  and nine months ended September 30, 2010 and 2009                                        | 4          |
|                                   |                                                                                                                                               |       |
|                                   | Consolidated  Statements of Stockholders’ Equity for the nine months ended  September 30, 2010 and the year ended December 31, 2009 | 5          |
|                                   |                                                                                                                                               |       |
|                                   | Consolidated Statements of Cash Flows for the nine  months ended September 30, 2010 and 2009                                                  | 6          |
|                                   |                                                                                                                                               |       |
|                                   | Notes to Consolidated Financial Statements                                                                                                         | 7          |
|                                   |                                                                                                                                               |       |
| **Item 2.**                            | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                    | 31         |
|                                   |                                                                                                                                               |       |
| **Item 3.**                            | **Quantitative  and Qualitative Disclosures About Market Risk**                                                                                    | 61         |
|                                   |                                                                                                                                               |       |
| **Item 4.**                            | **Controls and  Procedures**                                                                                                                       | 62         |
|                                   |                                                                                                                                               |       |
| **PART II  OTHER INFORMATION**    |
|                                   |                                                                                                                                               |       |
| **Item 1.**                            | **Legal Proceedings**                                                                                                                              | 63         |
|                                   |                                                                                                                                               |       |
| **Item 1A.**                           | **Risk Factors**                                                                                                                                   | 63         |
|                                   |                                                                                                                                               |       |
| **Item 2.**                            | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                   | 63         |
|                                   |                                                                                                                                               |       |
| **Item 3.**                            | **Defaults  Upon Senior Securities**                                                                                                               | 65         |
|                                   |                                                                                                                                               |       |
| **Item 4.**                            | **(Removed and Reserved)**                                                                                                                         | 65         |
|                                   |                                                                                                                                               |       |
| **Item 5.**                            | **Other Information**                                                                                                                              | 65         |
|                                   |                                                                                                                                               |       |
| **Item 6.**                            | **Exhibits**                                                                                                                                       | 66         |
|                                   |                                                                                                                                               |       |
| **Signature**                          | 67                                                                                                                                                 |

 

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

**Consolidated Balance Sheets**

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

**(Unaudited)**

** **
| ** **                                                                                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| **Assets**                                                                                                                                                                                              |       |                   |       |                  |       |
| Real estate:                                                                                                                                                                                            |       |                   |       |                  |       |
| Land                                                                                                                                                                                                    |       | $                      | 88,940     |                  | $          | 39,100 |   |
| Buildings and improvements                                                                                                                                                                              |       | 364,663                |       | 121,363               |       |
|                                                                                                                                                                                                    |       | 453,603                |       | 160,463               |       |
| Less accumulated depreciation                                                                                                                                                                           |       | (9,323                 | )          | (1,484                | )          |
| Total real estate, net                                                                                                                                                                                  |       | 444,280                |       | 158,979               |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| Investments in unconsolidated real estate joint  ventures                                                                                                                                               |       | 326,595                |       | 279,859               |       |
| Cash and cash equivalents                                                                                                                                                                               |       | 64,086                 |       | 77,540                |       |
| Deferred financing costs, net                                                                                                                                                                           |       | 3,758                  |       | 834                   |       |
| Receivables from affiliates                                                                                                                                                                             |       | 292                    |       | 258                   |       |
| Intangibles, net                                                                                                                                                                                        |       | 20,248                 |       | 1,205                 |       |
| Other assets, net                                                                                                                                                                                       |       | 9,796                  |       | 7,047                 |       |
| **Total assets**                                                                                                                                                                                        |       | $                      | 869,055    |                  | $          | 525,722 |   |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Liabilities and stockholders’  equity**                                                                                                                                                          |       |                   |       |                  |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Liabilities**                                                                                                                                                                                         |       |                   |       |                  |       |
| Mortgage loans payable                                                                                                                                                                                  |       | $                      | 93,508     |                  | $          | 51,300 |   |
| Credit facility payable                                                                                                                                                                                 |       | 20,000                 |       | —                |       |
| Payables to affiliates                                                                                                                                                                                  |       | 320                    |       | 2,278                 |       |
| Distributions payable                                                                                                                                                                                   |       | 4,636                  |       | 3,248                 |       |
| Accrued offering costs payable to affiliates                                                                                                                                                            |       | 2,654                  |       | 1,411                 |       |
| Deferred lease revenues and other related  liabilities, net                                                                                                                                             |       | 16,153                 |       | 15,197                |       |
| Tenant security deposits and prepaid rent                                                                                                                                                               |       | 781                    |       | 405                   |       |
| Accounts payable and other liabilities                                                                                                                                                                  |       | 12,136                 |       | 866                   |       |
| **Total liabilities**                                                                                                                                                                                   |       | 150,188                |       | 74,705                |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Commitments and contingencies**                                                                                                                                                                       |       |                   |       |                  |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Stockholders’ equity**                                                                                                                                                                           |       |                   |       |                  |       |
| Preferred stock, $.0001 par value per share;  125,000,000 shares authorized, none outstanding                                                                                                           |       | —                 |       | —                |       |
| Non-participating, non-voting convertible stock,  $.0001 par value per share; 1,000 shares authorized, 1,000 shares issued and  outstanding                                                             |       | —                 |       | —                |       |
| Common stock, $.0001 par value per share;  875,000,000 shares authorized, 94,811,198 and 57,098,265 shares issued and  outstanding at September 30, 2010 and December 31, 2009,  respectively |       | 10                     |       | 5                     |       |
| Additional paid-in capital                                                                                                                                                                              |       | 823,256                |       | 486,880               |       |
| Cumulative distributions and net loss                                                                                                                                                                   |       | (104,399               | )          | (35,868               | )          |
| **Total stockholders’ equity**                                                                                                                                                                     |       | 718,867                |       | 451,017               |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                                                    |       | $                      | 869,055    |                  | $          | 525,722 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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

**Consolidated Statements of Operations**

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

**(Unaudited)**

 
| ** **                                                                             | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2010**                                                               | ** ** | **2009**                                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Rental revenues**                                                                    |       | $                                                                      | 9,389      |                                                                  | $          | 538 |   | $ | 21,152 |   | $ | 538 |   |
|                                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| **Expenses**                                                                           |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Property operating expenses                                                            |       | 2,828                                                                  |       | 139                                                                   |       | 6,045 |   | 139 |   |
| Real estate taxes                                                                      |       | 1,500                                                                  |       | 67                                                                    |       | 2,819 |   | 67 |   |
| Asset management and other fees                                                        |       | 1,020                                                                  |       | 492                                                                   |       | 3,736 |   | 1,037 |   |
| General and administrative expenses                                                    |       | 1,144                                                                  |       | 889                                                                   |       | 3,304 |   | 2,263 |   |
| Acquisition expenses                                                                   |       | 3,203                                                                  |       | 2,791                                                                 |       | 8,734 |   | 2,791 |   |
| Interest expense                                                                       |       | 1,748                                                                  |       | —                                                                |       | 3,819 |   | — |   |
| Depreciation and amortization                                                          |       | 6,534                                                                  |       | 351                                                                   |       | 13,881 |   | 374 |   |
| **Total expenses**                                                                     |       | 17,977                                                                 |       | 4,729                                                                 |       | 42,338 |   | 6,671 |   |
|                                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Interest income                                                                        |       | 285                                                                    |       | 409                                                                   |       | 1,026 |   | 684 |   |
| Equity in earnings (loss) of investments in  unconsolidated real estate joint ventures |       | (2,074                                                                 | )          | (79                                                                   | )          | (8,038 | ) | 2,135 |   |
| **Net loss**                                                                           |       | $                                                                      | (10,377    | )                                                                     | $          | (3,861 | ) | $ | (28,198 | ) | $ | (3,314 | ) |
|                                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Weighted average number of common shares  outstanding                                  |       | 91,300                                                                 |       | 36,678                                                                |       | 78,512 |   | 26,867 |   |
|                                                                                   |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Basic and diluted loss per share                                                       |       | $                                                                      | (0.11      | )                                                                     | $          | (0.11 | ) | $ | (0.36 | ) | $ | (0.12 | ) |

 

*See Notes to Consolidated Financial Statements.*

 

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**BehringerHarvard Multifamily REIT I, Inc.**

**ConsolidatedStatements of Stockholders’ Equity**

**(inthousands)**

**(Unaudited)**

 
| ** **                                                    | ** ** | **Convertible Stock** | ** ** | **Common Stock** | ** ** | **Additional**     | ** ** | **Cumulative** | ** ** | **Total**   | ** ** |
|---------------------------------------------------------------|------------|----------------------------|------------|-----------------------|------------|--------------------|------------|----------------|------------|-------------|------------|
| ** **                                                    | ** ** | **Number**                 | ** ** | **Par**               | ** ** | **Number**         | ** ** | **Par**        | ** ** | **Paid-in** | ** ** | **Distributions** | ** ** | **Stockholders’** | ** ** |
| ** **                                                    | ** ** | **of Shares**         | ** ** | **Value**             | ** ** | **of Shares** | ** ** | **Value**      | ** ** | **Capital** | ** ** | **and Net Loss** | ** ** | **Equity** | ** ** |
| Balance at January 1, 2009                               |       | 1                          |       | $                     | —     |               | 15,348     |           | $          | 1           |       | $ | 117,268 |   | $ | (4,875 | ) | $ | 112,394 |   |
|                                                          |       |                       |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Net loss                                                      |       | —                     |       | —                |       | —             |       | —         |       | —      |       | (8,305 | ) | (8,305 | ) |
| Sales of common stock, net                                    |       | —                     |       | —                |       | 41,129             |       | 4              |       | 363,332     |       | — |   | 363,336 |   |
| Redemptions of common stock                                   |       | —                     |       | —                |       | (304               | )          | —         |       | (2,512      | )          | — |   | (2,512 | ) |
| Distributions declared on common stock                        |       | —                     |       | —                |       | —             |       | —         |       | —      |       | (22,688 | ) | (22,688 | ) |
| Stock issued pursuant to Distribution Reinvestment  Plan, net |       | —                     |       | —                |       | 925                |       | —         |       | 8,792       |       | — |   | 8,792 |   |
|                                                          |       |                       |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Balance at December 31, 2009                             |       | 1                          |       | —                |       | 57,098             |       | 5              |       | 486,880     |       | (35,868 | ) | 451,017 |   |
|                                                          |       |                       |       |                  |       |               |       |           |       |        |       |   |   |   |   |
| Net loss                                                      |       | —                     |       | —                |       | —             |       | —         |       | —      |       | (28,198 | ) | (28,198 | ) |
| Sales of common stock, net                                    |       | —                     |       | —                |       | 36,773             |       | 5              |       | 326,405     |       | — |   | 326,410 |   |
| Redemptions of common stock                                   |       | —                     |       | —                |       | (1,216             | )          | —         |       | (10,515     | )          | — |   | (10,515 | ) |
| Distributions declared on common stock                        |       | —                     |       | —                |       | —             |       | —         |       | —      |       | (40,333 | ) | (40,333 | ) |
| Stock issued pursuant to Distribution Reinvestment  Plan, net |       | —                     |       | —                |       | 2,156              |       | —         |       | 20,486      |       | — |   | 20,486 |   |
| Balance at September 30, 2010                            |       | 1                          |       | $                     | —     |               | 94,811     |           | $          | 10          |       | $ | 823,256 |   | $ | (104,399 | ) | $ | 718,867 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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

**Consolidated Statements of Cash Flows**

**(in thousands)**

**(Unaudited)**

** **
| ** **                                                                             | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2010**                                                              | ** ** | **2009** | ** ** |
| **Cash flows from operating  activities**                                              |       |                                                                  |       |   |   |
| Net loss                                                                               |       | $                                                                     | (28,198    | ) | $ | (3,314 | ) |
| Adjustments to reconcile net loss to net cash  provided by operating activities:       |       |                                                                  |       |   |   |
| Equity in (earnings) loss of investments in  unconsolidated real estate joint ventures |       | 8,038                                                                 |       | (2,135 | ) |
| Distributions received from investments in  unconsolidated real estate joint ventures  |       | 5,426                                                                 |       | 4,474 |   |
| Depreciation                                                                           |       | 7,838                                                                 |       | 220 |   |
| Amortization of intangibles                                                            |       | 4,669                                                                 |       | 77 |   |
| Amortization of deferred financing costs                                               |       | 1,374                                                                 |       | 78 |   |
| Amortization of deferred lease revenues and other  related liabilities                 |       | (1,032                                                                | )          | 28 |   |
| Changes in operating assets and liabilities:                                           |       |                                                                  |       |   |   |
| Deferred lease revenues and other related  liabilities                                 |       | 1,988                                                                 |       | — |   |
| Accounts payable and other liabilities                                                 |       | 1,725                                                                 |       | 1,053 |   |
| Other assets                                                                           |       | (275                                                                  | )          | (338 | ) |
| Accounts receivable                                                                    |       | (189                                                                  | )          | — |   |
| Payables to affiliates                                                                 |       | —                                                                |       | 204 |   |
| Accrued interest on note receivable                                                    |       | (166                                                                  | )          | (146 | ) |
| **Cash provided by operating  activities**                                             |       | 1,198                                                                 |       | 201 |   |
|                                                                                   |       |                                                                  |       |   |   |
| **Cash flows from investing  activities**                                              |       |                                                                  |       |   |   |
| Acquisition of and additions to real estate                                            |       | (288,516                                                              | )          | (123,095 | ) |
| Investments in unconsolidated real estate joint  ventures                              |       | (140,033                                                              | )          | (57,322 | ) |
| Issuances of note receivable                                                           |       | —                                                                |       | (2,183 | ) |
| Escrow deposits                                                                        |       | (1,712                                                                | )          | — |   |
| Return of investments in unconsolidated real  estate joint ventures                    |       | 78,886                                                                |       | 3,449 |   |
| Other                                                                                  |       | 47                                                                    |       | (166 | ) |
| **Cash used in investing  activities**                                                 |       | (351,328                                                              | )          | (179,317 | ) |
|                                                                                   |       |                                                                  |       |   |   |
| **Cash flows from financing  activities**                                              |       |                                                                  |       |   |   |
| Proceeds from sales of common stock                                                    |       | 366,490                                                               |       | 263,421 |   |
| Proceeds from financings, net:                                                         |       |                                                                  |       |   |   |
| Mortgage proceeds                                                                      |       | 15,820                                                                |       | — |   |
| Mortgage principal payments                                                            |       | (387                                                                  | )          | — |   |
| Mortgage financing costs                                                               |       | (370                                                                  | )          | — |   |
| Proceeds from credit facility, net:                                                    |       |                                                                  |       |   |   |
| Credit facility proceeds                                                               |       | 87,000                                                                |       | — |   |
| Credit facility payments                                                               |       | (67,000                                                               | )          | — |   |
| Credit facility financing costs                                                        |       | (2,640                                                                | )          | — |   |
| Offering costs paid                                                                    |       | (38,955                                                               | )          | (35,795 | ) |
| Distributions on common stock paid in cash                                             |       | (18,470                                                               | )          | (7,583 | ) |
| Redemptions of common stock                                                            |       | (4,812                                                                | )          | (1,184 | ) |
| **Cash provided by financing  activities**                                             |       | 336,676                                                               |       | 218,859 |   |
|                                                                                   |       |                                                                  |       |   |   |
| Net change in cash and cash equivalents                                                |       | (13,454                                                               | )          | 39,743 |   |
| Cash and cash equivalents at beginning of period                                       |       | 77,540                                                                |       | 23,771 |   |
| Cash and cash equivalents at end of period                                             |       | $                                                                     | 64,086     |   | $ | 63,514 |   |

 

*See Notes to Consolidated Financial Statements.*

 

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

**Notes to Consolidated Financial Statements**

**(Unaudited)**

 

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

 

***Organization***

 

BehringerHarvard Multifamily REIT I, Inc. (which, together with its subsidiaries asthe context requires, may be referred to as the “Company,” “we,” “us,” or “our”)was organized in Maryland on August 4, 2006 and has elected to be taxed,and currently qualifies, as a real estate investment trust (“REIT”) for federalincome tax purposes. As a REIT, we generally are not subject to corporate-levelincome taxes.  To maintain our REITstatus, we are required, among other requirements, to distribute annually atleast 90% of our “REIT taxable income,” as defined by the Internal Revenue Codeof 1986, as amended (the “Code”), to our stockholders.  If we fail to qualify as a REIT in anytaxable year, we would be subject to federal income tax on our taxable incomeat regular corporate tax rates.  As of September 30,2010, we believe we are in compliance with all applicable REIT requirements.

 

Weinvest in and operate high quality multifamily communities. These multifamilycommunities include conventional multifamily assets, such as mid-rise,high-rise, and garden style properties, and may also include student housingand age-restricted properties, typically requiring residents to be age 55 orolder.  Our targeted communities includeexisting “core” properties that are already stabilized and producing rentalincome as well as more opportunistic properties in various phases ofdevelopment, redevelopment, lease up or repositioning.  Further, we may invest in other types ofcommercial real estate, real estate-related securities, mortgage, bridge,mezzanine or other loans and Section 1031 tenant-in-common interests, orin entities that make investments similar to the foregoing.  We completed our first investment in April 2007and, as of September 30, 2010, we have made wholly owned or joint ventureinvestments in 30 multifamily communities of which 21 are stabilized operatingproperties and nine are in various stages of lease up.  We have made and intend to continue makinginvestments both in wholly owned investments and through co-investment arrangementswith other participants (“Co-Investment Ventures”).

 

Wehave no employees and are supported by related party service agreements. We areexternally managed by Behringer Harvard Multifamily Advisors I, LLC (“BehringerHarvard Multifamily Advisors I” or the “Advisor”), a Texas limited liabilitycompany. The Advisor is responsible for managing our affairs on a day-to-daybasis and for identifying and making real estate investments on ourbehalf.  Substantially all our businessis conducted through our indirectly wholly owned operating partnership,Behringer Harvard Multifamily OP I LP, a Delaware limited partnership (“BehringerHarvard Multifamily OP I”). Our wholly owned subsidiary, BHMF, Inc., aDelaware corporation (“BHMF Inc.”) owns less than 0.1% of Behringer HarvardMultifamily OP I as its sole general partner. The remaining ownership interestin Behringer Harvard Multifamily OP I is held as a limited partner’s interestby our wholly owned subsidiary BHMF Business Trust, a Maryland business trust.

 

***Offerings of our Common Stock***

 

OnNovember 22, 2006, we commenced a private offering pursuant to RegulationD of the Securities Act of 1933, as amended (the “Securities Act”) to sell amaximum of approximately $400 million of common stock to accredited investors(the “Private Offering”).  We terminatedthe Private Offering on December 28, 2007. We sold a total of approximately 14.2 million shares of common stock andraised a total of approximately $127.3 million in gross offering proceeds inthe Private Offering. Net proceeds after selling commissions, dealer managerfees, and other offering costs were approximately $114.3 million.

 

OnSeptember 5, 2008, we commenced our initial public offering (the “InitialPublic Offering”) of up to 200 million shares of common stock offered at aprice of $10.00 per share pursuant to a Registration Statement on Form S-11filed under the Securities Act.   TheInitial Public Offering also covered the registration of up to an additional 50million shares of common stock at a price of $9.50 per share pursuant to ourdistribution reinvestment plan (“DRIP”). We reserve the right to reallocate shares of our common stock betweenthe primary offering and our DRIP.  As ofSeptember 30, 2010, we have sold a total of approximately 82.1 millionshares of common stock and raised a total of approximately $817.4 million ingross offering proceeds in the Initial Public Offering. Net proceeds, afterselling commissions, dealer manager fees, and other offering costs wereapproximately $721.8 million.  On June 29,2010, our board of directors approved an extension of the Initial PublicOffering until no later than September 2, 2011.

 

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Our common stock is not currently listed on a national securitiesexchange. However, management anticipates within four to six years after thetermination of our Initial Public Offering to begin the process of either listingthe common stock on a national securities exchange or liquidating our assets,depending on then-prevailing market conditions.

 

**2.****            ****Interim Unaudited 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, 2009 whichwas filed with the Securities and Exchange Commission (“SEC”) on March 31,2010. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) have been condensedor omitted from this report.

 

Theresults for the interim periods shown in this report are not necessarilyindicative of future financial results. The accompanying consolidated balancesheet and consolidated statement of stockholders’ equity as of September 30,2010 and consolidated statements of operations and cash flows for the periodsended September 30, 2010 and 2009 have not been audited by our independentregistered public accounting firm. In the opinion of management, theaccompanying unaudited consolidated financial statements include alladjustments necessary to present fairly our consolidated financial position asof September 30, 2010 and our consolidated results of operations and cashflows for the periods ended September 30, 2010 and 2009. Such adjustmentsare of a normal recurring nature.

 

We have evaluated subsequent events for recognition or disclosure inour consolidated financial statements.

 

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

 

***Use of Estimates in the Preparation of FinancialStatements***

 

The preparation of consolidated financial statements in conformity withGAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the date of the consolidated financial statements and thereported amounts of revenues and expenses during the reporting period.  These estimates include such items as: thepurchase price allocations for real estate acquisitions; impairment oflong-lived assets, notes receivable and equity-method real estate investments;fair value evaluations; revenue recognition of note receivable interest incomeand equity in earnings of investments in unconsolidated real estate jointventures; depreciation and amortization; and allowance for doubtful accounts.  Actual results could differ from thoseestimates.

 

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

 

Ourconsolidated financial statements include our accounts, the accounts ofvariable interest entities in which we are the primary beneficiary and theaccounts of other subsidiaries over which we have control.  All inter-company transactions, balances andprofits have been eliminated in consolidation. Interests in entities are evaluated based on applicable GAAP, whichrequires the consolidation of variable interest entities (“VIEs”) in which weare deemed to be the primary beneficiary. If the interest in the entity is determined to not be a VIE, then theentities are evaluated for consolidation based on legal form, economicsubstance, and the extent to which we have control and/or substantiveparticipation rights under the respective ownership agreement.

 

Thereare judgments and estimates involved in determining if an entity in which wewill make an investment or have made an investment will be a VIE and if so, ifwe will be the primary beneficiary. The entity will be evaluated to determineif it is a VIE by, among other things, calculating the percentage of equitybeing risked compared to the total equity of the entity. There are someguidelines as to what the minimum equity at risk should be, but the percentagecan vary depending upon factors such as the type of financing, status ofoperations and entity structure and it will be up to our Advisor to determinethat minimum percentage as it relates to our business and the facts surroundingeach of our acquisitions. In addition, even if the entity’s equity at risk is alarge percentage, our Advisor will be required to evaluate the equity at riskcompared to the entity’s expected future losses to determine if there couldstill in fact be sufficient equity in the entity. Determining expected futurelosses involves assumptions of various possibilities of the results of futureoperations of the entity, assigning a probability to each possibility using adiscount rate to determine the net present value of those future losses andallocating those losses between the equity owners, subordinated lenders orother variable interests. The determination will also be based on an evaluationof the voting and other rights of owners and other parties to determine if the 

 

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equityinterests possess minimum governance powers. The evaluation will also consider the relation of these parties’ rightsto their economic participation in benefits or obligation to absorblosses.  As partnership and othergovernance agreements have various terms which may change over time or based onfuture results, these evaluations require complex analysis and weighting ofdifferent factors. A change in the judgments, assumptions, allocations 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 ourresults of operations and financial condition.

 

ForVIEs and other investments, we must evaluate whether we have control of anentity. Such evaluation involves judgments in determining if provisions ingoverning agreements provide control of activities that will impact theentity.  Such review includes anevaluation as to whether the governing provisions are protective or participatingrights for us, our Co-Investment Ventures or other equity owners. Thisevaluation includes an assessment of multiple terms as to their economic effectto the operations of the entity, how relevant the terms are to the recurringoperations of the entity and the weighing of each item to determine in theaggregate which owner, if any, has control. These assessments would affectwhether an entity should be consolidated or reported on the equity method, theeffects of which could be material to our results of operations and financialcondition.

 

***Real Estate and Other Related Intangibles***

 

For real estate properties acquired by us or our Co-Investment Venturesclassified as business combinations, we allocate the purchase price, afteradjusting for contingent consideration and settlement of any pre-existingrelationships, to the tangible assets acquired, consisting of land, inclusiveof associated rights, and buildings, any assumed debt, identified intangibleassets and liabilities and asset retirement obligations based on their fairvalues.  Identified intangible assets andliabilities primarily consist of the fair value of in-place leases andcontractual rights.  Goodwill isrecognized as of the acquisition date and measured as the aggregate fair valueof the consideration transferred and any noncontrolling interests in theacquiree over the fair value of identifiable net assets acquired.  Likewise, a bargain purchase gain isrecognized in current earnings when the aggregate fair value of theconsideration transferred and any noncontrolling interest in the acquiree areless than the fair value of the identifiable net assets acquired.

 

Thefair value of any tangible assets acquired, expected to consist of land andbuildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to land, buildings and improvements.  Land values are derived from appraisals, andbuilding values are calculated as replacement cost less depreciation orestimates of the relative fair value of these assets using discounted cash flowanalyses or similar methods.  Buildingsare depreciated over their estimated useful lives ranging from 25 to 35 yearsusing the straight-line method. Improvements are depreciated over their estimated useful lives rangingfrom 3 to 15 years using the straight-line method.  When we acquire rights to use land orimprovements through contractual rights rather than fee simple interests, wedetermine the value of the use of these assets based on the relative fair valueof the assets after considering the contractual rights and the fair value ofsimilar assets. Assets acquired under these contractual rights are classifiedas intangibles and amortized on a straight-line basis over the shorter of thecontractual term or the estimated useful life of the asset. Contractual rightsrelated to land or air rights that are substantively separated fromdepreciating assets are amortized over the life of the contractual term or, ifno term is provided, are classified as indefinite-lived intangibles.  Indefinite-lived intangible assets areevaluated at each reporting period to determine whether the indefinite usefullife is appropriate.

 

Wedetermine the value of 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 leases andtenant relationships was determined by applying a fair value model.  The estimates of fair value of in-placeleases includes an estimate of carrying costs during the expected lease-upperiods for the respective units considering current market conditions.  In estimating fair value of in-place leases,we consider items such as real estate taxes, insurance, leasing commissions,legal expenses, tenant improvements and other operating expenses to executesimilar deals as well as projected rental revenue and carrying costs during theexpected lease-up period.  The estimateof the fair value of tenant relationships also includes our estimate of thelikelihood of renewal.

 

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 difference between(i) the contractual amounts to be paid pursuant to the in-place leases and(ii) estimates of current market lease rates for the correspondingin-place leases, measured over a period equal to (1) the remainingnon-cancelable lease term for above-market leases, or (2) the remainingnon-cancelable lease term plus any fixed rate renewal options for below-marketleases. We record the fair value of above-market and below-market leases asintangible assets or intangible liabilities, respectively, and amortize them asan adjustment to rental income over the above determined lease term.

 

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Weamortize the value of in-place leases acquired to expense over the remainingterm of the leases. The value of tenant relationship intangibles will beamortized to expense over the initial term and any anticipated renewal periods,but in no event will the amortization period for intangible assets exceed theremaining depreciable life of the building. Intangible lease assets are classified as intangibles and intangiblelease liabilities are recorded within deferred lease revenues and other relatedliabilities.

 

Wedetermine the fair value of assumed debt by calculating the net present valueof the scheduled debt service payments using interest rates for debt withsimilar terms and remaining maturities that management believes we couldobtain.  Any difference between the fairvalue and stated value of the assumed debt is recorded as a discount or premiumand amortized over the remaining life of the loan.

 

Initialvaluations are subject to change until our information is finalized, which isno later than 12 months from the acquisition date.  We have had no significant valuation changesfor acquisitions prior to September 30, 2010.

 

***Impairment of Real Estate Related Assets andInvestments in Unconsolidated Real Estate Joint Ventures***

 

Forproperties wholly owned by us or our Co-Investment Ventures, including allrelated intangibles, we monitor 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 including its eventual disposition, to the carryingamount of the asset.  In the event that thecarrying amount exceeds the estimated future undiscounted operating cash flows,we recognize an impairment loss to adjust the carrying amount of the asset toestimated fair value.  In addition, weevaluate indefinite-lived intangible assets for possible impairment at leastannually by comparing the fair values with the carrying values.  Fair value is generally estimated byvaluation of similar assets.

 

Forreal estate we own through an investment in an unconsolidated real estate jointventure or other similar real estate investment structure, at each reportingdate we compare the estimated fair value of our real estate investment to thecarrying value.  An impairment charge isrecorded to the extent the fair value of our real estate investment is less thanthe carrying amount and the decline in value is determined to be other than atemporary decline.  We did not record anyimpairment losses for the three or nine months ended September 30, 2010 or2009.

 

***Cash and Cash Equivalents***

 

Weconsider investments in bank deposits, money market funds and highly-liquidcash investments with original maturities of three months or less to be cashequivalents.

 

***Notes Receivable***

 

Weand our Co-Investment Ventures report notes receivable at their outstandingprincipal balances net of any unearned income and unamortized deferred fees andcosts. Loan origination fees and certain direct origination costs are generallydeferred and recognized as adjustments to interest income over the lives of therelated loans.  Included within otherassets are notes receivable of $4.1 million and $4.0 million as of September 30,2010 and December 31, 2009, respectively.

 

Inaccounting for notes receivable by us or our Co-Investment Ventures, weevaluate whether the investments are loans, investments in joint ventures oracquisitions of real estate. In addition, we evaluate whether the loans containany rights to participate in expected residual profits, provide sufficientcollateral or qualifying guarantees or include other characteristics of a loan.As a result of our review, neither our wholly owned loan nor the loans madethrough our Co-Investment Ventures contain a right to participate in expectedresidual profits. In addition, the project borrowers remain obligated to payprincipal and interest due on the loan with sufficient collateral, reserves orqualifying guarantees.

 

Notesreceivables are assessed for impairment in accordance with applicableGAAP.  Based on specific circumstances,we determine whether it is probable that there has been an adverse change inthe estimated cash flows of the contractual payments for the notes receivable.We then assess the impairment based on the probability of collecting allcontractual amounts. If the impairment is probable, we recognize an impairmentloss equal to the difference between our or the Co-Investment Venture’sinvestment in the note receivable and the present value of the estimated cashflows discounted at the note receivable’s effective interest rate. Where wehave the intent and the ability to foreclose on our security interest in theproperty, we will use the collateral’s fair value as a basis for theimpairment.

 

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Thereare judgments involved in determining the probability for an impairment tocollect contractual amounts. As these types of notes receivable are generallyinvestment specific based on the particular loan terms and the underlyingproject characteristics, there is usually no secondary market to evaluateimpairments. Accordingly, we must rely on our subjective judgments andindividual weightings of the specific factors. If notes receivable areconsidered impaired, then judgments and estimates are required to determine theprojected cash flows for the notes receivable, considering the borrower’s or,if applicable, the guarantor’s financial condition and the consideration andvaluation of the secured property and any other collateral. Changes in thesefacts or in our judgments and assessments of these facts could result inimpairment losses which could be material to our consolidated financialstatements.

 

***Investments in Unconsolidated Real Estate JointVentures***

 

Weor our Co-Investment Ventures account for certain investments in unconsolidatedreal estate joint ventures using the equity method of accounting because weexercise significant influence over, but do not control, these entities.  These investments are initially recorded atcost and are adjusted for our share of equity in earnings anddistributions.  We report our share ofincome and losses based on our economic interests in the entities.

 

Wecapitalize interest expense to investments in unconsolidated real estate jointventures for our share of qualified expenditures.

 

Weamortize any excess of the carrying value of our investments in joint venturesover the book value of the underlying equity over the estimated useful lives ofthe underlying operating property, which represents the assets to which theexcess is most clearly related.

 

Whenwe or our Co-Investment Ventures acquire a controlling interest in a previouslynoncontrolled investment, a gain or loss is recognized for the differencesbetween the investment’s carrying value and fair value.

 

***Deferred Financing Costs***

 

Deferred financing costsare recorded at cost and are amortized to interest expense using astraight-line method that approximates the effective interest method over thelife of the related debt.

 

***Revenue Recognition***

 

Rental income related toleases is recognized on an accrual basis when due from residents or commercialtenants, generally on a monthly basis. Rental revenues for leases with uneven payments and terms greater thanone year are recognized on a straight-line basis over the term of thelease.  Any deferred revenue is recordedas a liability within deferred lease revenues and other related liabilities.

 

***Acquisition Costs***

 

Acquisitioncosts for business combinations, which are expected to include most whollyowned properties, are expensed when it is probable that the transaction will beaccounted for as a business combination and the purchase will be consummated.Our acquisition costs related to investments in unconsolidated real estatejoint ventures are capitalized as a part of our basis in the investment.Pursuant to our Advisory Management Agreement (as defined below), ourAdvisor is obligated to reimburse us for all investment-related expenses theCompany pursues but ultimately does not consummate. Prior to the determinationof its status, amounts incurred are recorded in other assets.  Acquisition costs and expenses includeamounts incurred with our Advisor and with third parties.

 

***Organization and******O******ffering Costs***

 

OurAdvisor is obligated to pay all of our Initial Public Offering and PrivateOffering organization and offering costs and we are required to makereimbursements in accordance with the Advisory Management Agreement, asamended.  Organization expenses areexpensed as incurred.  Offering costs arerecognized based on estimated amounts probable of reimbursement and are offsetagainst additional paid-in capital.

 

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***Redemptions of Common Stock***

 

We account for the possibleredemption of our shares by classifying securities that are convertible forcash at the option of the holder outside of equity.  We do not reclassify the shares to beredeemed from equity to other liabilities until such time as the redemption hasbeen formally approved.  The portion ofthe redeemed common stock in excess of the par value is charged to additionalpaid-in capital.

 

***Income Taxes***

 

Wehave elected to be taxed as a REIT under Sections 856 through 860 of the Codeand have qualified as a REIT since the year ended December 31, 2007. To qualify as 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 notbe subject to federal income tax at the corporate level.  We are organizedand operate in such a manner as to qualify for taxation as a REIT under theCode and intend to continue to operate in such a manner, but no assurance canbe given that we will operate in a manner so as to remain qualified as a REIT.

 

Wehave evaluated the current and deferred income tax related to state taxes,where we do not have a REIT exemption, and we have no significant tax liabilityor benefit as of September 30, 2010 or December 31, 2009.

 

Werecognize the financial statement benefit of an uncertain tax position onlyafter determining that the relevant tax authority would more likely than notsustain the position following an audit. As of September 30, 2010, we haveno significant uncertain tax positions.

 

***Concentration of Credit Risk***

 

Weinvest our cash and cash equivalents among several banking institutions andmoney market accounts in an attempt to minimize exposure to any one of theseentities.  As of September 30, 2010 and December 31, 2009, wehad cash and cash equivalents deposited in certain financial institutions inexcess of federally-insured levels.  Weregularly monitor the financial stability of these financial institutions andbelieve that we are not exposed to any significant credit risk in cash and cashequivalents.

 

***Income (Loss) per Share***

 

Basicearnings per share is calculated by dividing net earnings available to commonstockholders by the weighted average common shares outstanding during theperiod. Diluted earnings per share is calculated similarly, except that duringperiods of net income it includes the dilutive effect of the assumed exerciseof securities, including the effect of shares issuable under our stock-basedincentive plans.  During periods of netloss, the assumed exercise of securities is anti-dilutive and is not includedin the calculation of earnings per share.

 

TheBehringer Harvard Multifamily REIT I, Inc. Amended and Restated 2006Incentive Award Plan (“Incentive Award Plan”) authorizes the grant ofnon-qualified and incentive stock options, restricted stock awards, restrictedstock units, stock appreciation rights, dividend equivalents and otherstock-based awards.  A total of 10 millionshares has been authorized and reserved for issuance under the Incentive AwardPlan.  As of September 30, 2010, nooptions have been issued.  For the ninemonths ended September 30, 2010 and 2009, 6,000 shares of the restrictedstock have been included in the basic and dilutive earnings per sharecalculation.

 

As of September 30, 2010 and December 31, 2009, we had 1,000shares of convertible stock issued and outstanding, no shares of preferredstock issued and outstanding, and had no options to purchase shares of commonstock outstanding.  The convertible stockis not included in the dilutive earnings per share because the shares ofconvertible stock do not participate in earnings and would currently not beconvertible into any common shares, if converted.

 

***Reportable Segments***

 

Ourcurrent business consists of investing in and operating multifamilycommunities. Substantially all of our consolidated net income is frominvestments in real estate properties that we wholly own or own throughCo-Investment Ventures, the latter of which we account for under the equitymethod of accounting. Our management evaluates operating performance on anindividual investment

 

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level.However, as each of our investments has similar economic characteristics in ourconsolidated financial statements, the Company is managed on an enterprise-widebasis with one reportable segment.

 

***Fair Value***

 

Inconnection with our assessments and determinations of fair value for many realestate assets and financial instruments, there are generally not availableobservable market price inputs for substantially the same items.  Accordingly, we make assumptions and usevarious estimates and pricing models, including, but not limited to, theestimated cash flows, costs to lease properties, useful lives of the assets,the cost of replacing certain assets, discount and interest rates used todetermine present values and market capitalization rates and rental rates. Manyof these estimates are from the perspective of market participants and willalso be obtained from independent third-party appraisals. However, we will beresponsible for the source and use of these estimates. A change in theseestimates and assumptions could be material to our results of operations andfinancial condition.

 

As of September 30,2010, we believe the carrying values of cash and cash equivalents, receivablesand payables from affiliates and credit facility payable approximate their fairvalues based on their highly-liquid nature and/or short-term maturities,including prepayment options. As of September 30, 2010, we estimate thefair value of our mortgage loans payable at $99.0 million, compared to itscarrying value of $93.5 million.  As of September 30,2009, we had no mortgage loans payable. As of September 30, 2010 and December 31, 2009, we had nosignificant assets or liabilities measured at fair value on a recurring ornonrecurring basis.  We estimate fairvalues for financial instruments based on interest rates with similar terms andremaining maturities that management believes we could obtain.

 

***Reclassification***

 

Certainfinancial information from the previous fiscal year has been revised to conformto the current year presentation. This revision to the historical presentationdoes not reflect a material change to the information presented in theConsolidated Balance Sheets.  As of December 31,2009, in order to combine the immaterial amount, we combined note and otherreceivables of approximately $4.0 million into the “Other assets, net” caption.

 

**4.****            ****NewAccounting Pronouncements**

 

InJune 2009, the Financial Accounting Standards Board (“FASB”) issued anamendment to the authoritative guidance on the consolidation of variableinterest entities.  This guidanceeliminates exceptions to consolidating qualifying special-purpose entities,contains new criteria for determining the primary beneficiary, and increasesthe frequency of required reassessments to determine whether a company is theprimary beneficiary of a variable interest entity.  This guidance also contains a new requirementthat any term, transaction, or arrangement that does not have a substantiveeffect on an entity’s status as a variable interest entity, a company’s powerover a variable interest entity, or a company’s obligation to absorb losses orits rights to receive benefits of an entity must be disregarded in evaluatingwhether an entity is a variable interest entity.  This guidance was applicable to us beginning January 1,2010.  The adoption of this guidance didnot have a material impact on our consolidated financial statements.

 

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**5.****            ****Real EstateInvestments**

 

Wemake real estate investments through entities wholly owned by us or throughunconsolidated real estate joint ventures. As of September 30, 2010, we had eight wholly owned real estateinvestments and 22 investments in unconsolidated real estate joint ventures. Asof December 31, 2009, we had three wholly owned real estate investmentsand 17 investments in unconsolidated real estate joint ventures.  All of our investments in unconsolidated realestate joint ventures are BHMP CO-JVs (as defined below). We are not limited tojoint ventures through BHMP CO-JVs, as we may choose other joint venturepartners or investment structures.

 

Thefollowing tables present our wholly owned real estate investments and ourinvestments in unconsolidated real estate joint ventures as of September 30,2010 and December 31, 2009.  Theinvestments are categorized as of September 30, 2010 based on the type ofinvestment, on the stages in the development and operation of the investmentand for investments in unconsolidated real estate joint ventures based on itstype of underlying investment.  Thedefinitions of each stage are as follows:

 

·      Stabilized /Comparable are communities that are stabilized (the earlier of 90% occupancy orone year after completion) for both the current and all prior reportingperiods.

 

·      Stabilized /Non-comparable are communities that have been stabilized or acquired after January 1,2009.

 

·      Lease ups arecommunities that have commenced leasing but have not yet reached stabilization.

 

·      Developmentsare communities currently under construction for which leasing activity has notcommenced.  As of September 30,2010, there were no communities classified as developments.

 

Yearof acquisition dates represent the year of our purchase of the multifamilycommunity.  Initial investment datesrepresent the year of our initial investment in the multifamily community.  Completion dates, including estimated futurecompletion dates, are based on the date the multifamily community issubstantially complete or renovated and capable of generating all significantrevenue sources.  Accordingly, the datesprovided in the table below may be different from the completion dates definedin the various contractual agreements or the final issuance of any officialregulatory recognition of completion related to each multifamilycommunity.  Occupancy data is presentedupon stabilization of the property and is as of September 30, 2010.

 
| ** **                                    | ** ** | ** **       | ** ** | ** **                    | ** ** | ** **                   | ** ** | ** ** | ** ** | ** **          | ** ** | **Total Real Estate, net  (in millions)** |       |
|-----------------------------------------------|------------|------------------|------------|-------------------------------|------------|------------------------------|------------|------------|------------|---------------------|------------|---------------------------------------------------------------|------------|
| **Investments in Real Estate** | ** ** | **Location**     | ** ** | **Year of  Acquisition** | ** ** | **Year of  Completion** | ** ** | **Units**  | ** ** | **Occupancy  Rate** | ** ** | **September 30,  2010**                                  | ** ** | **December 31,  2009** |   |
| *Stabilized / Non-comparable:*                |       |             |       |                          |       |                         |       |       |       |                |       |                                                          |       |   |   |
| The  Gallery at NoHo Commons (1)              |       | Los Angeles, CA  |       | 2009                          |       | 2006                         |       | 438        |       | 93                  | %          | $                                                             | 103.7      |   | $ | 106.0 |   |
| Mariposa  Loft Apartments                     |       | Atlanta, GA      |       | 2009                          |       | 2004                         |       | 253        |       | 97                  | %          | 27.3                                                          |       | 27.9 |   |
| Grand  Reserve Orange                         |       | Orange, CT       |       | 2009                          |       | 2005                         |       | 168        |       | 92                  | %          | 24.5                                                          |       | 25.1 |   |
| Acacia  on Santa Rosa Creek                   |       | Santa Rosa, CA   |       | 2010                          |       | 2003                         |       | 277        |       | 96                  | %          | 37.0                                                          |       | — |   |
| The  Lofts at Park Crest (1)  (2)        |       | McLean, VA       |       | 2010                          |       | 2008                         |       | 131        |       | 98                  | %          | 48.5                                                          |       | — |   |
| Burnham  Pointe (2)                           |       | Chicago, IL |       | 2010                          |       | 2008                         |       | 298        |       | 85                  | %          | 85.6                                                          |       | — |   |
| Uptown  Post Oak                              |       | Houston, TX      |       | 2010                          |       | 2008                         |       | 392        |       | 92                  | %          | 63.1                                                          |       | — |   |
| *Lease ups:*                                  |       |             |       |                          |       |                         |       |       |       |                |       |                                                          |       |   |   |
| Acappella                                     |       | San Bruno, CA    |       | 2010                          |       | 2010                         |       | 163        |       | N/A                 |       | 54.6                                                          |       | — |   |
|                                          |       |             |       |                          |       |                         |       | 2,120      |       |                |       | $                                                             | 444.3      |   | $ | 159.0 |   |

 

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| ** **                                                                                      | ** ** | ** **           | ** ** | **Initial**          | ** ** | **Year of  Completion  or Estimated** | ** ** | ** ** | ** ** | ** **          | ** ** | **Our Investment in Unconsolidated  Real Estate Joint Ventures  (in millions)** |       |
|-------------------------------------------------------------------------------------------------|------------|----------------------|------------|----------------------|------------|-------------------------------------------------|------------|------------|------------|---------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| **Investments in Unconsolidated Real Estate  Joint Ventures (3)** | ** ** | **Location**         | ** ** | **Investment  Date** | ** ** | **Completion  Date**                            | ** ** | **Units**  | ** ** | **Occupancy  Rate** | ** ** | **September 30,  2010**                                                                                       | ** ** | **December 31,  2009** |   |
| **Equity Investments**                                                                          |       |                 |       |                 |       |                                            |       |       |       |                |       |                                                                                                               |       |   |   |
| *Stabilized / Comparable:*                                                                      |       |                 |       |                 |       |                                            |       |       |       |                |       |                                                                                                               |       |   |   |
| The  Reserve at Johns Creek Walk (4)                                                            |       | Johns Creek, GA      |       | 2007                 |       | 2006                                            |       | 210        |       | 97                  | %          | $                                                                                                                  | 3.6        |   | $ | 4.0 |   |
| *Stabilized / Non-comparable:*                                                                  |       |                 |       |                 |       |                                            |       |       |       |                |       |                                                                                                               |       |   |   |
| The  Eclipse (5)                                                                                |       | Houston, TX          |       | 2007                 |       | 2009                                            |       | 330        |       | 91                  | %          | 7.2                                                                                                                |       | 19.7 |   |
| Halstead  (5)                                                                                   |       | Houston, TX          |       | 2009                 |       | 2004                                            |       | 301        |       | 90                  | %          | 14.8                                                                                                               |       | 3.4 |   |
| The  Venue (5)                                                                                  |       | Clark County, NV     |       | 2008                 |       | 2009                                            |       | 168        |       | 95                  | %          | 14.9                                                                                                               |       | 4.5 |   |
| Waterford  Place (5)                                                                            |       | Dublin, CA           |       | 2009                 |       | 2003                                            |       | 390        |       | 95                  | %          | 10.0                                                                                                               |       | 11.0 |   |
| Burrough’s  Mill Apartment Homes (5)                                                       |       | Cherry Hill, NJ      |       | 2009                 |       | 2003                                            |       | 308        |       | 96                  | %          | 7.3                                                                                                                |       | 8.1 |   |
| Forty55  Lofts (5)                                                                              |       | Marina del Rey,  CA  |       | 2009                 |       | 2010                                            |       | 140        |       | 94                  | %          | 27.2                                                                                                               |       | 26.2 |   |
| Calypso  Apartments and Lofts (5)                                                               |       | Irvine, CA           |       | 2009                 |       | 2008                                            |       | 177        |       | 93                  | %          | 13.8                                                                                                               |       | 27.4 |   |
| 4550  Cherry Creek (5)                                                                          |       | Denver, CO           |       | 2010                 |       | 2004                                            |       | 288        |       | 92                  | %          | 12.2                                                                                                               |       | — |   |
| 7166  at Belmar (5)                                                                             |       | Lakewood, CO         |       | 2010                 |       | 2008                                            |       | 308        |       | 95                  | %          | 12.8                                                                                                               |       | — |   |
| Briar  Forest Lofts (5)                                                                         |       | Houston, TX          |       | 2010                 |       | 2008                                            |       | 352        |       | 90                  | %          | 9.5                                                                                                                |       | — |   |
| Fitzhugh  Urban Flats (5)                                                                       |       | Dallas, TX           |       | 2010                 |       | 2009                                            |       | 452        |       | 94                  | %          | 11.6                                                                                                               |       | — |   |
| Tupelo  Alley (2) (5)                                                                      |       | Portland, OR         |       | 2010                 |       | 2009                                            |       | 188        |       | 96                  | %          | 10.9                                                                                                               |       | — |   |
| *Lease ups:*                                                                                    |       |                 |       |                 |       |                                            |       |       |       |                |       |                                                                                                               |       |   |   |
| Bailey’s  Crossing (4) (6)                                                            |       | Alexandria, VA       |       | 2007                 |       | 2010                                            |       | 414        |       | N/A                 |       | 29.4                                                                                                               |       | 29.8 |   |
| 55  Hundred (2) (4) (6)                                                               |       | Arlington, VA        |       | 2007                 |       | 2010                                            |       | 234        |       | N/A                 |       | 22.1                                                                                                               |       | 23.6 |   |
| Cyan/PDX  (2) (5)                                                                          |       | Portland, OR         |       | 2009                 |       | 2009                                            |       | 352        |       | N/A                 |       | 45.0                                                                                                               |       | 46.2 |   |
| San  Sebastian (5)                                                                              |       | Laguna Woods, CA     |       | 2009                 |       | 2010                                            |       | 134        |       | N/A                 |       | 19.9                                                                                                               |       | 19.9 |   |
| **Equity and Loan Investments**                                                                 |       |                 |       |                 |       |                                            |       |       |       |                |       |                                                                                                               |       |   |   |
| *Stabilized / Non-comparable:*                                                                  |       |                 |       |                 |       |                                            |       |       |       |                |       |                                                                                                               |       |   |   |
| Satori  (2) (4) (6)                                                                   |       | Fort Lauderdale,  FL |       | 2007                 |       | 2010                                            |       | 279        |       |                |       | 11.3                                                                                                               |       | 12.3 |   |
| *Lease ups:*                                                                                    |       |                 |       |                 |       |                                            |       |       |       |                |       |                                                                                                               |       |   |   |
| Veritas  (4) (6)                                                                           |       | Henderson, NV        |       | 2007                 |       | 1st Quarter 2011                           |       | 430        |       | N/A                 |       | 14.4                                                                                                               |       | 14.9 |   |
| Skye  2905 (2) (4) (6)                                                                |       | Denver, CO           |       | 2008                 |       | 2010                                            |       | 400        |       | N/A                 |       | 12.3                                                                                                               |       | 12.9 |   |
| **Loan Investments**                                                                            |       |                 |       |                 |       |                                            |       |       |       |                |       |                                                                                                               |       |   |   |
| *Lease ups:*                                                                                    |       |                 |       |                 |       |                                            |       |       |       |                |       |                                                                                                               |       |   |   |
| Grand  Reserve                                                                                  |       | Dallas, TX           |       | 2007                 |       | 2010                                            |       | 149        |       | N/A                 |       | 5.4                                                                                                                |       | 5.1 |   |
| The  Cameron (2) (6)                                                                       |       | Silver Spring, MD    |       | 2007                 |       | 2010                                            |       | 325        |       | N/A                 |       | 11.0                                                                                                               |       | 10.9 |   |
|                                                                                            |       |                 |       |                 |       |                                            |       | 6,329      |       |                |       | $                                                                                                                  | 326.6      |   | $ | 279.9 |   |
|                                                                                            |       |                 |       |                 |       | Total Units                                     |       | 8,449      |       |                |       |                                                                                                               |       |   |   |

 

----

| (1)    | Purchase  prices for The Gallery at NoHo Commons and The Lofts at Park Crest were $96.0  million and $68.2 million, respectively, before closing costs and prorations.  Other amounts from the acquisitions were recognized as intangible assets or  deferred lease revenues and other related liabilities.                                                                                                                                                                  |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (2)    | Includes  retail space, where the total approximate square footage of retail space of  gross leasable area (“GLA”) for all these investments totals approximately  127,500 square feet or approximately 6% of total rentable area. Of the  stabilized communities, The Lofts at Park Crest, Tupelo Alley, Burnham Pointe  and Satori contain retail space with approximately 104,600 square feet of  GLA, of which 73% was occupied as of September 30, 2010. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (3)    | Our  ownership interest in all our investments in unconsolidated real estate joint  ventures is 55% except for The Reserve at Johns Creek Walk (64%), Cyan/PDX  (70%) and 7166 at Belmar (70%).                                                                                                                                                                                                                                                                              |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (4)    | Equity  investment of a BHMP CO-JV in a Property Entity with unaffiliated third  parties.                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (5)    | Equity  investment wholly owned by a BHMP CO-JV.                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| (6)    | Equity  interests in the property owned by BHMP CO-JV and/or other owners may be  subject to call rights, put rights and/or buy-sell rights and/or right of  BHMP CO-JV to convert mezzanine loan investment to equity in the property.                                                                                                                                                                                                                                      |

 

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***Investments in Real Estate***

 

Forthe nine months ended September 30, 2010, we acquired in separatetransactions five wholly owned multifamily communities, Acacia on Santa RosaCreek, The Lofts at Park Crest, Burnham Pointe, Uptown Post Oak and Acappellatotaling 1,261 units, for an aggregate purchase price of approximately $315.3million, including the assumption of a mortgage loan payable of $26.7 million.

 

Thefollowing tables present certain additional information regarding our materialacquisitions in The Lofts at Park Crest, acquired in March 2010, andBurnham Pointe, acquired in June 2010. The amounts recognized for majorassets acquired and liabilities assumed as of the acquisition date are asfollows (in millions):

 
| ** **                         | ** ** | **The Lofts at  Park Crest** | ** ** | **Burnham Pointe** | ** ** |
|------------------------------------|------------|---------------------------------------------|------------|-------------------------|------------|
| Land                               |       | $                                           | —     |                    | $          | 10.4 |   |
| Buildings and improvements         |       | 49.6                                        |       | 76.0                    |       |
| Intangible assets:                 |       |                                        |       |                    |       |
| In-place leases                    |       | 2.7                                         |       | 1.6                     |       |
| Contractual rights                 |       | 16.3                                        |       | —                  |       |
| Total intangible assets            |       | 19.0                                        |       | 1.6                     |       |
|                               |       |                                        |       |                    |       |
| Contingent consideration liability |       | (0.4                                        | )          | —                  |       |
| Total                              |       | $                                           | 68.2       |                    | $          | 88.0 |   |

 

·      Contractualrights include land and parking garage rights.

 

·      We are in theprocess of finalizing our acquisition allocations, which are subject to changeuntil our information is finalized, no later than twelve months from theacquisition date.

 

Theamounts recognized for revenues and net losses from the acquisition dates to September 30,2010 related to the operations of The Lofts at Park Crest and Burnham Pointeare as follows (in millions).

 
| ** **                    | ** ** | **The Lofts at Park Crest** | ** ** | **Burnham Pointe** | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|-------------------------|------------|
| Revenues                      |       | $                                               | 3.5        |                    | $          | 1.7 |   |
| Acquisition expenses          |       | $                                               | 0.4        |                    | $          | 1.0 |   |
| Depreciation and amortization |       | $                                               | 2.0        |                    | $          | 1.6 |   |
| Net loss                      |       | $                                               | —     |                    | $          | (1.8 | ) |

 

Thefollowing unaudited consolidated pro forma information is presented as if weacquired The Lofts at Park Crest and Burnham Pointe on January 1,2009.  This information is notnecessarily indicative of what the actual results of operations would have beenhad we completed these transactions on January 1, 2009, nor does itpurport to represent our future operations (amounts in millions, expect pershare):

 
| ** **                    | ** ** | **Pro Forma**                                                     | ** ** |
|-------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                    | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
| ** **                    | ** ** | **2010**                                                               | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                      |       | $                                                                      | 9.4        |   | $ | 2.6 |   | $ | 25.5 |   | $ | 5.1 |   |
| Acquisition expenses          |       | $                                                                      | 3.2        |   | $ | 2.8 |   | $ | 4.2 |   | $ | 7.3 |   |
| Depreciation and amortization |       | $                                                                      | 6.5        |   | $ | 1.7 |   | $ | 16.0 |   | $ | 6.8 |   |
| Net loss                      |       | $                                                                      | (10.4      | ) | $ | (5.2 | ) | $ | (23.7 | ) | $ | (15.3 | ) |
| Net loss per share            |       | $                                                                      | (0.10      | ) | $ | (0.10 | ) | $ | (0.25 | ) | $ | (0.37 | ) |

 

Depreciationexpense associated with all of our wholly owned buildings and improvements forthe three months ended September 30, 2010 and 2009 was approximately $3.7million and $0.2 million, respectively. Depreciation expense associated with 

 

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allof our wholly owned buildings and improvements for the nine months ended September 30,2010 and 2009 was approximately $7.8 million and $0.2 million, respectively.

 

Costof intangibles related to our wholly owned investments in real estate consistedof the value of in-place leases and other contractual intangibles.  Included in other contractual intangibles asof September 30, 2010 is $6.8 million related to the use rights of aparking garage and site improvements and $9.5 million of indefinite-livedcontractual rights related to land air rights. There were no indefinite-lived intangibles as of December 31, 2009.Anticipated amortization associated with lease and other contractualintangibles for each of the following five years is as follows (in millions):

 
| October –  December 2010 |   | $ | 2.0 |   |
|-----------------------------------------|--------|---|-----|--------|
| 2011                                    |   | $ | 0.6 |   |
| 2012                                    |   | $ | 0.4 |   |
| 2013                                    |   | $ | 0.4 |   |
| 2014                                    |   | $ | 0.4 |   |

 

Asof September 30, 2010 and December 31, 2009, accumulated depreciationand amortization related to our consolidated real estate properties and relatedintangibles were as follows (in millions):

 
| ** **                                       | ** ** | ** **                           | ** ** | **Intangibles**                      | ** ** |
|--------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| **As of September 30, 2010** | ** ** | **Buildings and  Improvements** | ** ** | **In-Place Lease  Intangibles** | ** ** | **Other  Contractual** | ** ** |
| Cost                                             |       | $                                    | 364.7      |                                 | $          | 9.8 |   | $ | 16.3 |   |
| Less: depreciation and amortization              |       | (9.3                                 | )          | (5.8                                 | )          | (0.1 | ) |
| Net                                              |       | $                                    | 355.4      |                                 | $          | 4.0 |   | $ | 16.2 |   |

 
| ** **                                      | ** ** | ** **                           | ** ** | **Intangibles**                      | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| **As of December 31, 2009** | ** ** | **Buildings and  Improvements** | ** ** | **In-Place Lease  Intangibles** | ** ** | **Other  Contractual** | ** ** |
| Cost                                            |       | $                                    | 121.4      |                                 | $          | 2.4 |   | $ | — |   |
| Less: depreciation and amortization             |       | (1.5                                 | )          | (1.2                                 | )          | — |   |
| Net                                             |       | $                                    | 119.9      |                                 | $          | 1.2 |   | $ | — |   |

 

***Investments in Unconsolidated Real Estate JointVentures***

 

Wehave entered into 22 separate joint ventures with Behringer Harvard MasterPartnership I LP (the “BHMP Co-Investment Partner”) through entities in whichwe are the manager. The 1% general partner of the BHMP Co-Investment Partner isBehringer Harvard Institutional GP LP, which is an affiliate of our Advisor andis indirectly owned by our sponsor, Behringer Harvard Holdings, LLC. The 99%limited partner of the BHMP Co-Investment Partner is Stichting Depositary PGGMPrivate Real Estate Fund, a Dutch foundation acting in its capacity asdepositary of and for the account and risk of PGGM Private Real Estate Fund, aninvestment vehicle for Dutch pension funds (“PGGM”).  Substantially all of the capital provided tothe BHMP Co-Investment Partner is from PGGM. We have no ownership or otherdirect financial interests in either of these entities.

 

PGGMhas committed to invest up to $300 million in co-investments with affiliates orinvestment programs of our sponsor.  Asof September 30, 2010, approximately $45.5 million of the $300 millioncommitment remains unfunded; however, in the event that certain investments arerefinanced or new property debt is placed within two years from the date of theacquisition, the amount of the unfunded commitment may be increased.

 

Generally,the BHMP Co-Investment Partner will co-invest with a 45% equity interest, andwe will co-invest with a 55% equity interest, although the BHMP Co-InvestmentPartner may elect smaller allocations. Capital contributions and cash distributions are allocated pro rata inaccordance with ownership interests.

 

Eachof our separate joint ventures with the BHMP Co-Investment Partner is madethrough a separate entity that owns 100% of the voting equity interests andapproximately 99% of the economic interests in one subsidiary REIT, throughwhich substantially all of the joint venture’s business is conducted.  Each separate joint venture entity, togetherwith its respective subsidiary REIT, is 

 

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referredto herein as a “BHMP CO-JV.”  Each BHMPCO-JV is a separate legal entity formed for the sole purpose of holding itsrespective investment and obtaining legally separated debt and equityfinancing.  In certain circumstances thegoverning documents of the BHMP CO-JV may require the subsidiary REIT to bedisposed of via a sale of its capital stock rather than as an asset sale bythat subsidiary REIT.

 

EachBHMP CO-JV is managed by us or a subsidiary of ours, but the operation of theBHMP CO-JV’s investment must generally be conducted in accordance withoperating plans approved by the BHMP Co-Investment Partner.  In addition, without the consent of allmembers of the BHMP CO-JV, the manager may not generally approve or disapproveon behalf of the BHMP CO-JV certain major decisions affecting the BHMP CO-JV,such as (i) selling or otherwise disposing of the BHMP CO-JV’s investmentor any other property having a value in excess of $100,000, (ii) sellingany additional interests in the BHMP CO-JV, (iii) approving initial andannual operating plans and capital expenditures or (iv) incurring or materiallymodifying any indebtedness of the BHMP CO-JV in excess of $100,000 or causingthe BHMP CO-JV to become liable for any debt, obligation or undertaking of anyother individual or entity in excess of $100,000 other than in accordance withthe operating plans.  The BHMPCo-Investment Partner may remove the manager for cause and appoint a successor.

 

Wehave determined that our BHMP CO-JVs are not variable interest entities andthat each partner has equal substantive control and participating rights withno single party controlling each BHMP CO-JV. Accordingly, we account for ourinterest in each BHMP CO-JV using the equity method of accounting.

 

CertainBHMP CO-JVs have made equity investments with third-party partners in, and/orhave made loans to, entities that own one multifamily operating or developmentcommunity.  The collective group of theseoperating property entities or development entities are collectively referredto herein as “Property Entities.”  EachProperty Entity is a separate legal entity for the sole purpose of holding itsrespective operating property or development project and obtaining legallyseparated debt and equity financing.

 

Asof September 30, 2010, six of our BHMP CO-JVs include equity investmentsin Property Entities.  Each of these BHMPCO-JV equity investments in a Property Entity is evaluated for consolidation atthe BHMP CO-JV level using our principles of consolidation. Of these sixProperty Entities, three investments are reported on a consolidated basis bythe BHMP CO-JV and the remaining three investments are recorded asunconsolidated real estate joint ventures and reported with the equity methodof accounting by the respective BHMP CO-JVs.

 

Duringthe nine months ended September 30, 2010, we invested in five newly formedBHMP CO-JVs, each holding a wholly owned multifamily community. The totalacquisition price for these multifamily communities was $219.7 million.  Our total share of the capital contributionfor these BHMP CO-JVs was $127.0 million. Also during the nine months ended September 30, 2010, eight BHMPCO-JVs obtained mortgage financing secured by the respective multifamilycommunity for an aggregate amount of $190.0 million.  Substantially all of the net proceeds relatedto these financings were distributed to us and the BHMP Co-Investment Partnerand our share was $107.9 million.

 

InAugust 2010, The Venue BHMP CO-JV indirectly acquired the remainingownership interest in The Venue Property Entity for $0.4 million. Included as apart of the acquisition, The Venue BHMP CO-JV also extinguished The VenueProperty Entity’s construction loan with a final principal payment of $17.9million.  At the time of the payoff, theconstruction loan had a principal balance of $19.7 million.  The total funding by The Venue BHMP CO-JV wasapproximately $18.5 million. Our contribution to The Venue BHMP CO-JV wasapproximately $10.2 million. Effective with the transaction, The Venue PropertyEntity became wholly owned by The Venue BHMP CO-JV. Upon the acquisition of thecontrolling interest, The Venue BHMP CO-JV recognized a gain of $1.3 millionfor the difference between The Venue BHMP CO-JV’s investment carrying value andthe fair value. Our share of the gain is included in equity in earnings (loss)of investments in unconsolidated real estate joint ventures and wasapproximately $0.7 million. At the closing of the acquisition, The Venue BHMPCO-JV effectively eliminated its note receivable to The Venue Property Entity.

 

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Thesummarized financial data shown below presents the combined accounts of each ofthe (i) BHMP CO-JVs and (ii) Property Entities where there is acorresponding BHMP CO-JV equity investment. The amounts listed below include 100% of the Property Entities’accounts, where the noncontrolling interest amounts represent the portion ownedby unaffiliated third parties.  Allinter-entity transactions, balances and profits have been eliminated in thecombined financial data (amounts in millions):

 
| ** **                                                                                                                                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **Balance Sheet Data:**                                                                                                                            | ** ** | **2010**               | ** ** | **2009**              | ** ** |
| Land, buildings and improvements                                                                                                                             |       | $                      | 1,091.3    |                  | $          | 656.0 |   |
| Less: accumulated depreciation and amortization                                                                                                              |       | (29.1                  | )          | (6.7                  | )          |
| Land, buildings and improvements, net                                                                                                                        |       | 1,062.2                |       | 649.3                 |       |
|                                                                                                                                                         |       |                   |       |                  |       |
| Construction in progress                                                                                                                                     |       | 25.7                   |       | 210.2                 |       |
| Notes receivable, net                                                                                                                                        |       | 25.8                   |       | 25.4                  |       |
| Cash and cash equivalents                                                                                                                                    |       | 38.7                   |       | 6.2                   |       |
| Intangible assets, net of accumulated amortization  of $11.3 million and $4.2 million as of September 30, 2010 as  December 31, 2009, respectively |       | 1.9                    |       | 2.8                   |       |
| Other assets, including restricted cash                                                                                                                      |       | 15.4                   |       | 20.1                  |       |
| Total assets                                                                                                                                                 |       | $                      | 1,169.7    |                  | $          | 914.0 |   |
| * *                                                                                                                                                     | * *   | * *               | * *   | * *              | * *   |
| BHMP CO-JV level mortgage loans payable                                                                                                                      |       | $                      | 275.2      |                  | $          | 110.1 |   |
| Property Entity level construction and mortgage  loans payable                                                                                               |       | 314.0                  |       | 284.3                 |       |
| Accounts payable, interest payable and other  liabilities                                                                                                    |       | 22.9                   |       | 30.2                  |       |
| Total liabilities                                                                                                                                            |       | 612.1                  |       | 424.6                 |       |
|                                                                                                                                                         |       |                   |       |                  |       |
| Redeemable, noncontrolling interests                                                                                                                         |       | 8.4                    |       | 10.4                  |       |
|                                                                                                                                                         |       |                   |       |                  |       |
| Our members’ equity                                                                                                                                     |       | 316.6                  |       | 268.5                 |       |
| BHMP Co-Investment Partner’s equity                                                                                                                     |       | 223.1                  |       | 201.2                 |       |
| Nonredeemable, noncontrolling interests                                                                                                                      |       | 9.5                    |       | 9.3                   |       |
| Total equity                                                                                                                                                 |       | 549.2                  |       | 479.0                 |       |
| Total liabilities and equity                                                                                                                                 |       | $                      | 1,169.7    |                  | $          | 914.0 |   |

 

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| ** **                                                                                          | ** ** | **For the three months ended  September 30,** | ** ** | **For the nine months ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Operating Data:**                                                                            | ** ** | **2010**                                                               | ** ** | **2009**                                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                                                            |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Rental revenues                                                                                     |       | $                                                                      | 20.8       |                                                                  | $          | 3.5 |   | $ | 47.3 |   | $ | 5.9 |   |
| Interest income                                                                                     |       | 2.5                                                                    |       | 3.7                                                                   |       | 7.3 |   | 10.6 |   |
|                                                                                                |       | 23.3                                                                   |       | 7.2                                                                   |       | 54.6 |   | 16.5 |   |
|                                                                                                |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Expenses                                                                                            |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Property operating expenses                                                                         |       | 7.8                                                                    |       | 2.0                                                                   |       | 19.9 |   | 4.0 |   |
| Real estate taxes                                                                                   |       | 2.9                                                                    |       | 0.5                                                                   |       | 6.7 |   | 1.0 |   |
| Interest expense                                                                                    |       | 5.9                                                                    |       | 1.7                                                                   |       | 14.3 |   | 3.0 |   |
| Acquisition expenses                                                                                |       | —                                                                 |       | 1.3                                                                   |       | 1.0 |   | 1.5 |   |
| Depreciation and amortization                                                                       |       | 12.7                                                                   |       | 1.8                                                                   |       | 31.7 |   | 3.2 |   |
|                                                                                                |       | 29.3                                                                   |       | 7.3                                                                   |       | 73.6 |   | 12.7 |   |
|                                                                                                |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Gain on acquisition of controlling interest                                                         |       | 1.3                                                                    |       | —                                                                |       | 1.3 |   | — |   |
|                                                                                                |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net income (loss)                                                                                   |       | (4.7                                                                   | )          | (0.1                                                                  | )          | (17.7 | ) | 3.8 |   |
|                                                                                                |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Net loss attributable to noncontrolling interests                                                   |       | 1.3                                                                    |       | 0.1                                                                   |       | 3.8 |   | 0.1 |   |
| Net income (loss) attributable to consolidated  BHMP CO-JVs                                         |       | $                                                                      | (3.4       | )                                                                     | $          | (0.2 | ) | $ | (13.9 | ) | $ | 3.9 |   |
|                                                                                                |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Our share of equity in earnings (loss) of  investments in unconsolidated real estate joint ventures |       | $                                                                      | (2.1       | )                                                                     | $          | (0.1 | ) | $ | (8.0 | ) | $ | 2.1 |   |

 

Thefollowing presents the reconciliation between our member’s equity interest inthe combined BHMP CO-JVs and our total investments in unconsolidated realestate joint ventures (amounts in millions):

 
| ** **                                                | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|-----------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Balance of our member’s equity in the BHMP CO-JVs    |       | $                            | 316.6      |                        | $          | 268.5 |   |
| Other capitalized costs, net of amortization              |       | 10.0                         |       | 11.4                        |       |
| Investments in unconsolidated real estate joint  ventures |       | $                            | 326.6      |                        | $          | 279.9 |   |

 

Includedin the combined financial data are certain notes receivable from PropertyEntities to BHMP CO-JVs in various stages of lease up.  All note receivable advances have reachedtheir required maximum funding amounts. Generally for each of the notes receivable included in the combinedfinancial data, the BHMP CO-JVs acquired options to purchase a certainpercentage ownership interest in the Property Entity, or to convert the notesreceivable into equity interests in the Property Entities. Options aregenerally exercisable during defined periods after project completion.  Below are the BHMP CO-JVs’ notes receivablefrom the Property Entities that are included in the combined financial data(amounts in millions):

 
| ** **                                     | ** ** | **Carrying Amount**     | ** ** | **Fixed**                   | ** ** | ** **         | ** ** | **Option Period** | ** ** |
|------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|--------------------|------------|------------------------|------------|
| **Name of Underlying Property** | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** | **Interest  Rate** | ** ** | **Maturity Date** | ** ** | **Commencement  After Completion** | ** ** |
| Grand Reserve                                  |       | $                            | 7.5        |                        | $          | 7.5                |       | 10.0                   | %          | April 2012 |   | N/A (a) |   |
| The Cameron                                    |       | 19.3                         |       | 19.3                        |       | 9.5                | %          | December 2012     |       | 90 days |   |
| Total BHMP CO-JV Notes                         |       | 26.8                         |       | 26.8                        |       |               |       |                   |       |   |   |
| Less: Deferred Financing Fees                  |       | (1.0                         | )          | (1.4                        | )          |               |       |                   |       |   |   |
| Net BHMP CO-JV Notes                           |       | $                            | 25.8       |                        | $          | 25.4               |       |                   |       |   |   |   |   |

 

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(a) Pursuantto the terms of the option agreement, the BHMP CO-JV exercised its right toterminate the option agreement on May 18, 2010.

 

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Inthe combined financial data, the notes receivable and notes payable between theBHMP CO-JVs and their Property Entities in which the BHMP CO-JVs have equityinterests are eliminated.  For thesenotes, all advances have reached their required maximum funding amounts. Inconnection with each of these notes receivable or their equity investment, theBHMP CO-JVs acquired options to purchase a certain percentage ownershipinterest in the Property Entity, or to convert the notes receivable into equityinterests in the Property Entities. Options are generally exercisable duringdefined periods after project completion. Below are the eliminated BHMP CO-JVs’notes receivable (amounts in millions):

 
| ** **                                                   | ** ** | **Carrying Amount**     | ** ** | **Fixed**                   | ** ** | ** **         | ** ** | **Option Period** | ** ** |
|--------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|--------------------|------------|------------------------|------------|
| **Name of Underlying Property**               | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** | **Interest  Rate** | ** ** | **Maturity Date** | ** ** | **Commencement  After Completion** | ** ** |
| Satori                                                       |       | $                            | 14.8       |                        | $          | 14.8               |       | 10.0                   | %          | October 2012 |   | 90 days |   |
| Skye 2905                                                    |       | 14.8                         |       | 14.8                        |       | 10.0               | %          | April 2013        |       | 90 days |   |
| Veritas                                                      |       | 21.0                         |       | 21.0                        |       | 13.0               | %          | December 2013     |       | 90 days |   |
| The Venue (a)                                                |       | —                       |       | 5.8                         |       |               | (a)        | (a)                    |       | (a) |   |
| Total BHMP CO-JV Notes Receivable Eliminated in  Combination |       | $                            | 50.6       |                        | $          | 56.4               |       |                   |       |   |   |   |   |

 

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(a) Effectivein August 2010, the $5.8 million note receivable was converted into acontrolling equity interest in the Property Entity.  The converted note receivable had a fixedinterest rate of 10.0% and a maturity date of June 2013.

 

Asof September 30, 2010 and December 31, 2009, BHMP CO-JVs are alsosubject to senior mortgage loans payable as described in the following table.These loans are senior to the equity investments by the BHMP CO-JVs.  The lenders for these mortgage loans payablehave no recourse to us or the applicable BHMP CO-JV other than carve-outguarantees for certain matters such as environmental conditions, misuse offunds and material misrepresentations. These mortgage loan payables are referredto as BHMP CO-JV level mortgage loans payable (amounts in millions):

 
| ** **                                                           | ** ** | **Carrying Amount**     | ** ** | ** **                  | ** ** | ** **             | ** ** |
|----------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|------------------------|------------|
| **BHMP CO-JV Level Mortgage Loans Payable** | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** | **Interest Rate** | ** ** | **Maturity Date** | ** ** |
| Waterford Place                                                      |       | $                            | 59.2       |                        | $          | 60.1                   |       | 4.83% - Fixed |   | May 2013 |   |
| 4550 Cherry Creek                                                    |       | 28.6                         |       | —                      |       | 4.23% - Fixed          |       | March 2015 |   |
| Calypso Apartments and Lofts                                         |       | 24.0                         |       | —                      |       | 4.21% - Fixed          |       | March 2015 |   |
| 7166 at Belmar                                                       |       | 22.8                         |       | —                      |       | 4.11% - Fixed          |       | June 2015 |   |
| Burrough’s Mill Apartment Homes                                 |       | 26.0                         |       | 26.0                        |       | 5.29% - Fixed          |       | October 2016 |   |
| Fitzhugh Urban Flats                                                 |       | 28.0                         |       | —                      |       | 4.35% - Fixed          |       | August 2017 |   |
| The Eclipse                                                          |       | 20.8                         |       | —                      |       | 4.46% - Fixed          |       | September 2017 |   |
| Briar Forest Lofts                                                   |       | 21.0                         |       | —                      |       | 4.46% - Fixed          |       | September 2017 |   |
| Tupelo Alley                                                         |       | 19.3                         |       | —                      |       | 3.58% - Fixed          |       | October 2017 |   |
| Forty55 Lofts                                                        |       | 25.5                         |       | —                      |       | 3.90% - Fixed          |       | October 2020 |   |
| Halstead (a)                                                         |       | —                       |       | 24.0                        |       | (a)                    |       | (a) |   |
| Total                                                                |       | $                            | 275.2      |                        | $          | 110.1                  |       |   |   |   |   |

 

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(a) InSeptember 2010, the Halstead BHMP CO-JV prepaid the outstanding loanbalance of $24.0 million without penalty. Subsequent to September 30,2010, the Halstead BHMP CO-JV closed on a new $15.7 million mortgage, with afixed interest rate of 3.79% and a maturity date of September 2017.

 

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Asof September 30, 2010 and December 31, 2009, Property Entities aresubject to senior construction and mortgage loans payable as described in thefollowing table. These loans are senior to any equity or debt investments by theBHMP CO-JVs.  The lenders for these loanshave no recourse to us or the BHMP CO-JVs with recourse only to the applicableProperty Entities and with respect to Satori, Skye 2905, and Veritas toaffiliates of the project developers that have provided completion andrepayment guarantees.  These loanspayable are referred to as Property Entity level construction and mortgageloans payable (amounts in millions and monthly LIBOR at September 30, 2010was 0.26%):

 
| ** **                                                                                       | ** ** | **Carrying Amount**     | ** ** | ** **                  | ** ** | ** **              | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|-------------------------|------------|
| **Property Entity Level Construction and  Mortgage Loans Payable** | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** | **Interest Rate**  | ** ** | **Maturity Date** | ** ** |
| Satori (a)                                                                                       |       | $                            | 71.9       |                        | $          | 69.4                    |       | Monthly LIBOR + 140 bps |   | October 2010 (b) |   |
| Skye 2905 (a)                                                                                    |       | 63.8                         |       | 42.2                        |       | Monthly LIBOR + 195 bps |       | May 2011 |   |
| Bailey’s Crossing (a)                                                                       |       | 69.8                         |       | 61.1                        |       | Monthly LIBOR + 275 bps |       | November 2011 |   |
| The Venue (c)                                                                                    |       | —                       |       | 19.2                        |       | (c)                     |       | (c) |   |
| Veritas (a)                                                                                      |       | 32.8                         |       | 16.7                        |       | Monthly LIBOR + 275 bps |       | December 2012 |   |
| The Reserve at Johns Creek Walk                                                                  |       | 23.0                         |       | 23.0                        |       | 6.46% - Fixed           |       | March 2013 |   |
| 55 Hundred (a)                                                                                   |       | 52.7                         |       | 52.7                        |       | Monthly LIBOR + 300 bps |       | November 2013 |   |
| Total                                                                                            |       | $                            | 314.0      |                        | $          | 284.3                   |       |   |   |   |   |

 

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(a)   Each of theseProperty Entity level construction loans are used to fund development projectsand are drawn as construction costs are incurred.  The aggregate total commitment, if fullyfunded, is $310.4 million.  Eachconstruction loan has provisions allowing for prepayment at par and extensions,generally two, one-year options if certain operational performance levels havebeen achieved as of the maturity date. An extension fee, generally 0.25% of the total loan balance, is requiredfor each extension.

 

(b)   Subsequent to September 30,2010, the construction loan maturity date was extended to October 2011.

 

(c)   In connectionwith the BHMP CO-JV’s acquisition of the remaining ownership interests from anunaffiliated third party, the construction loan with a principal balance of$19.7 million was paid of in full with a final payment of $17.9 million.

 

Asof September 30, 2010, approximately $936.1 million of the net carryingvalue of land, buildings and improvements and construction in progresscollateralized the combined BHMP CO-JV level and Property Entity levelconstruction and mortgage loans payable.

 

InDecember 2009, Fairfield Residential LLC, a real estate operating company,(“Fairfield Residential”) and certain of its affiliates filed for voluntarybankruptcy.  Certain other affiliates ofFairfield Residential that serve as the general partner for The Cameron andcurrent limited partners of Bailey’s Crossing and 55 Hundred were not part ofthe bankruptcy filing (the “Fairfield Projects”).  The Bailey’s Crossing, 55 Hundred and TheCameron Property Entities were also not a part of the bankruptcy filing. TheBailey’s Crossing and 55 Hundred Property Entity restructurings andrecapitalizations were completed prior to Fairfield Residential’s bankruptcyand were not affected by the bankruptcy filing. With regard to The CameronProperty Entity, The Cameron BHMP CO-JV investment is only as a lender with a$19.3 million note receivable.  Our shareof the note receivable is approximately $10.6 million.

 

Inconnection with the note receivable made by The Cameron BHMP CO-JV to TheCameron Property Entity, Fairfield Residential provided The Cameron BHMP CO-JVwith a completion guarantee. In addition, Fairfield Residential provided thesenior construction lender a repayment guarantee and a completion guarantee forthe senior construction loan. Fairfield Residential’s bankruptcy gave rise toan event of default under The Cameron senior construction loan agreement.  As a result, The Cameron senior constructionlender and in turn The Cameron BHMP CO-JV gave default notices to The CameronProperty Entity in 2009.  During 2010,Fairfield Residential and certain of its affiliates emerged from bankruptcy asFairfield Residential Company LLC.  TheCameron completion guarantee received by The Cameron BHMP CO-JV was part of thebankruptcy estate of Fairfield Residential and was assigned to a class ofunsecured creditors.  Through September 30,2010, The Cameron BHMP CO-JV has not made any claims, although it has preservedits rights to do so.

 

Althoughoperating under an event of default, through September 2010, the seniorconstruction lender has continued to fund construction draws.  In October 2010, the senior lender gavenotice that the interest rate would be reset to the default rate, retroactiveto December 2009.  In turn, TheCameron BHMP CO-JV gave notice that the interest rate on its note receivablewould be reset to the 

 

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defaultrate, retroactive to December 2009. The default rate of The Cameron BHMP CO-JV’s note receivable is 13%,compared to the regular rate of 9.5%. As of November 15, 2010, The CameronProperty Entity has not paid either the senior lender or The Cameron BHMP CO-JVdefault interest.

 

TheCameron BHMP CO-JV is currently in discussions with the senior lender and theowners of The Cameron Property Entity to restructure The Cameron PropertyEntity or cure the senior construction loan default and the BHMP CO-JV notereceivable default.  If The CameronProperty Entity does not cure the default, we expect to have an opportunity to (i) curethe default, (ii) purchase the senior construction loan (iii) forecloseon the property, (iv) acquire the 100% or partial ownership interest inThe Cameron Property Entity or (v) otherwise negotiate a solutionacceptable to the senior construction lender. However, there is no assurance that we would be able to restructure thesenior construction loan including associated guarantees on terms that areacceptable to The Cameron Property Entity owners and the Cameron BHMPCO-JV.  Such restructuring could includea pay down of the senior construction loan by The Cameron Property Entityand/or the BHMP CO-JV, which could result in a capital contribution by us toThe Cameron BHMP CO-JV.  In addition, thesenior construction lender’s exercise of default remedies or the results of anyrestructuring negotiations may change our analysis of the accounting for theinvestment, which could result in The Cameron BHMP CO-JV accounting for theinvestment as a joint venture, or if The Cameron BHMP CO-JV is viewed as the primarybeneficiary, to consolidate the investment. However, we believe we havesufficient collateral, contractual remedies and other creditor rights for TheCameron BHMP CO-JV to recover the carrying value of its note receivable to TheCameron Property Entity.

 

Asof September 30, 2010, management’s assessment related to The Cameron BHMPCO-JV is that the loan investment is still properly accounted for as aloan.  The continuation of thisaccounting treatment is dependent on the resolution of the issues describedabove, and there can be no assurance as new facts and circumstances arise thatdifferent accounting would not be required. A change in accounting could affectour recognition of earnings in future periods.

 

**6.****            ****LeasingActivity**

 

Futureminimum base rental payments due to us under non-cancelable leases in effect asof September 30, 2010 for our wholly owned multifamily communities are asfollows (in millions):

 
| ** **                                          | ** ** | **Future Minimum  Lease Payments** | ** ** |
|-----------------------------------------------------|------------|----------------------------------------------|------------|
| October 1, 2010 –  December 31, 2010 |       | $                                            | 0.5        |   |
| 2011                                                |       | 2.1                                          |       |
| 2012                                                |       | 2.1                                          |       |
| 2013                                                |       | 2.1                                          |       |
| 2014                                                |       | 2.1                                          |       |
| Thereafter                                          |       | 28.6                                         |       |
| Total                                               |       | $                                            | 37.5       |   |

 

 

Thefuture minimum lease payments in the above table relate solely to retailleases.

 

**7.****            ****MortgageLoans Payable**

 

Thefollowing presents the carrying amounts of the mortgage loans payable as of September 30,2010 and December 31, 2009 (amounts in millions).

 
| **Mortgage Loans Payable** | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** | **Loan Type** | ** ** | **Interest Rate** | ** ** | **Maturity Date** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|--------------------|------------|------------------------|------------|------------------------|------------|
| Acacia on Santa Rosa Creek           |       | $                            | 26.4       |                        | $          | —             |       | Principal and interest |       | 4.63% - fixed          |       | May 2013 |   |
| The Gallery at NoHo Commons          |       | 51.3                         |       | 51.3                        |       | Interest-only      |       | 4.72% - fixed          |       | November 2016     |       |
| Mariposa Loft Apartments             |       | 15.8                         |       | —                      |       | Interest-only      |       | 5.21% - fixed          |       | March 2017        |       |
| Total                                |       | $                            | 93.5       |                        | $          | 51.3               |       |                   |       |                   |       |   |   |

 

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Asof September 30, 2010, $168.0 million of the net carrying value of realestate collateralized the mortgage loans payable.

 

Contractualprincipal payments for the remainder of 2010 and each of the four subsequentyears thereafter are as follows (in millions):

 
| October 1, 2010 –  December 31, 2010 |   | $      | 0.1    |   |
|-----------------------------------------------------|--------|--------|--------|--------|
| 2011                                                |   | 0.6    |   |
| 2012                                                |   | 0.6    |   |
| 2013                                                |   | 25.1   |   |
| 2014                                                |   | — |   |
| Thereafter                                          |   | 67.1   |   |
| Total                                               |   | $      | 93.5   |   |

 

**8.****            ****CreditFacility Payable**

 

OnMarch 26, 2010, we closed on a $150.0 million credit facility.  The credit facility matures on April 1,2017, when all unpaid principal and interest is due.  Borrowing tranches under the credit facilitybear interest at a “base rate” based on either the one-month or three-monthLIBOR rate, selected at our option, plus an applicable margin which adjustsbased on the facility’s debt service requirements. As of September 30,2010, the applicable margin was 2.08% and the base rate was 2.34% based on one-monthLIBOR.  The credit facility also providesfor fees based on unutilized amounts and minimum usage.  The unused facility fee is equal to 1% perannum of the total commitment less the greater of 75% of the total commitmentor the actual amount outstanding. The minimum usage fee is equal to 75% of thetotal credit facility times the lowest applicable margin less the marginportion of interest paid during the calculation period.  The loan requires monthly interest-onlypayments and monthly or annual payment of fees. We may prepay borrowing tranches at the expiration of the LIBOR interestrate period without any penalty. Prepayments during a LIBOR interest rate period are subject to aprepayment penalty generally equal to the interest due for the remaining termof the LIBOR interest rate period.

 

Drawsunder the credit facility are secured by a pool of certain multifamilycommunities directly owned by our wholly owned subsidiaries, where we may addand remove multifamily communities from the collateral pool in compliance withthe requirements under the credit facility agreement.   As of September 30, 2010, $241.8million of the net carrying value of real estate collateralized the creditfacility.   The aggregate borrowingsunder the credit facility are limited to 70% of the value of the collateralpool, which may be different than the carrying value for financial statementreporting.  As of September 30,2010, available but undrawn amounts under the credit facility are approximately$107 million.

 

Thecredit facility agreement contains customary provisions with respect to eventsof default, covenants and borrowing conditions. In particular, the credit facility agreement requires us to maintainconsolidated net worth of at least $150.0 million, liquidity of at least $15.0million and net operating income of the collateral pool to be no less than 155%of the facility debt service cost. Certain prepayments may be required upon abreech of covenants or borrowing conditions. We believe we are in compliance with all provisions as of September 30,2010.

 

**9.****            ****Stockholders’Equity**

 

***Capitalization***

 

Asof September 30, 2010 and December 31, 2009, we had 94,811,198 and57,098,265 shares of common stock outstanding, respectively, including 6,000shares of restricted stock issued to our independent directors for no cash, and24,969 shares issued to Behringer Harvard Holdings, LLC for cash ofapproximately $0.2 million.

 

Asof September 30, 2010 and December 31, 2009, we had 1,000 shares ofconvertible stock owned by our Advisor issued for cash of $1,000.  The convertible stock has no voting rights,other than for certain limited exceptions, and prior to conversion, does notparticipate in any earnings or distributions. The convertible stock generally is convertible into shares of commonstock with a value equal to 15% of the amount by which (i) our enterprisevalue at the time of conversion, including the total amount of distributionspaid to our stockholders, exceeds (ii) the sum of the aggregate capitalinvested by our stockholders plus a 7% cumulative, non-compounded, annualreturn on such capital at the time of conversion, on a cash-on-cash basis.  The convertible stock can be converted whenthe excess value described above is achieved and distributed to stockholders orour common stock is listed on a national securities exchange.  The conversion may also be prorated in theevent of a termination or non-renewal of the Advisory 

 

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ManagementAgreement (defined below) other than for cause. Management has determined thatthe requirements for conversion have not been met as of September 30,2010.  Management reviewed the terms ofthe underlying convertible stock and determined the fair value approximated thenominal value paid for the shares at issuance.

 

Asof September 30, 2010 and December 31, 2009, we had no shares ofpreferred stock issued and outstanding. Our board of directors has no presentplans to issue preferred stock but may do so with terms established at itsdiscretion and at any time in the future without stockholder approval.

 

***Share Redemption Program***

 

Ourboard of directors has authorized a share redemption program for stockholderswho have held their shares for more than one year, subject to the significantconditions and limitations of the program. Under the share redemption program, the per share redemption price willgenerally equal 90% of the most recently disclosed estimated value per share asdetermined in accordance with our valuation policy.**Redemptionsare limited to no more than 5% of the weighted average of shares outstandingduring the preceding twelve month period immediately prior to the date ofredemption.  In addition, redemptions aregenerally limited to the proceeds from our DRIP during the period consisting ofthe preceding four fiscal quarters for which financial statements areavailable, less any cash already used for redemptions during the same period,plus, if we had positive cash flows from operating activities during suchpreceding four fiscal quarters, 1% of all such cash flows during such precedingfour fiscal quarters.

 

Forthe nine months ended September 30, 2010, our board of directors approved theredemption of 1,215,647 million shares of common stock for approximately $10.5million.  For the nine months ended September 30,2009, we redeemed 235,340 shares of common stock for approximately $1.9million.  As of September 30, 2010,we had approximately $5.7 million of redemptions authorized but unpaid.  As of December 31, 2009, we did not haveany unpaid redemptions.

 

***Distributions***

 

Wepaid our first distribution effective July 1, 2007.

 

Distributions, includingdistributions paid by issuing shares under the DRIP, for the nine months ended September 30,2010 and for the year ended December 31, 2009 were as follows (amounts inmillions):

 
| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2010**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
| Third Quarter  |       | $                 | 15.3       |   | $ | 15.6 |   |
| Second Quarter |       | 13.9              |       | 13.1 |   |
| First Quarter  |       | 11.1              |       | 10.2 |   |
| Total          |       | $                 | 40.3       |   | $ | 38.9 |   |
|           |       |              |       |   |   |
| **2009**       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $                 | 8.7        |   | $ | 7.8 |   |
| Third Quarter  |       | 6.5               |       | 5.9 |   |
| Second Quarter |       | 4.6               |       | 4.1 |   |
| First Quarter  |       | 2.9               |       | 2.5 |   |
| Total          |       | $                 | 22.7       |   | $ | 20.3 |   |

 

Ourboard of directors have declared distributions at a daily amount of $0.0016438per share of common stock, an annualized rate of 6%, beginning in the month of September 2010through the fourth quarter 2010.  Wecalculate the annualized rate as if the shares were outstanding for a full yearbased on a $10 per share price.

 

**10.****         ****Commitmentsand Contingencies**

 

Each of the BHMP CO-JV equity investments that include unaffiliatedthird-party partners also includes buy/sell provisions.  Under these provisions and during specificperiods, a partner could make an offer to purchase the interest of the otherpartner and the other partner would have the option to accept the offer orpurchase the offering partner’s interest at that price.  As of September 30, 2010, no such offersare outstanding.

 

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The Bailey’s Crossing and The Cameron BHMP CO-JVs may become separatelyobligated to purchase a limited partnership interest in the related PropertyEntity at a price set through an appraisal process if the limited partner wasto exercise its rights to put its interests to the BHMP CO-JVs. The obligationsare for defined periods ranging from one to three years.  As the prices would be based on future eventsand valuations, we are not able to estimate this amount if exercised; howeverthe limited partners’ combined invested capital as of September 30, 2010is approximately $22.1 million.  Based onthis value, our combined share of these BHMP CO-JV obligations would beapproximately $12.2 million.

 

In the ordinary course of business, the multifamily communities inwhich we have investments may have commitments to provide affordable housing.Under these arrangements, we generally receive from the resident a below marketrent, which is determined by a local or national authority. In certainarrangements, a local or national housing authority makes payments coveringsome or substantially all of the difference between the restricted rent paid byresidents and market rents. In connection with our acquisition of The Galleryat NoHo Commons, we assumed an obligation to provide affordable housing through2048. As partial reimbursement for this obligation, the housing authority willmake level annual payments of approximately $2.0 million through 2028 and noreimbursement for the remaining 20-year period. We may also be required toreimburse the housing authority if certain operating results are achieved on acumulative basis during the term of the agreement. At the acquisition, werecorded a liability of $14.0 million based on the fair value of the terms overthe life of the agreement.  In addition,we will record rental revenue from the housing authority on a straight linebasis, recognizing a portion of the collections as deferred lease revenues andother related liabilities. As of September 30, 2010 and December 31,2009, we have approximately $16.2 million and $15.2 million, respectively, ofcarrying value for deferred lease revenues and other related liabilities.

 

**11.****         ****Related Party Arrangements**

 

Wehave no employees and are supported by related party service agreements.  We are dependent on our Advisor, BehringerSecurities LP (“Behringer Securities”), Behringer Harvard MultifamilyManagement Services, LLC (“BHM Management”) and their affiliates for certainservices that are essential to us, including the sale of shares of our commonstock, asset acquisition and disposition decisions, property management andleasing services and other general administrative responsibilities. In theevent that these companies become unable to provide us with the respectiveservices, we would be required to obtain such services from other sources.

 

These services are providedthrough our advisory management agreement (the “Advisory Management Agreement”),as it has been amended and restated, and may be renewed for an unlimited numberof successive one-year terms.  Thecurrent term of the Advisory Management Agreement expires on July 1,2011.  The board of directors has a dutyto evaluate the performance of our Advisor annually before the parties canagree to renew the Advisory Management Agreement.

 

Subjectto the deferral described below, we are required to reimburse the Advisor fororganization and offering expenses related to a public offering of shares(other than pursuant to a distribution reinvestment plan) and any organizationand offering expenses previously advanced by the Advisor related to a prioroffering of shares to the extent not previously reimbursed by us out of proceedsfrom the prior offering (“O&O Reimbursement”). However, the Advisor isobligated to reimburse us after the completion of the public offering to theextent that O&O Reimbursement paid by the Company exceeds 1.5% of the grossproceeds of the completed public offering. The Company’s reimbursement oforganization and offering expenses related to subsequent public offerings ofshares also will not be capped as of the date of reimbursement, unless theterms are amended by the parties upon renewal of the Advisory ManagementAgreement. In April 2009, in connection with an amendment to the AdvisoryManagement Agreement, a payment of $6.9 million was made to the Advisor forprior O&O Reimbursement incurred but not previously paid. For the threemonths ended September 30, 2010 and 2009, we incurred O&OReimbursement of approximately $1.4 million and $2.3 million,respectively.  For the nine months ended September 30,2010 and 2009, we incurred O&O Reimbursement of approximately $6.4 millionand $6.6 million, respectively.  As of September 30,2010, the amount by which our O&O Reimbursement exceeded 1.5% of the grossproceeds of our Initial Public Offering was approximately $10.4 million.

 

InNovember 2010, the Advisor agreed to defer payment of the O&OReimbursement until no later than March 31, 2011. As of September 30,2010, $2.7 million of O&O Reimbursement was accrued and unpaid.

 

BehringerSecurities serves as the dealer manager for the Initial Public Offering andreceives selling commissions of up to 7% of gross offering proceeds beforereallowance of commissions earned by participating broker-dealers.  Inconnection with the Initial Public Offering, up to 2.5% of gross proceedsbefore reallowance to participating broker-dealers are paid to Behringer 

 

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Securitiesas a dealer manager fee. No selling commissions or dealer manager fee is paidon purchases made pursuant to our DRIP.  In the Initial Public Offering,Behringer Securities reallows all of its commissions to participatingbroker-dealers and reallows a portion of its dealer manager fee of up to 2.0%of the gross offering proceeds to be paid to such participating broker-dealers;provided, however, that Behringer Securities may reallow, in the aggregate, nomore than 1.5% of gross offering proceeds for marketing fees and expenses, bonafide training and educational meetings and non-itemized, non-invoiced duediligence efforts, and no more than 0.5% of gross offering proceeds for bonafide, separately invoiced due diligence expenses incurred as fees, costs andother expenses from third parties.

 

Thefollowing presents the components of our sale of common stock, net related toour Initial Public Offering (amounts in millions):

 
| ** **                              | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **Sale of common stock** | ** ** | **2010**                                                               | ** ** | **2009**                                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Gross proceeds                          |       | $                                                                      | 78.2       |                                                                  | $          | 98.6 |   | $ | 366.5 |   | $ | 263.4 |   |
| Less offering costs:                    |       |                                                                   |       |                                                                  |       |   |   |   |   |
| O&O Reimbursement                   |       | (1.4                                                                   | )          | (2.3                                                                  | )          | (6.4 | ) | (6.6 | ) |
| Dealer manager fees                     |       | (2.0                                                                   | )          | (2.5                                                                  | )          | (9.2 | ) | (6.6 | ) |
| Selling commissions                     |       | (5.2                                                                   | )          | (6.8                                                                  | )          | (24.5 | ) | (18.1 | ) |
| Total offering costs                    |       | (8.6                                                                   | )          | (11.6                                                                 | )          | (40.1 | ) | (31.3 | ) |
| Sale of common stock, net               |       | $                                                                      | 69.6       |                                                                  | $          | 87.0 |   | $ | 326.4 |   | $ | 232.1 |   |

 

OurAdvisor and its affiliates receive acquisition and advisory fees of 1.75% of(i) the contract purchase price paid or allocated in respect of thedevelopment, construction or improvement of each asset acquired directly by us,including any debt attributable to these assets, or (ii) when we make aninvestment indirectly through another entity, our pro rata share of the grossasset value of real estate investments held by that entity. Our Advisor and itsaffiliates also receive 1.75% of the funds advanced in respect of a loan orother investment.

 

OurAdvisor receives a non-accountable acquisition expense reimbursement in theamount of 0.25% of (i) funds advanced in respect of a loan or otherinvestment, and (ii) the funds paid for purchasing an asset, including anydebt attributable to the asset, plus 0.25% of the funds budgeted fordevelopment, construction or improvement in the case of assets that we acquireand intend to develop, construct or improve. We will also pay third parties, orreimburse the Advisor, for any investment-related expenses due to third partiesin the case of a completed investment, including, but not limited to, legalfees and expenses, travel and communication expenses, costs of appraisals,accounting fees and expenses, third-party brokerage or finder’s fees, titleinsurance, premium expenses and other closing costs.  In addition, to the extent our Advisor or itsaffiliates directly provide services formerly provided or usually provided bythird parties, including without limitation accounting services related to thepreparation of audits required by the SEC, property condition reports, titleservices, title insurance, insurance brokerage or environmental servicesrelated to the preparation of environmental assessments in connection with acompleted investment, the direct employee costs and burden to our Advisor ofproviding these services are acquisition expenses for which we reimburse ourAdvisor. In addition, acquisition expenses for which we reimburse our Advisorinclude any payments made to (i) a prospective seller of an asset, (ii) anagent of a prospective seller of an asset, or (iii) a party that has theright to control the sale of an asset intended for investment by us that arenot refundable and that are not ultimately applied against the purchase pricefor such asset. Except as described above with respect to services customarilyor previously provided by third parties, our Advisor is responsible for payingall of the expenses it incurs associated with persons employed by the Advisorto the extent dedicated to making investments for us, such as wages andbenefits of the investment personnel. Our Advisor is also responsible forpaying all of the investment-related expenses that we or our Advisor incursthat are due to third parties or related to the additional services provided byour Advisor as described above with respect to investments we do not make,other than certain non-refundable payments made in connection with anyacquisition.

 

Forthe three months ended September 30, 2010 and 2009, our Advisor earnedacquisition and advisory fees, including the 0.25% non-accountable acquisitionexpense reimbursement, of approximately $2.4 million and $4.3 million,respectively. For the nine months ended September 30, 2010 and 2009, ourAdvisor earned acquisition and advisory fees, including the 0.25%non-accountable acquisition expense reimbursement, of approximately $8.8million and $4.7 million, respectively. For the three months ended September 30,2010, no acquisition and advisory fees were capitalized.  For the three months ended September 30,2009, $1.8 million was capitalized to investments in unconsolidated real estatejoint ventures.   For the nine monthsended September 30, 2010 and 2009, $2.5 million and $2.2 million,respectively, were capitalized to investments in unconsolidated real estatejoint ventures.

 

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OurAdvisor receives debt financing fees of 1% of the amount available to us underdebt financing which was originated, assumed or refinanced by or for us. OurAdvisor may pay some or all of these fees to third parties with whom itsubcontracts to coordinate financing for us. For the three months ended September 30,2010 and 2009, our Advisor has earned debt financing fees of approximately $0.5million and $0.4 million, respectively. For the nine months ended September 30, 2010 and 2009, our Advisorhas earned debt financing fees of approximately $2.6 million and $0.6 million,respectively.

 

On November 22, 2010,our property management agreement (the “Property Management Agreement”) withour operating partnership and our property manager, BHM Management, willautomatically renew for an additional two-year term. The Property ManagementAgreement will terminate on November 21, 2012. If no party gives writtennotice of termination to the other parties at least thirty days prior to theexpiration date of the agreement, then it will automatically continue forconsecutive two-year periods. The Property Management Agreement also providesthat, in the event we terminate the advisory management agreement with ourAdvisor, BHM Management will have the right to terminate the agreement upon atleast thirty days prior written notice.

 

Propertymanagement fees are equal to 3.75% of gross revenues.  In the event that we contract directly with anon-affiliated third-party property manager in respect to a property, we willpay BHM Management or its affiliates an oversight fee equal to 0.5% of grossrevenues of the property managed.  In noevent will we pay both a property management fee and an oversight fee to BHMManagement or its affiliates with respect to a particular property. We willreimburse the costs and expenses incurred by BHM Management on our behalf,including fees and expenses of apartment locators and third-party accountants,the wages and salaries and other employee-related expenses of all on-siteemployees of BHM Management and other out-of-pocket expenses that are directlyrelated to the management of specific properties.

 

TheProperty Management Agreement applies where we have control over the selectionof property management.  As of September 30,2010, 24 multifamily communities, including BHMP CO-JVs, were subject to theProperty Management Agreement.  For thethree and nine months ended September 30, 2010, BHM Management or itsaffiliates earned property management fees of $0.2 million and $0.4 million, respectively.   For the three and nine months ended September 30,2009, BHM Management or its affiliates earned minimal property managementfees.   For all other multifamilycommunities, the unaffiliated third-party partner has selected the propertymanager or the property is still in development.

 

OurAdvisor receives a monthly asset management fee for each asset held by us.Through June 30, 2010, this amount was one-twelfth of 0.75% of the higherof the total cost of the investment or value of the investment.  Effective July 1, 2010, the AdvisoryManagement Agreement was amended and restated changing the fees associated withasset management.  As modified, ratherthan being a monthly fee equal to one-twelfth of 0.75% of the sum of the higherof the cost or value of our assets, effective July 1, 2010, the assetmanagement fee will be a monthly fee equal to one-twelfth of the “ApplicableAsset Management Fee Percentage” of the sum of the higher of the cost or valueof such assets.  The Applicable AssetManagement Fee Percentage starting July 1, 2010 will initially be 0.50%,reduced from 0.75% prior to that time. The percentage will increase to 0.75%following two consecutive fiscal quarters during which our Modified Funds FromOperations (“MFFO” as defined below) per share of common stock equals orexceeds $0.12. The percentage will increase further to 1.0% following twoconsecutive fiscal quarters during which our MFFO for each such fiscal quarterequals or exceeds $0.15.  Finally, thepercentage will return to 0.75% upon the first day following the fiscal quarterduring which our Advisor has, since July 1, 2010, earned asset managementfees equal to the amount of asset management fees our Advisor would have earnedif the Applicable Asset Management Fee Percentage had been 0.75% every daysince July 1, 2010. Once the Applicable Asset Management Fee Percentageincreases above the 0.50% described above, it will not decrease during the termof the agreement, except as described, regardless of our MFFO in any subsequentperiod. In no event will our Advisor receive more than the asset management feeat the 0.75% rate originally contracted for. As used above, MFFO means, with respect to any fiscal quarter, our fundsfrom operations, or FFO (as defined by the National Association of Real EstateInvestment Trusts), during such quarter, plus acquisition expenses, impairmentcharges and adjustments to fair value for derivatives not qualifying for hedgeaccounting during such quarter. However, if a trade or industry group promulgatesa different definition of MFFO applicable to listed or non-listed REITs that weadopt in our periodic reports filed with the SEC, MFFO will have the meaning ofsuch different definition.  For the threemonths ended September 30, 2010 and 2009, our Advisor earned assetmanagement fees of approximately $1.0 million and $0.5 million,respectively.  For the nine months ended September 30,2010 and 2009, our Advisor earned asset management fees of approximately $3.7million and $1.0 million, respectively.

 

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Wewill pay a development fee to our Advisor in an amount that is usual andcustomary for comparable services rendered to similar projects in thegeographic market of the project; provided, however, we will not pay adevelopment fee to an affiliate of our Advisor if our Advisor or any of itsaffiliates elects to receive an acquisition and advisory fee based on the costof such development. Our Advisor has earned no development fees since ourinception.

 

Forother expenses paid or incurred by our Advisor in connection with the servicesprovided to us that are not covered by a fee, we will reimburse our Advisor, subjectto the limitation that we will not reimburse our Advisor for any amount bywhich its operating expenses (including the asset management fee) at the end ofthe four preceding fiscal quarters exceeds the greater of: (i) 2% of ouraverage invested assets (as defined in our charter), or (ii) 25% of ournet income (as defined in our charter) determined without reduction for anyadditions to reserves for depreciation, bad debts or other similar non-cashreserves and excluding any gain from the sale of our assets for that period.Notwithstanding the above, we may reimburse our Advisor for expenses in excessof this limitation if a majority of our independent directors determines thatsuch excess expenses are justified based on unusual and non-recurring factors.

 

Aspart of our reimbursement of operating expenses, we reimburse our Advisor forany direct expenses and costs of salaries and benefits of persons employed byour Advisor performing advisory services for us, provided, however, that wewill not reimburse our Advisor for personnel employment costs incurred by ourAdvisor in performing services under the Advisory Management Agreement to theextent that the employees perform services for which the Advisor receives aseparate fee other than with respect to acquisition services formerly providedor usually provided by third parties.

 

Includedin general and administrative expenses are accounting and legal personnel costsincurred on our behalf by our Advisor for the three months ended September 30,2010 and 2009 of approximately $0.7 million and $0.3 million,respectively.  For the nine months ended September 30,2010 and 2009, such general and administrative expenses incurred areapproximately $1.8 million and $0.9 million, respectively.

 

**12.****         ****Supplemental Disclosures of CashFlow Information**

 

Supplementalcash flow information is summarized below (amounts in millions):

 
| ** **                                                         | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **2010**                                                              | ** ** | **2009** | ** ** |
| **Supplemental disclosure of cash  flow information:**             |       |                                                                  |       |   |   |
| Interest paid, net of amounts capitalized of $0.9  million in 2010 |       | $                                                                     | 2.5        |   | $ | — |   |
|                                                               |       |                                                                  |       |   |   |
| **Non-cash investing and  financing activities:**                  |       |                                                                  |       |   |   |
| Assumption of mortgage note payable                                |       | $                                                                     | 26.7       |   | $ | — |   |
| Stock issued pursuant to our DRIP                                  |       | $                                                                     | 18.8       |   | $ | 4.9 |   |
| Distributions payable                                              |       | $                                                                     | 4.6        |   | $ | 2.3 |   |
| Redemptions payable                                                |       | $                                                                     | 5.7        |   | $ | 0.7 |   |
| Accrued offering costs and dealer manager fees                     |       | $                                                                     | 2.7        |   | $ | 2.4 |   |

 

**13.****         ****SubsequentEvents**

 

***Status of the Offering***

 

Forthe period October 1, 2010 through October 31, 2010, we soldapproximately 2.6 million shares of common stock for gross proceeds ofapproximately $26.0 million including issuances through our DRIP.

 

***Distributions Paid***

 

OnOctober 1, 2010, we paid total distributions of approximately $4.6million, of which $2.1 million was funded with cash and $2.5 million was fundedby issuing shares pursuant to our DRIP, relating to distributions declared eachday in the month of September 2010. On November 2, 2010, we paidtotal distributions of approximately $4.9 million, of which $2.3 million wasfunded with cash and $2.6 million was funded by issuing shares pursuant to ourDRIP, relating to distributions declared each day in the month of October 2010.

 

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***Acquisitions and Financings of Real Estate***

 

OnOctober 7, 2010, we acquired a wholly owned multifamily community, locatedin Atlanta, Georgia, from an unaffiliated seller.  The purchase price was approximately $40.4million, excluding closing costs. Acquisition expenses of approximately $0.8million were recognized for the acquisition. No mortgage debt was assumed in the acquisition. Due to the timing ofthis acquisition, we are unable to provide the other acquisition disclosures orfinalize the acquisition allocations.

 

***Financings***

 

OnOctober 22, 2010, the Halstead BHMP CO-JV in which we hold a 55% ownershipinterest closed on a $15.7 million mortgage loan payable. The mortgage loanpayable bears interest at 3.79% and matures in September 2017. Themortgage loan payable is secured with BHMP CO-JV assets that as of September 30,2010 had a carrying value of approximately $27.3 million.

 

***Potential Acquisitions and Financings of RealEstate***

 

Subsequentto the quarter ended September 30, 2010, we entered into purchase and saleagreements for two multifamily communities for a total purchase price ofapproximately $80.9 million, excluding closing costs.  As of November 15, 2010, we have made atotal of $2.0 million in earnest money deposits on these multifamilycommunities.  If consummated, we expectthat the acquisitions would be made through wholly owned subsidiaries of ouroperating partnership or newly created BHMP CO-JVs. The consummation of eachpurchase remains subject to substantial conditions, including, but not limitedto, (i) the satisfaction of the conditions to the acquisition contained inthe relevant contracts; (ii) no material adverse change occurring relatingto the multifamily community or in the local economic conditions; (iii) ourreceipt of sufficient net proceeds from the Initial Public Offering andfinancing proceeds to make the acquisition; and (iv) our receipt ofsatisfactory due diligence information, including environmental reports andlease information.  Other investments maybe identified in the future that we may acquire before or instead of thesemultifamily communities.

 

*********

 

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

 

Thefollowing discussion and analysis should be read in conjunction with theaccompanying consolidated financial statements and the notes thereto.

 

**Forward-LookingStatements**

 

Certainstatements in this Quarterly Report on Form 10-Q constitute “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended (the “Securities Act”) and Section 21E of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”).  These forward-looking statements includediscussion and analysis of the financial condition of Behringer Harvard MultifamilyREIT I, Inc. and its subsidiaries (which may be referred to herein as the “Company,”“we,” “us” or “our”), including, but not limited to, our ability to makeaccretive investments, our ability to generate cash flow to supportdistributions to our stockholders, our ability to obtain favorable debtfinancing, our ability to secure leases at favorable rental rates, ourassessment of market rental rate trends, capital markets and othermatters.  Words such as “may,” “anticipates,”“expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “would,” “could,”“should” and variations of these words and similar expressions are intended toidentify forward-looking statements.

 

Theseforward-looking statements are not historical facts but reflect the intent,belief or current expectations of our management based on their knowledge andunderstanding of the business and industry, the economy and other futureconditions.  These statements are notguarantees of future performance, and we caution stockholders not to placeundue reliance on forward-looking statements. Actual results may differ materially from those expressed or forecastedin the forward-looking statements due to a variety of risks, uncertainties andother factors, including but not limited to the factors listed and describedunder Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-Kfiled with the Securities and Exchange Commission (the “SEC”) on March 31,2010 and in Part II, Item 1A of this Quarterly Report on Form 10-Q,and the factors described below:

 

·              market and economic challenges experienced by theU.S. economy or real estate industry as a whole and the local economicconditions in the markets in which our properties are located;

 

·              our ability to make accretive investments in adiversified portfolio of assets;

 

·              the availability of cash flow from operatingactivities for distributions;

 

·              our level of debt and the terms and limitationsimposed on us by our debt agreements;

 

·              the availability of credit generally, and anyfailure to obtain debt financing at favorable terms or a failure to satisfy theconditions and requirements of that debt;

 

·              our ability to secure resident leases at favorablerental rates;

 

·              our ability to raise capital through our initialpublic offering of shares of common stock and through joint venturearrangements;

 

·              our ability to retain our executive officers andother key personnel of our advisor, our property manager and their affiliates;

 

·              conflicts of interest arising out of ourrelationships with our advisor and its affiliates;

 

·              unfavorable changes in laws or regulations impactingour business or our assets; and

 

·              factors that could affect our ability to qualify asa real estate investment trust.

 

Forward-lookingstatements in this Quarterly Report on Form 10-Q reflect our management’sview only as of the date of this Report, and may ultimately prove to beincorrect or false.  We undertake noobligation to update or revise forward-looking statements to reflect changedassumptions, the occurrence of unanticipated events or changes to futureoperating results.  We intend for theseforward-looking statements to be covered by the applicable safe harborprovisions created by Section 27A of the Securities Act and Section 21Eof the Exchange Act.

 

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**CautionaryNote**

 

Therepresentations, warranties, and covenants made by us in any agreement filed asan exhibit to this Quarterly Report are made solely for the benefit of theparties to the agreement, including, in some cases, for the purpose ofallocating risk among the parties to the agreement, and should not be deemed tobe representations, warranties, or covenants to or with any otherparties.  Moreover, these representations, warranties or covenants shouldnot be relied upon as accurately describing or reflecting the current state ofour affairs.

 

**Overview**

 

Wewere incorporated on August 4, 2006 as a Maryland corporation and operateas a real estate investment trust (“REIT”) for federal income tax purposes. Wemake investments in and operate high quality multifamily communities. Inparticular, we were organized to invest in and operate high quality multifamilycommunities that we believe have desirable locations, personalized amenities,and high quality construction. We began acquiring interests in multifamilycommunities in April 2007. As of September 30, 2010, all of ourinvestments have been in high quality development and operating multifamilycommunities located in the top 50 metropolitan statistical areas (“MSAs”) inthe United States.  We have made andintend to continue making investments both in wholly owned investments andthrough co-investment arrangements with other participants (“Co-InvestmentVentures”).

 

Ourinvestment strategy is designed to provide our stockholders with a diversifiedportfolio, and our management and board of directors have extensive experiencein investing in numerous types of real estate, loans and other investments toexecute this strategy. We intend to focus on acquiring high quality multifamilycommunities that will produce rental income and will appreciate in value withinour program’s targeted life. Our targeted communities include existing “core”properties that are already stabilized and producing rental income as well asmore opportunistic properties in various phases of development, redevelopment,lease up or repositioning.  Further, wemay invest in other types of commercial real estate, real estate-relatedsecurities, mortgage, bridge, mezzanine or other loans and Section 1031tenant-in-common interests, or in entities that make investments similar to theforegoing. Although we intend to primarily invest in real estate assets locatedin the United States, in the future, we may make investments in real estateassets located outside the United States.

 

OnSeptember 5, 2008, we commenced our initial public offering (the “InitialPublic Offering”) of up to 200 million shares of common stock offered at aprice of $10.00 per share pursuant to a Registration Statement on Form S-11filed under the Securities Act.  TheInitial Public Offering also covered the registration of up to an additional 50million shares of common stock at a price of $9.50 per share pursuant to ourdistribution reinvestment plan (“DRIP”). We reserve the right to reallocate shares of our common stock betweenthe primary offering and our DRIP.

 

OnJune 29, 2010, our board of directors approved an extension of our initialpublic offering until no later than September 2, 2011. Under rules promulgatedby the SEC, we could extend our offering until February 29, 2012. Ourboard of directors has the discretion to extend the offering period for theshares being sold pursuant to our DRIP up to the sixth anniversary of thetermination of the primary offering until we have sold all shares availablepursuant to the DRIP.

 

Asof September 30, 2010, we own eight wholly owned multifamily communities,22 investments in Co-Investment Ventures and one wholly owned notereceivable.  We have funded theseinvestments and intend to fund future investments with a combination ofsources, including proceeds from our Initial Public Offering, mortgage debt,unsecured or secured debt facilities.  Asdiscussed below, we plan to utilize available Co-Investment Ventures as afunding source when it is an effective structure for the investment; however,we anticipate Co-Investment Ventures will represent a smaller percentage of ournew investments in the future.

 

Asof September 30, 2010 all of our Co-Investment Ventures have been madethrough joint ventures with Behringer Harvard Master Partnership I LP (the “BHMPCo-Investment Partner”) through entities in which we are the manager. The 1%general partner of the BHMP Co-Investment Partner is Behringer HarvardInstitutional GP LP, which is an affiliate of our advisor, Behringer HarvardMultifamily Advisors I, LLC (“Behringer Harvard Multifamily Advisors I” or the “Advisor”)and is indirectly owned by our sponsor, Behringer Harvard Holdings, LLC. The99% limited partner of the BHMP Co-Investment Partner is Stichting DepositaryPGGM Private Real Estate Fund, a Dutch foundation acting in its capacity asdepositary of and for the account and risk of PGGM Private Real Estate Fund, aninvestment vehicle for Dutch pension funds (“PGGM”).  Substantially all of the capital provided tothe BHMP Co-Investment Partner is from PGGM. We have no ownership or otherdirect financial interests in either of these entities.

 

PGGM’scommitment under the partnership agreement of the BHMP Co-Investment Partner is$300 million. As of September 30, 2010, approximately $45.5 million of the$300 million commitment remains unfunded; however, in the event that 

 

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certainof the investments refinance or new property debt is placed within two yearsfrom the date of the acquisition, the amount of unfunded commitment may beincreased.  To the extent thatinvestments fit within the investment parameters agreed between PGGM and oursponsor, we expect a portion of our future real estate acquisitions and realestate under development activities will be made through BHMP CO-JVs.

 

Eachof our separate joint ventures with the BHMP Co-Investment Partner is madethrough a separate entity that owns 100% of the voting equity interests andapproximately 99% of the economic interests in one subsidiary REIT, throughwhich substantially all of the joint venture’s business is conducted.  Each separate joint venture entity, togetherwith its respective subsidiary REIT, is referred to herein as a “BHMP CO-JV.”  Each BHMP CO-JV is a separate legal entityformed for the sole purpose of holding its respective investment and obtaininglegally separated debt and equity financing. Generally, the BHMP Co-Investment Partner will co-invest in a BHMP CO-JVwith a 45% equity interest and we will co-invest with a 55% equity interest,although the BHMP Co-Investment Partner may elect smaller allocations.

 

EachBHMP CO-JV is managed by us or a subsidiary of ours, but the operation of theBHMP CO-JV’s investment must generally be conducted in accordance withoperating plans approved by the BHMP Co-Investment Partner.  In addition, without the consent of allmembers of the BHMP CO-JV, the manager may not generally approve or disapproveon behalf of the BHMP CO-JV certain major decisions affecting the BHMP CO-JV,such as (i) selling or otherwise disposing of the BHMP CO-JV’s investmentor any other property having a value in excess of $100,000, (ii) sellingany additional interests in the BHMP CO-JV, (iii) approving initial andannual operating plans and capital expenditures or (iv) incurring or materiallymodifying any indebtedness of the BHMP CO-JV in excess of $100,000 or causingthe BHMP CO-JV to become liable for any debt, obligation or undertaking of anyother individual or entity in excess of $100,000 other than in accordance withthe operating plans.  The BHMPCo-Investment Partner may remove the manager for cause and appoint asuccessor.  Distributions of net cashflow from the BHMP CO-JV will be distributed to the members no less thanquarterly in accordance with the members’ ownership interests.  BHMP CO-JV capital contributions anddistributions are made pro rata in accordance with ownership interests.

 

Wehave determined that our BHMP CO-JVs are not variable interest entities andthat each partner has equal substantive control and participating rights withno single party controlling each BHMP CO-JV. Accordingly, we account for ourinterest in each BHMP CO-JV using the equity method of accounting.

 

CertainBHMP CO-JVs have made equity investments with third-party partners in, and/orhave made loans to, entities that own one multifamily operating or developmentcommunity.  The collective group of theseoperating property entities or development entities are collectively referredto herein as “Property Entities.”  EachProperty Entity is a separate legal entity for the sole purpose of holding itsrespective operating property or development project and obtaining legallyseparated debt and equity financing.

 

Twoof our 22 BHMP CO-JVs have made only mezzanine or mortgage loan investments inProperty Entities that are developing multifamily communities. Fourteeninvestments are indirectly wholly owned by the BHMP CO-JVs. The remaining sixBHMP CO-JVs have made equity investments with third-party partners in, and/orhave made notes receivable to, Property Entities that own one real estateoperating property or development project. The partners of these PropertyEntities are the applicable BHMP CO-JV and unaffiliated third parties, whichwere organized to own, construct, and finance only one particular real estateproject. Each of these six BHMP CO-JV investments in a Property Entity isevaluated for consolidation at the BHMP CO-JV level using our principles ofconsolidation.  Based on this evaluation,three of the six investments are reported on a consolidated basis by the BHMPCO-JV.  The remaining three investmentsare recorded as unconsolidated real estate joint ventures and reported with theequity method of accounting by the respective BHMP CO-JVs.

 

Webelieve our strategy of investing through Co-Investment Ventures will allow usto increase the number of our investments, thereby increasing ourdiversification, and providing participation with greater economic interest inlarger or more selective real estate investments with greater access to highquality investment opportunities. We also believe partnerships with highquality institutional entities, such as PGGM, enhances the valuation of ourportfolio. We intend to continue to invest through BHMP CO-JVs in operatingcommunities, to-be-developed multifamily communities or newly constructedmultifamily communities that have not yet stabilized, excluding residentialproperties for assisted living, student housing or senior housing. However, weare not limited to co-investments with the BHMP Co-Investment Partner and asthe BHMP Co-Investment Partner’s funding commitment is utilized, we may pursueother Co-Investment Ventures if they provide greater diversification orinvestment opportunities. We also plan to pursue wholly owned, directinvestments consistent with our investment policies.

 

Fourteenof our 22 BHMP CO-JV investments are wholly owned by us and the BHMPCo-Investment Partner. In the eight remaining BHMP CO-JV investments, theProperty Entity is owned entirely or in part by other unaffiliated partners andparticipants.  

 

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EachProperty Entity arrangement with an unaffiliated developer is unique and heavilynegotiated, but we will generally seek the following provisions:

 

Fordevelopment stage investments:

 

·      *Completion Guarantees* — Thedeveloper provides us with a guarantee of completion and costs from a dedicatedentity with cash, real estate and/or securities.  This entity is typically not the developerentity or the Property Entity, but what is referred to as the “guaranteeentity.”  We believe that this guaranteeis an important mitigant to the risk of completion of developments in excess ofbudgeted costs.

 

·      *Developer Fee Subordination* — We negotiatefee deferrals at various levels.  Thefees, usually developer fees for managing the development, are deferred andonly received by the developer after we have recouped certain of ourinvestments, which may include our mezzanine loan and any accrued and unpaidinterest, equity investment and preferred return.

 

·      *Cost Overrun Protection* — Generally,we will seek to mandate that any cost overruns, including those due to delayedcompletions, be borne by the developer or other capital partners, whichessentially reduces their share of net profit from development to the extent ofany such overrun.  Because this potentialprofit is a significant source of compensation to the developer, the developeris highly motivated to remain on budget.

 

Foroperating and development stage investments:

 

·      *Equity Subordination* — We will seek to requirethe other partners to provide an equity investment that is subordinate to ourinvestment.  In these instances, some orall of our returns will take priority to the other partners’ equity.

 

·      *Hurdle Returns* — We will seek to receivecertain minimum returns before the other partners participate in operating cashflow or residual profits from a sale or other capital events. In theseinstances we may receive a preferred return on our capital investment or requirethat our capital investment earn a minimum required internal rate of return.

 

·      *Joint Funding Protection* — Although ourstructures do not require that any of the partners fund capital calls fordevelopment or operating deficits, we seek to include higher preferred returnson these types of capital contributions. As we may have more incentive to keepthe project funded, if the other partners do not contribute pro-rata with us,then these higher preferred returns, which are generally the first allocationof distributable cash, would significantly dilute non-contributing partners.

 

Inaddition, most of these Property Entity joint venture agreements provide theapplicable BHMP CO-JV with option rights to increase its equity ownershippercentage and/or acquire outright ownership of the multifamily community.These option rights are generally available at completion of the developmentand for some period thereafter. As of September 30, 2010, individual BHMPCO-JVs have acquired a 100% ownership in two Property Entities, The Eclipse andThe Venue, and increased their ownership interest in two others, Bailey’sCrossing and 55 Hundred. For one investment, Grand Reserve, the BHMP CO-JV hasterminated the option rights. Of the remaining three equity investments withdeveloper partners (Satori, Skye 2905 and Veritas), the time period to exercisethe option rights have not commenced. However, each of these three multifamily communities are in the lease upstage of development or recently achieved stabilization and we continue toevaluate our investment options.

 

Webelieve these specific terms and the general provisions noted above will helpus achieve our return objectives and help mitigate certain of the real estateproject risks. However, not all of these provisions will necessarily beincluded in each Property Entity arrangement and there is no assurance we willachieve those objectives.

 

Ourmultifamily community acquisition strategy concentrates on multifamilycommunities located in the top 50 MSAs across the United States. We believethese types of investments are in demand by institutional investors which canresult in better exit pricing.  We alsobelieve that economic conditions in the major metropolitan markets of theUnited States will continue to provide adequate demand for properly positionedmultifamily communities; such conditions include job and salary growth,lifestyle trends, as well as single-family home pricing and availability ofcredit. The****U.S. Census populationestimates are used to determine the largest MSAs. Our top 50 MSA strategy willfocus on acquiring properties and other real estate assets that provide us withbroad geographic diversity.

 

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Investmentsin multifamily communities have benefited from the changing demographic andresidential finance trends of the last ten years. These trends includecontinued growth in household formations, particularly non-traditionalhouseholds and the echo-boomer generation coming of age and entering the rentalmarket, as well as baby-boomers or retirees who desire freedom from the costsand expenses of entering and maintaining a home, increased immigration andrecently higher credit standards for home buyers. Many of these trends aresomewhat independent of economic factors and could lead to growth trends higherthan what has traditionally occurred in post-recessionary cycles. Changes indomestic financial markets can affect the stability and direction of thesehistorical trends and can significantly affect our strategies, both favorablyand unfavorably.  Demand for multifamilycommunities is also affected by changes in financial markets where changes inunderwriting have affected the cost, availability and affordability offinancing for purchase of single family homes. In the near term, we believethese trends will be favorable for multifamily demand as the key demographicpopulation increases and single family housing options become more restrictive.

 

**MarketOutlook**

 

Duringthe third quarter of 2010, the general economy reported continued growth whichwas enough to lessen the chances for a double-dip recession but less than whatis required to dramatically change overall fundamentals in the short term.Nationally, private employers added approximately 64,000 new jobs in the monthof September 2010, an increase for the ninth straight month, but less thanprior reports and far less than amounts necessary to make up for new workersentering the market. Accordingly, U.S. national unemployment remained at 9.6%.Manufacturing activity expanded for the 14th straightmonth, but at the slowest pace since the first quarter. Similarly, consumerspending continued to increase at a moderate rate of 0.4%, indicating that thehigher consumer saving rates are starting to peak and that consumer incometrends are also positive. While corporate earnings and balance sheets haveimproved and bank lending to commercial and industrial companies are showingsome growth, corporate spending and hiring is still below historical averages.Consequently, the overall economy, as measured by GDP grew at 2.0%, as comparedto 1.7% for the prior quarter.

 

Whilethese trends indicate a slow overall economic recovery, the fundamentals forthe multifamily sector continue to reflect the foundation for a quickerrecovery.  National research firms havereported increases in effective rents and occupancies across many markets,significant improvements in ratios of property offerings of sales to closingsand compression in capitalization rates for high quality communities.  During the second quarter of 2010, averagenational rents showed their biggest gains in two years. In the third quartereffective rents increased from the prior quarter and as compared to the thirdquarter of 2009. During the second quarter of 2010, multifamily vacanciesdecreased for the first time since 2007 to 7.2%, the lowest rate since fourthquarter of 2008.  In particular, themultifamily community sector we invest in, which are communities that are new,have high quality finishes and are highly amenitized communities, has had thegreatest improvement in occupancy over the last 18 months as compared to theother multifamily property sectors, further evidence that our class ofcommunities should outperform other multifamily property classes. During 2010,net multifamily absorption, which is the change in occupied units, rose by over84,000 units, the largest increase in over 10 years. These factors providefurther evidence that rent concessions are slowing and that renter demand mayadvance prior to employment improvements as household formation and dislocationof prior homeowners drives demand. So-called shadow rental alternatives from unsold condominiums andincreasing single-family vacant residences will continue to be a factor andwill likely slow the rate of improvement. Accordingly, we still believe the recovery to be gradual and uneven forthe rest of 2010 with greater and more sustainable improvements thereafter.

 

Astrong positive from the current macroeconomic conditions is that there isexpected to be limited new supply of multifamily assets in the nearfuture.  Over the past decade, themultifamily sector, including condominiums, added between 200,000 and 300,000units annually but is now reported to be on a pace to deliver just 60,000 unitsfor all of 2011 and 2012 combined. Since high quality multifamily developmentscan take 18 to 36 months to entitle, obtain necessary permits and construct, webelieve there will be an imbalance in supply and demand fundamentals for atleast the next couple of years.  As theeconomy improves, particularly in job growth and specifically in thedemographic sectors which have a relatively higher proportion of multifamilyresidents, we expect renter demand and effective rent to increase inmultifamily communities.  Particularlyafter 2010, we expect multifamily rental rates to begin to return to theirpre-recession levels.  This could resultin higher than normal rental increases during that period.

 

Inthe multifamily capital markets sector, we continue to experience favorablefinancing options, particularly for high quality, well-capitalizedinvestments.  Specifically,government-sponsored entities such as Fannie Mae and Freddie Mac (“GSEs”) haveand may continue to provide needed financing, refinancing and creditenhancement to the multifamily sector. However, there are reported transactions and increased activity by otherproviders of multifamily financings, particularly from insurance companies andissuers of commercial mortgage-backed securities. If these trends continue,these options will provide further diversified lending sources and will be afactor in keeping interest rates competitive. In 2010, we and eight of our BHMPCO-JVs completed nine new

 

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loans,totaling approximately $205.8 million at a weighted average interest rate of 4.25%.This includes $69.8 million in mortgage loans with insurance companies. Thisalso includes a $150 million LIBOR-based credit facility at a rate of 2.34% asof September 30, 2010. Although there can be no assurance that the GSEs orcomparable financing will continue to be available or available at these rates,particularly in light of recent financial reform legislation and continuedpolitical scrutiny over their operations, the aforementioned are positive factors in our investment strategy.

 

Further,market interest rates continue to be at historical lows. Short term rates, asmeasured by 30-day LIBOR, are at historical lows of 0.26% as of September 30,2010, which was down from its prior historic low of 0.35% at June 30,2010. During the third quarter, longer term rates have also fallensignificantly. Five-year and ten-year treasuries are approximately 1.5% and2.6%, respectively, as of September 30, 2010, down approximately 0.30%since June 30, 2010 and more than 1% since the beginning of 2010. At thesebase rates, overall financing rates for multifamily communities are veryattractive and provide on a community by community basis leveraged returns inexcess of our distribution rate. However, it is doubtful that these levels canbe sustained and we do see the potential for rates to increase. Accordingly, acomponent of our finance strategy is to obtain fixed-rate financing forstabilized multifamily communities with maturities ranging from five to tenyears.

 

Inthis investing environment, we will continue to monitor the interplay fromchanging capitalization rates, growth rates and financing interest rates.  While in 2008 and parts of 2009 themultifamily sector experienced increasing capitalization rates, the sector iscurrently experiencing a contraction in capitalization rates as investors,especially institutional investors, re-enter the market for high qualitymultifamily communities. We would expect such a contraction in capitalizationrates to increase the valuation of our existing portfolio, especially whencoupled with increasing rental and occupancy rates.  In this environment, leverage on ourportfolio investments can enhance the equity value increases of our existingportfolio.  On the other hand,compressing capitalization rates could decrease the going-in returns on newinvestments. However, capitalization rates usually do not change independent ofother real estate fundamentals. Based on our analysis and as reported bynational analysts, these increases are coupled with higher rental and netoperating income growth expectations as a consequence of forecasted demand andsupply factors.  If these expectationsare met, capitalization rates will normalize over time based on higher netoperating incomes.  Although not perfectlycorrelated, we would also expect a relationship between future interest ratesand capitalization rates, where capitalization rates would move up as interestrates adjust to higher, historical levels. However, with the long-termfinancing we have already placed and currently available as discussed above, webelieve new investments can still meet our total return expectations.

 

Withthese market fundamentals, we believe our strategy of focusing on institutionalhigh quality market sectors with low housing affordability and high barriers toentry will benefit from the combination of low supply and pent up demand.  The stabilized multifamily communities in ourportfolio have an average occupancy of 94% as of September 30, 2010,compared to 92% as of June 30, 2010 and 93% as of March 31, 2010. Inour newly opened communities, which are those multifamily communities thateither were recently completed or were acquired during or prior to initiallease up, we are experiencing high leasing demand.  All of these newly opened communities arehighly amenitized and were built with condominium construction and finishquality in highly desired locations. For three of these newly openedcommunities, Forty55 Lofts in Marina del Rey, which began lease up in thefourth quarter of 2009, Satori in Fort Lauderdale, which was completed in thefirst quarter 2010 and The Venue in metropolitan Las Vegas, which was completedin the fourth quarter 2009, have now exceeded 90% occupancy.  In addition, we expect that the followingnewly opened communities located in urban locations, Skye 2905 in Denver andCyan/PDX in Portland, a LEED gold certified community, will soon reachstabilization. We expect the remaining multifamily communities that are inlease up in our portfolio to reach stabilization by the end of 2010 or early2011.

 

Weexpect to use the proceeds from our Initial Public Offering as the primaryfunding source for the execution of our investment strategy and the expansionof our portfolio.  As of September 30,2010, we sold a total of approximately 82.1 million shares (including DRIP) ofcommon stock and raised a total of $817.4 million in gross proceeds from ourInitial Public Offering.  OnJune 29, 2010, our board of directors approved an extension of our initialpublic offering until no later than September 2, 2011. Under rules promulgatedby the SEC, we could extend our offering until February 29, 2012. Ourboard of directors has the discretion to extend the offering period for theshares being sold pursuant to our DRIP up to the sixth anniversary of thetermination of the primary offering until we have sold all shares availablepursuant to the DRIP.

 

Weintend to leverage the proceeds from these offerings with property debt and aimfor a leverage ratio of approximately 50% to 60% following the investment ofthe proceeds raised from the Initial Public Offering and upon stabilization ofour portfolio.  We may use various formsof debt financing, including property specific, cross collateralized pools andcredit facilities.  We will generallyseek non-recourse financing, particularly for stabilized communities.

 

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Weexpect to meet our short-term liquidity requirements through the net cashraised from offerings, our credit facility and cash flow from operatingactivities of our current and future investments. For purposes of our long-termliquidity requirements, we expect that the net cash from our Initial PublicOffering, our credit facility and our current and future investments willgenerate sufficient cash flow to cover operating expenses and our distributionsto stockholders. Also to the extent we hold unencumbered or appreciated realestate investments, refinancing proceeds could be another source of capital.

 

**Property Portfolio**

 

Ourmultifamily investments include wholly owned multifamily communities andinvestments in unconsolidated real estate joint ventures.  Each of these investments is categorizedbased on stages as defined below:

 

·      Stabilized / Comparable are communities that arestabilized (the earlier of 90% occupancy or one year after completion) for boththe current and all prior reporting periods.

 

·      Stabilized / Non-comparable are communities thathave been stabilized or acquired after January 1, 2009.

 

·      Lease ups are communities that have commencedleasing but have not yet reached stabilization.

 

·      Developments are communities currently underconstruction for which leasing activity has not commenced.  As of September 30, 2010, there were nocommunities classified as developments.

 

Presentedbelow are the carrying amounts for our wholly owned real estate investments andindividual BHMP CO-JV investments as of September 30, 2010 and December 31,2009.  For the investments in unconsolidatedreal estate joint ventures in BHMP CO-JVs, we provide information describingthe underlying investment.  Alsopresented are the occupancy rates as of September 30, 2010 and December 31,2009, which for stabilized multifamily communities is based on the number ofindividual units and for retail spaces is based on gross leasable area (“GLA”)(amounts in millions):

 
| ** **                                                 | ** ** | ** ** | ** ** | **Occupancy Rates**     | ** ** | **Total Real Estate, net  (in millions)** | ** ** |
|------------------------------------------------------------|------------|------------|------------|------------------------------|------------|---------------------------------------------------------------|------------|
| **Investments in Real Estate**              | ** ** | **Units**  | ** ** | **September 30,  2010** | ** ** | **December 31,  2009**                                   | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
| *Stabilized / Non-comparable:*                             |       |       |       |                         |       |                                                          |       |   |   |   |   |
| The Gallery at NoHo Commons / Los Angeles,  California (1) |       | 438        |       | 93                           | %          | 90                                                            | %          | $ | 103.7 |   | $ | 106.0 |   |
| Mariposa Loft Apartments / Atlanta, Georgia                |       | 253        |       | 97                           | %          | 91                                                            | %          | 27.3 |   | 27.9 |   |
| Grand Reserve Orange / Orange, Connecticut                 |       | 168        |       | 92                           | %          | 92                                                            | %          | 24.5 |   | 25.1 |   |
| Acacia on Santa Rosa Creek / Santa Rosa,  California       |       | 277        |       | 96                           | %          | N/A                                                           |       | 37.0 |   | — |   |
| The Lofts at Park Crest / McLean, Virginia  (1) (2)   |       | 131        |       | 98                           | %          | N/A                                                           |       | 48.5 |   | — |   |
| Burnham Pointe / Chicago, Illinois (2)                |       | 298        |       | 85                           | %          | N/A                                                           |       | 85.6 |   | — |   |
| Uptown Post Oak / Houston, Texas                           |       | 392        |       | 92                           | %          | N/A                                                           |       | 63.1 |   | — |   |
| *Lease ups:*                                               |       |       |       |                         |       |                                                          |       |   |   |   |   |
| Acappella / San Bruno, California                          |       | 163        |       | N/A                          |       | N/A                                                           |       | 54.6 |   | — |   |
| Total wholly owned investments                             |       | 2,120      |       |                         |       |                                                          |       | $ | 444.3 |   | $ | 159.0 |   |

 

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| ** **                                                                                          | ** ** | ** ** | ** ** | **Occupancy Rates**     | ** ** | **Our Investment in Unconsolidated  Real Estate Joint Ventures  (in millions)** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|
| **Investments in Unconsolidated Real Estate Joint Ventures (3)** | ** ** | **Units**  | ** ** | **September 30,  2010** | ** ** | **December 31,  2009**                                                                                        | ** ** | **September 30,  2010** | ** ** | **December 31,  2009** | ** ** |
| *Stabilized / Comparable:*                                                                          |       |       |       |                         |       |                                                                                                               |       |   |   |   |   |
| The Reserve at Johns Creek Walk / Johns Creek,  Georgia (4)                                         |       | 210        |       | 97                           | %          | 93                                                                                                                 | %          | $ | 3.6 |   | $ | 4.0 |   |
| *Stabilized / Non-comparable:*                                                                      |       |       |       |                         |       |                                                                                                               |       |   |   |   |   |
| The Eclipse / Houston, Texas (5)                                                                    |       | 330        |       | 91                           | %          | N/A                                                                                                                |       | 7.2 |   | 19.7 |   |
| Halstead / Houston, Texas (5)                                                                       |       | 301        |       | 90                           | %          | 90                                                                                                                 | %          | 14.8 |   | 3.4 |   |
| Satori / Fort Lauderdale, Florida  (2) (4) (6) (7)                                   |       | 279        |       |                         |       | N/A                                                                                                                |       | 11.3 |   | 12.3 |   |
| The Venue / Clark County, Nevada (5) (6)                                                       |       | 168        |       | 95                           | %          | N/A                                                                                                                |       | 14.9 |   | 4.5 |   |
| Waterford Place / Dublin, California (5)                                                            |       | 390        |       | 95                           | %          | 92                                                                                                                 | %          | 10.0 |   | 11.0 |   |
| Burrough’s Mill Apartment Homes / Cherry Hill, New  Jersey (5)                                 |       | 308        |       | 96                           | %          | 92                                                                                                                 | %          | 7.3 |   | 8.1 |   |
| Forty55 Lofts / Marina del Rey, California (5)                                                      |       | 140        |       | 94                           | %          | N/A                                                                                                                |       | 27.2 |   | 26.2 |   |
| Calypso Apartments and Lofts / Irvine, California  (5)                                              |       | 177        |       | 93                           | %          | 89                                                                                                                 | %          | 13.8 |   | 27.4 |   |
| 4550 Cherry Creek / Denver, Colorado (5)                                                            |       | 288        |       | 92                           | %          | N/A                                                                                                                |       | 12.2 |   | — |   |
| 7166 at Belmar / Lakewood, Colorado (5)                                                             |       | 308        |       | 95                           | %          | N/A                                                                                                                |       | 12.8 |   | — |   |
| Briar Forest Lofts / Houston, Texas (5)                                                             |       | 352        |       | 90                           | %          | N/A                                                                                                                |       | 9.5 |   | — |   |
| Fitzhugh Urban Flats / Dallas, Texas (5)                                                            |       | 452        |       | 94                           | %          | N/A                                                                                                                |       | 11.6 |   | — |   |
| Tupelo Alley / Portland, Oregon (2) (5)                                                        |       | 188        |       | 96                           | %          | N/A                                                                                                                |       | 10.9 |   | — |   |
| *Lease ups:*                                                                                        |       |       |       |                         |       |                                                                                                               |       |   |   |   |   |
| Bailey’s Crossing / Alexandria, Virginia  (4) (6)                                         |       | 414        |       | N/A                          |       | N/A                                                                                                                |       | 29.4 |   | 29.8 |   |
| 55 Hundred / Arlington, Virginia  (2) (4) (6)                                             |       | 234        |       | N/A                          |       | N/A                                                                                                                |       | 22.1 |   | 23.6 |   |
| Cyan/PDX / Portland, Oregon (2) (5)                                                            |       | 352        |       | N/A                          |       | N/A                                                                                                                |       | 45.0 |   | 46.2 |   |
| San Sebastian / Laguna Woods, California (5)                                                        |       | 134        |       | N/A                          |       | N/A                                                                                                                |       | 19.9 |   | 19.9 |   |
| Veritas / Henderson, Nevada (4) (6) (7)                                                   |       | 430        |       | N/A                          |       | N/A                                                                                                                |       | 14.4 |   | 14.9 |   |
| Skye 2905 / Denver, Colorado  (2) (4) (6) (7)                                        |       | 400        |       | N/A                          |       | N/A                                                                                                                |       | 12.3 |   | 12.9 |   |
| Grand Reserve / Dallas, Texas (8)                                                                   |       | 149        |       | N/A                          |       | N/A                                                                                                                |       | 5.4 |   | 5.1 |   |
| The Cameron / Silver Spring, Maryland  (2) (6) (8)                                        |       | 325        |       | N/A                          |       | N/A                                                                                                                |       | 11.0 |   | 10.9 |   |
| Total investments in unconsolidated real estate  joint ventures                                     |       | 6,329      |       |                         |       |                                                                                                               |       | $ | 326.6 |   | $ | 279.9 |   |
| ** **                                                                                          |       | 8,449      |       |                         |       |                                                                                                               |       |   |   |   |   |

 

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(1)       Purchase prices for The Gallery at NoHo Commons andthe Lofts at Park Crest were $96.0 million and $68.2 million, respectively,before closing costs and prorations. Other amounts from the acquisitions were recognized as intangible assetsor deferred lease revenues and other related liabilities.

 

(2)       Includes retail space, where the total approximatesquare footage of retail space of GLA for all these investments totalsapproximately 127,500 square feet or approximately 6% of total rentablearea.  Of the stabilized communities, TheLofts at Park Crest, Tupelo Alley, Burnham Pointe and Satori contain retailspace with approximately 104,600 square feet of GLA, of which 73% was occupiedas of September 30, 2010.

 

(3)       Our ownership interest in all our investments inunconsolidated real estate joint ventures is 55% except for The Reserve atJohns Creek Walk (64%), Cyan/PDX (70%) and 7166 at Belmar (70%).

 

(4)       Equity investment of a BHMPCO-JV in a Property Entity with unaffiliated third parties.

 

(5)       Equity investment whollyowned by a BHMP CO-JV.

 

(6)       Equity interests in theproperty owned by BHMP CO-JV and/or other owners may be subject to call rights,put rights and/or buy-sell rights and/or right of BHMP CO-JV to convertmezzanine loan investment to equity in the property.

 

(7)       Equity investment of a BHMPCO-JV in a Property Entity with unaffiliated third parties and a loaninvestment by a BHMP CO-JV.

 

(8)       Loan investment by a BHMP CO-JV.

 

Theincreased carrying amounts on our wholly owned investments as of September 30,2010 are largely due to acquiring five wholly owned multifamily communitiesduring the nine months ended September 30, 2010 for an aggregate purchaseprice of

 

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approximately$315.3 million. During the nine months ended September 30, 2010, we alsoinvested in five newly formed BHMP CO-JVs, each holding a wholly ownedmultifamily community. The total acquisition price for these multifamilycommunities was $219.7 million and our total share of the capital contributionfor these BHMP CO-JVs was $127.0 million. Also during the nine months ended September 30, 2010, eight BHMPCO-JVs obtained new mortgage financing secured by the respective property foran aggregate amount of $190.0 million. Substantially all of the net proceeds related to these financings weredistributed to the partners and our share was $107.9 million, which decreasedour investment in the unconsolidated joint ventures.

 

**Results of Operations**

 

Forthe three months ended September 30, 2010 and 2009, we are reporting a netloss of $10.4 million and $3.9 million, respectively. For the nine months endedSeptember 30, 2010 and 2009, we are reporting a net loss of $28.2 millionand $3.3 million, respectively. The overall increase in net loss is primarilydue to our acquisitions made in the past 12 months of six wholly ownedmultifamily communities, eight acquisitions by BHMP CO-JVs and the treatment ofthese acquisition activities.  Our shareof acquisition costs related to our acquisitions is expensed.  For the three and nine months ended September 30,2010, our share of acquisition expenses was approximately $3.2 million and $9.3million, respectively, including our share of acquisition expenses forunconsolidated real estate joint ventures. For the three and nine months ended September 30,2009, we made five and six new acquisitions, respectively, and our share ofacquisition expense was approximately $3.5 million and $3.6 million,respectively. Acquisition accounting also requires that we allocate a portionof the purchase price to in-place lease intangibles.  These lease intangibles are amortized overremaining lease terms, generally a term of less than one year. Accordingly,amortization expense is higher in the period immediately following an acquisitionfor both our wholly owned investments and our investments in unconsolidatedreal estate joint ventures.  Real estaterelated depreciation and amortization, including our share from unconsolidatedreal estate joint ventures, for the three and nine months ended September 30,2010 was $12.5 million and $29.1 million, respectively, compared to $1.3million and $2.0 million for the same periods in 2009.  Further, several of the multifamilycommunities we have made investments in are in lease up.  During these periods, holding costs, amortizationand depreciation expense may exceed the pre-stabilization revenues.  We expect that as we complete the investmentsof the proceeds from our Initial Public Offering that earnings on ourstabilized real estate investments will have a higher contribution to our netincome while pre-stabilized investments will be proportionally less significantto our overall operating results. However, acquisition and amortization expenses during this acquisitionand development stage could be significant, resulting in net losses until wehave substantially invested the proceeds from our Initial Public Offering.

 

Asof September 30, 2009 we owned only two wholly owned multifamilycommunities. In the last 12 months we acquired six wholly owned multifamilycommunities, where two and five were acquired in the three months and ninemonths ended September 30, 2010, respectively. In addition, as of September 30,2009, we had 14 investments in unconsolidated joint real estate joint ventures.In the last 12 months we acquired eight additional investments inunconsolidated joint ventures, where none and five were acquired in the threemonths and nine months ended September 30, 2010, respectively. Whollyowned investments are reported on a consolidated basis rather than as equity investments.Accordingly, many of our results for the three and nine months ended September 30,2010 are not directly comparable to the three and nine months ended September 30,2009, where our results of operations for each period presented reflectsignificant increases in substantially all reporting categories for the currentperiod. This will likely be the case until we substantially invest the proceedsfrom the Initial Public Offering.

 

***The three months ended September 30, 2010 as comparedto the three months ended September 30, 2009***

 

*Rental Revenues. *Rental revenues for the three months ended September 30, 2010 wereapproximately $9.4 million, compared to $0.5 million for the three months endedSeptember 30, 2009. As noted above, the increase was due primarily to ouracquisition activity during the last 12 months. We expect continued increases in these revenues as a result of owningthese communities for a full reporting period and our expected acquisitions ofadditional real estate investments.

 

*Property Operating and Real Estate Tax Expenses*.  Property operating and realestate tax expenses for the three months ended September 30, 2010 wereapproximately $4.3 million, compared to $0.2 million for the three months endedSeptember 30, 2009. As noted above, the increase was due primarily to ouracquisition activity during the last 12 months. We expect continued increases in these expenses as a result of owningthese communities for a full reporting period and our expected acquisitions ofadditional real estate investments.

 

*Asset Management and Other Fees.*Assetmanagement fees for the three months ended September 30, 2010 and 2009were approximately $1.0 million and $0.5 million, respectively. These feesare generally based on the amount of our real estate investments at cost, thetime period in place and the asset management fee rate.  Accordingly, the increase is due to thetiming and funded amounts 

 

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ofour investments during the past twelve months. We expect continued increases in the amount of our real estateinvestments as a result of owning and acquiring additional real estateinvestments; however, effective July 1, 2010 the asset management fee ratewas decreased from an annual rate of 0.75% to 0.50%. Accordingly, we expect anincrease in our asset management fees but the rate of increase is expected tobe less than previously expected.

 

*General and Administrative Expenses*. General and administrativeexpenses for the three months ended September 30, 2010 and 2009 wereapproximately $1.1 million and $0.9 million, respectively, and includedincreased costs for corporate general and administrative expenses incurred andreimbursed to our Advisor, as well as compensation of our board of directors,audit and tax fees, and legal fees. We expect further increases as a result ofowning and acquiring additional real estate investments and other joint ventureinterests.

 

*Acquisition Expenses. *Acquisitionexpenses for the three months ended September 30, 2010 and 2009 wereapproximately $3.2 million and $2.8 million, respectively, which includedexpenses incurred with third parties, incurred with our advisor and ouramortization of acquisition costs related to our BHMP CO-JV investments.  As we make additional wholly owned and jointventure investments, we expect acquisition expenses to increase and to have asignificant effect on our operating results. Prior to 2009, Generally AcceptedAccounting Principles (“GAAP”) provided for the capitalization of acquisitioncosts.  See the section below entitled “Fundsfrom Operations and Modified Funds from Operations” for additional discussion.

 

*Interest Expense.*Interest expense for thethree months ended September 30, 2010 was approximately $1.7 million,relating to permanent mortgages on our wholly owned multifamily communities andour credit facility.  As of September 30,2010, our mortgage loans payable were $93.5 million and the weighted averageinterest rate was approximately 4.78%. During the three months ended September 30, 2010, our borrowingsunder the credit facility ranged between $10 million and $65 million withinterest rates generally ranging between 2.3% and 2.4%. Also included ininterest expense are credit facility fees related to minimum usage and unusedcommitments. These fees were $0.5 million during the three months ended September 30,2010. Interest expense for the three months ended September 30, 2010 isnet of interest capitalization of $0.1 million. We did not have any permanent mortgages on wholly owned multifamilycommunities or a credit facility for the three months ended September 30,2009.

 

*Depreciation and Amortization. *Depreciationand amortization expense for the three months ended September 30, 2010 and2009 was approximately $6.5 million and $0.4 million, respectively.  Asnoted above, the increase was due primarily to our acquisition activity duringthe last 12 months.  We expect continuedincreases in these expenses as a result of owning these communities for a fullreporting period and our expected acquisitions of additional real estateinvestments. Depreciation and amortization expense is a significantfactor in our GAAP reported results. See the section below entitled “Funds fromOperations and Modified Funds from Operations” for additional discussion.

 

*Interest Income.*Interest income, which primarily includedinterest earned on our cash equivalents, for the three months ended September 30,2010 and 2009 was approximately $0.3 million and $0.4 million,respectively.  Our cash equivalentbalance is primarily a function of the timing and magnitude of the proceedsraised from our Initial Public Offering and our expenditures for investmentactivities.  Accordingly, our cashequivalent balances are subject to significant changes.  Due to our primary emphasis on providingliquidity for future real estate investments, our cash equivalents aresubstantially held in daily liquidity bank deposits.  In the current environment, these cashequivalents continue to have low earnings rates.

 

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*Equity in Earnings (Loss) of Investments in Unconsolidated Real EstateJoint Ventures.*Equity in loss of joint venture investments for thethree months ended September 30, 2010 and 2009 was approximately $2.1million and $0.1 million, respectively. A breakdown of our approximate equityin earnings by type of underlying investments is as follows (amounts inmillions):

 
| ** **                  | ** ** | **For the Three Months Ended  September 30, 2010** | ** ** | **For the Three Months Ended  September 30, 2009** | ** ** |
|-----------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Equity in  Earnings (Loss)**                                         | ** ** | **Cash Provided  by Operating  Activities**                            | ** ** | **Equity in  Earnings (Loss)** | ** ** | **Cash Provided  by Operating  Activities** | ** ** |
| Loan investments            |       | $                                                                                | 1.3        |                                                                             | $          | 0.7 |   | $ | 2.0 |   | $ | 1.7 |   |
|                        |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Equity investments:         |       |                                                                             |       |                                                                             |       |   |   |   |   |
| Stabilized / Comparable     |       | (0.2                                                                             | )          | —                                                                           |       | (0.1 | ) | — |   |
| Stabilized / Non-comparable |       | (1.5                                                                             | )          | 1.6                                                                              |       | (0.5 | ) | — |   |
| Lease ups                   |       | (1.7                                                                             | )          | 0.1                                                                              |       | (1.4 | ) | — |   |
| Developments                |       | —                                                                           |       | —                                                                           |       | (0.1 | ) | — |   |
|                        |       | (3.4                                                                             | )          | 1.7                                                                              |       | (2.1 | ) | — |   |
| Total                       |       | $                                                                                | (2.1       | )                                                                                | $          | 2.4 |   | $ | (0.1 | ) | $ | 1.7 |   |

 

Earningsfrom underlying loan investments decreased for the three months ended September 30,2010 as compared to the three months ended September 30, 2009 primarilydue to the BHMP CO-JV conversion of mezzanine notes to additional equityinterests for Bailey’s Crossing, The Eclipse and 55 Hundred during the fourthquarter of 2009. As a result, these BHMP CO-JVs did not have any interestincome for the three months ended September 30, 2010.  These BHMP CO-JVs had interest income ofapproximately $0.7 million for the three months ended September 30,2009.  In August 2010, The VenueBHMP CO-JV converted its mezzanine note for an additional equity interest,further reducing interest income during the period. The remaining mezzaninenotes held by the BHMP CO-JVs also have conversion options.  If these mezzanine notes are also convertedwe would expect further decreases in equity earnings and distributionsclassified as cash provided by operating activities related to loaninvestments.  Cash provided by operatingactivities may also decrease for loan investments due to loan provisions whichprovide for full or partial accrual of interest until maturity.

 

Equityin loss from stabilized/non-comparable investments increased for the threemonths ended September 30, 2010 compared to the comparable period in 2009,primarily due to our share of depreciation and amortization expense exceedingnet operating income. During the past twelve months, we added nine newstabilized/non-comparable communities as well as reclassified The Eclipse,Satori and The Venue from a lease up to a stabilized/non-comparable investment.While all our stabilized/non-comparable investments produced an overall loss,primarily due to non-cash expenses for depreciation and amortization, theseinvestments provided cash flow for operating activity of approximately $1.6million during the three months ended September 30, 2010. There were nodistributions classified as operating activity for the corresponding period in2009. These acquisitions noted above were substantially completed in the secondhalf of 2009 and the first half of 2010, and therefore do not provide us with afull year of operating results. The three months ended September 30, 2010also benefited from a $0.7 million gain related to the acquisition of acontrolling interest in The Venue and a $0.1 million gain related to the earlyextinguishment of the Halstead mortgage payable.We expect to continue toreceive distributions from these investments but due to non-cash charges fordepreciation and amortization, we expect a loss in reported equity earnings.

 

Equityin loss from lease up equity investments increased for the three months ended September 30,2010 compared to the comparable period in 2009, primarily due to an increase inthe number of properties underlying our investments that were in lease up.  All of the investments in propertiesundergoing lease up produced equity losses as operating, interest, depreciationand amortization expenses exceeded unstabilized rental revenue. 55 Hundred,Skye 2905 and Veritas, multifamily communities in the early stages of lease up,produced equity losses for the three months ended September 30, 2010 ofapproximately $1.1 million. We expect equity losses from these investments toincrease for the remainder of 2010.   Inaddition, we made equity investments related to acquisitions of Cyan/PDX, SanSebastian and Bailey’s Crossing subsequent to September 30, 2009. Theseinvestments produced equity losses of approximately $0.6 million. During thethree months ended September 30, 2010, Satori and The Venue werereclassified from lease up to stabilized/non-comparable investments.  These properties produced equity lossesduring the three months ended September 30, 2009.

 

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***The nine months ended September 30, 2010 as compared tothe nine months ended September 30, 2009***

* *

*Rental Revenues. *Rental revenues for the nine months ended September 30, 2010 wereapproximately $21.2 million, compared to $0.5 million for the nine months endedSeptember 30, 2009. As noted above, the increase was due primarily to ouracquisition activity during the last 12 months. We expect continued increases in these revenues as a result of owningthese communities for a full reporting period and our expected acquisitions ofadditional real estate investments.

 

*Property Operating and Real Estate Tax Expenses. * Property operating and real estate taxexpenses for the nine months ended September 30, 2010 were approximately$8.9 million, compared to $0.2 million for the three months ended September 30,2009. As noted above, the increase was due primarily to our acquisitionactivity during the last 12 months.  Weexpect continued increases in these expenses as a result of owning thesecommunities for a full reporting period and our expected acquisitions ofadditional real estate investments.

 

*Asset Management and Other Fees.*Assetmanagement fees for the nine months ended September 30, 2010 and 2009 wereapproximately $3.7 million and $1.0 million, respectively. These fees aregenerally based on the amount of our gross real estate investments, the timeperiod in place and the asset management fee rate.  Accordingly, the increase is due to thetiming and funded amounts of our investments during the past twelvemonths.  We expect continued increases inthe amount of our real estate investments as a result of owning and acquiringadditional real estate investments; however, effective July 1, 2010 theasset management fee rate was decreased. Accordingly, we expect an increase in our asset management fees but therate of increase is expected to be less than previously expected.

 

*General and Administrative Expenses*. General and administrativeexpenses for the nine months ended September 30, 2010 and 2009 wereapproximately $3.3 million and $2.3 million, respectively, and includedincreased costs for corporate general and administrative expenses incurred andreimbursed to our Advisor, as well as compensation of our board of directors,audit and tax fees, and legal fees.  Weexpect further increases as a result of owning and acquiring additional realestate investments and other joint venture interests.

 

*Acquisition Expenses. *Acquisitionexpenses for the nine months ended September 30, 2010 and 2009 wereapproximately $8.7 million and $2.8 million, respectively, which includedexpenses incurred with third parties, incurred with our advisor and ouramortization of acquisition costs related to our BHMP CO-JV investments.  As we make additional wholly owned and jointventure investments, we expect acquisition expenses to increase and to have asignificant effect on our operating results. Prior to 2009, GAAP provided forthe capitalization of acquisition costs. See the section below entitled “Funds from Operations and Modified Fundsfrom Operations” for additional discussion.

 

*Interest Expense.*Interest expense for thenine months ended September 30, 2010 was approximately $3.8 million,relating to permanent mortgages on our wholly owned multifamily communities andour credit facility.  As of September 30,2010, our mortgage loans payable were $93.5 million and the weighted averageinterest rate was approximately 4.78%. During the nine months ended September 30, 2010, our borrowingsunder the credit facility ranged between no amount outstanding and $65 millionwith interest rates generally ranging between 2.3% and 2.4%. Also included ininterest expense are credit facility fees related to minimum usage and unusedcommitments. These fees were $1.1 million during the nine months ended September 30,2010. Interest expense for the nine months ended September 30, 2010 is netof interest capitalization of $0.9 million. We did not have any permanent mortgages on wholly owned multifamilycommunities or a credit facility for the nine months ended September 30,2009.

 

*Depreciation and Amortization. *Depreciationand amortization expense for the nine months ended September 30, 2010 and2009 was approximately $13.9 million and $0.4 million, respectively, primarilyrelating to our wholly owned real estate acquired in the past twelve months.Depreciation and amortization expense primarily includes depreciation of ourwholly owned multifamily communities and amortization of acquired in-placeleases.  As we make additional whollyowned investments, we expect depreciation and amortization expense to increaseand to be a significant factor in our GAAP reported results. See the sectionbelow entitled “Funds from Operations and Modified Funds from Operations” foradditional discussion.

 

*Interest Income.*Interest income, which primarily includedinterest earned on our cash equivalents, for the nine months ended September 30,2010 and 2009 was approximately $1.0 million and $0.7 million,respectively.  Our cash equivalentbalance is primarily a function of the timing and magnitude of the proceedsraised from our Initial Public Offering and our expenditures for investment activities.  Accordingly, our cash equivalent balances aresubject to significant changes.  Due toour primary emphasis on providing liquidity for future real estate investments,our cash equivalents are substantially held in daily liquidity bank deposits.  In the current environment, these cash equivalentscontinue to have low earnings rates.

 

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*Equity in Earnings (Loss) of Investments in Unconsolidated Real EstateJoint Ventures.*Equity in loss of joint venture investments for thenine months ended September 30, 2010 was approximately $8.0 millioncompared to equity in earnings of approximately $2.1 million for the ninemonths ended September 30, 2009.  Abreakdown of our approximate equity in earnings by type of underlyinginvestments is as follows (amounts in millions):

 
| ** **                  | ** ** | **For the Nine Months Ended  September 30, 2010** | ** ** | **For the Nine Months Ended  September 30, 2009** | ** ** |
|-----------------------------|------------|---------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                  | ** ** | **Equity in  Earnings (Loss)**                                        | ** ** | **Cash Provided  by Operating  Activities**                           | ** ** | **Equity in  Earnings (Loss)** | ** ** | **Cash Provided  by Operating  Activities** | ** ** |
| Loan investments            |       | $                                                                               | 3.9        |                                                                            | $          | 1.9 |   | $ | 5.7 |   | $ | 4.5 |   |
|                        |       |                                                                            |       |                                                                            |       |   |   |   |   |
| Equity investments:         |       |                                                                            |       |                                                                            |       |   |   |   |   |
| Stabilized / Comparable     |       | (0.5                                                                            | )          | —                                                                          |       | (0.4 | ) | — |   |
| Stabilized / Non-comparable |       | (4.5                                                                            | )          | 2.6                                                                             |       | (0.6 | ) | — |   |
| Lease ups                   |       | (6.9                                                                            | )          | 0.9                                                                             |       | (2.5 | ) | — |   |
| Developments                |       | —                                                                          |       | —                                                                          |       | (0.1 | ) | — |   |
|                        |       | (11.9                                                                           | )          | 3.5                                                                             |       | (3.6 | ) | — |   |
| Total                       |       | $                                                                               | (8.0       | )                                                                               | $          | 5.4 |   | $ | 2.1 |   | $ | 4.5 |   |

 

Earningsfrom underlying loan investments decreased for the nine months ended September 30,2010 as compared to the nine months ended September 30, 2009 primarily dueto the BHMP CO-JV conversion of mezzanine notes to additional equity interestsfor Bailey’s Crossing, The Eclipse and 55 Hundred during the fourth quarter of2009. As a result, these BHMP CO-JVs did not have any interest income for thenine months ended September 30, 2010. These BHMP CO-JVs had interest income of approximately $2.0 million forthe nine months ended September 30, 2009. In August 2010, The Venue BHMP CO-JV converted its mezzanine notefor an additional equity interest, further reducing interest income during theperiod. The remaining mezzanine notes held by the BHMP CO-JVs also haveconversion options. If these mezzanine notes are also converted we would expectfurther decreases in equity earnings and distributions classified as cashprovided by operating activities related to loan investments.  Cash provided by operating activities mayalso decrease for loan investments due to loan provisions which provide forfull or partial accrual of interest until maturity.

 

Equityin loss from stabilized/non-comparable investments increased for the ninemonths ended September 30, 2010 compared to the comparable period in 2009,primarily due to our share of depreciation and amortization expense andone-time charges for acquisition expenses exceeding net operating income.During the past twelve months, we added nine new stabilized/non-comparablecommunities as well as reclassified Satori and The Venue from a lease up to astabilized/non-comparable investment. For the nine months ended September 30,2010, we incurred approximately $0.6 million of one-time acquisition expensesrelated to the acquisition of five operating BHMP CO-JVs. While all ourstabilized/non-comparable investments produced an overall loss, primarily dueto non-cash expenses for depreciation and amortization, these investmentsprovided cash flow for operating activity of approximately $2.6 million duringthe nine months ended September 30, 2010. There were no distributionsclassified as operating activity for the corresponding period in 2009.  These acquisitions noted above weresubstantially completed in the second half of 2009 and the first half of 2010,and therefore do not provide us with a full year of operating results. The ninemonths ended September 30, 2010 also benefited from a $0.7 million gainrelated to the acquisition of a controlling interest in The Venue and a $0.1million gain related to the early extinguishment of the Halstead mortgagepayable. We expect to continue to receive distributions from these investmentsbut due to non-cash charges for depreciation and amortization, we expect a lossin reported equity earnings.

 

Equityin loss from lease up equity investments increased for the nine months ended September 30,2010 compared to the comparable period in 2009, primarily due to an increase inthe number of properties underlying our investments that were in lease up.  All of the investments in propertiesundergoing lease up produced equity losses as operating, interest, depreciationand amortization expenses exceeded unstabilized rental revenue. 55 Hundred,Skye 2905 and Veritas, multifamily communities in the early stages of lease up,produced equity losses during 2010 of approximately $3.1 million. These propertiesare in the early stages of lease up and we expect equity losses from theseinvestments to increase for the remainder of 2010.   In addition, we made equity investmentsrelated to the acquisitions of Cyan/PDX, San Sebastian and Bailey’s Crossingsubsequent to September 30, 2009. These investments produced equity lossesduring 2010 of approximately $2.1 million. During the nine months ended September 30, 2010, Satori and TheVenue were reclassified from lease up to stabilized/non-comparable investments. These properties produced equity lossesduring the nine months ended September 30, 2009.

 

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Wereview our investments for impairments in accordance with our accountingpolicies. For the three and nine months ended September 30, 2010 and 2009,we have not recorded any impairment losses. However, this conclusion couldchange in future periods based on changes in certain factors, primarily:

 

·                  *Status of guarantors’ financial position.* If generalmarket prices continue to decline, parties that provided us guarantees may nothave the assets or net worth as previously reported. Guarantors may also faceliquidity issues as their financings become due. Where our analysis wasdependent on a guarantor’s ability to perform, our judgments could change basedon new developments.

 

·                  *Project specific performance.* All of ourloan and equity investments in Property Entities are dependent on management-derived market assumptions for fair value determinations. These assumptionsparticularly include projected rents, occupancy and terminal capitalizationrates. If general and specific market conditions deteriorate, changes in theseassumptions will affect our fair value determinations.

 

·                  *Workouts.* In structuring the BHMPCO-JVs’ investments in Property Entities, some of our investments containprovisions that provide us with priority or preferential returns. If theunderlying projects are affected by market conditions, which may not directlyaffect our returns but may affect the other partners, the other partners mayrequest workouts or other changes to the deal structures. Although we may notbe contractually forced to accept these changes, there could be other factorsthat would cause us to accept certain modifications or enter into workouts.Based on the consequences of these changes, our assessment of our investmentcould change.  In particular, seediscussions of The Cameron below.

 

·                  *Lease up assumptions.*  In assessing development projects, we mustmake assumptions about general market conditions, projected occupancy andrental rates for projects that are several periods from the completion of leaseup activities. Our assumptions are based on our market analysis and competingprojects. During lease up activity, we may be faced with different marketconditions, and our assessment of our investment could change.

 

InDecember 2009, Fairfield Residential LLC, a real estate operating company,(“Fairfield Residential”) and certain of its affiliates filed for voluntarybankruptcy.  Certain other affiliates ofFairfield Residential that serve as the general partner for The Cameron andcurrent limited partners of Bailey’s Crossing and 55 Hundred were not part ofthe bankruptcy filing (the “Fairfield Projects”).  The Bailey’s Crossing, 55 Hundred and TheCameron Property Entities were also not a part of the bankruptcy filing. TheBailey’s Crossing and 55 Hundred Property Entity restructurings andrecapitalizations were completed prior to Fairfield Residential’s bankruptcyand were not affected by the bankruptcy filing. With regard to The Cameron Property Entity, The Cameron BHMP CO-JVinvestment is only as a lender with a $19.3 million note receivable.  Our share of the note receivable isapproximately $10.6 million.

 

BecauseFairfield Residential has guaranteed repayment of The Cameron seniorconstruction loan, as well as completion of the project for the seniorconstruction loan, Fairfield Residential’s bankruptcy gave rise to an event ofdefault under The Cameron senior construction loan agreement.  As a result, The Cameron senior constructionlender and in turn The Cameron BHMP CO-JV gave default notices to The CameronProperty Entity in 2009.  During 2010,Fairfield Residential emerged from bankruptcy and the Cameron guarantee to TheCameron BHMP CO-JV was assigned to a class of unsecured creditors.  Through September 30, 2010, The CameronBHMP CO-JV has not made any claims to the bankruptcy restructured entity,although it has preserved its rights to do so.

 

Althoughoperating under an event of default, through September 2010, the seniorconstruction lender has continued to fund construction draws.  In October 2010, the senior lender gavenotice that the interest rate would be reset to the default rate, retroactiveto December 2009.  In turn, TheCameron BHMP CO-JV gave notice that the interest rate on its note receivablewould be reset to the default rate, retroactive to December 2009.  The default rate of The Cameron BHMP CO-JVnote receivable is 13%, compared to the regular rate of 9.5%. As of November 15,2010, The Cameron Property Entity has not paid either the senior lender or TheCameron BHMP CO-JV default interest.

 

TheCameron BHMP CO-JV is currently in discussions with the senior lender and theowners of The Cameron Property Entity to restructure The Cameron PropertyEntity or cure the senior construction loan default and the BHMP CO-JV notereceivable default.  If The CameronProperty Entity does not cure the default, we expect to have an opportunity to (i) curethe default, (ii) purchase the senior construction loan (iii) foreclose onthe property, (iv) acquire the 100% or partial ownership interest in The 

 

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CameronProperty Entity or (v) otherwise negotiate a solution acceptable to thesenior construction lender.  However,there is no assurance that we would be able to restructure the seniorconstruction loan including associated guarantees on terms that are acceptableto The Cameron Property Entity owners and The Cameron BHMP CO-JV.  Such restructuring could include a pay downof the senior construction loan by The Cameron Property Entity and/or the BHMPCO-JV, which could result in a capital contribution by us to The Cameron BHMPCO-JV.  In addition, the seniorconstruction lender’s exercise of default remedies or the results of anyrestructuring negotiations may change our analysis of the accounting for theinvestment, which could result in the BHMP CO-JV accounting for the investmentas a joint venture, or if The Cameron BHMP CO-JV is viewed as the primarybeneficiary, to consolidate the investment. However, we believe we havesufficient collateral, contractual remedies and other creditor rights for theCameron BHMP CO-JV to recover the carrying value of its note receivable to TheCameron Property Entity.

 

Asof September 30, 2010, management’s assessment related to The Cameron BHMPCO-JV is that the loan investment is still properly accounted for as aloan.  The continuation of thisaccounting treatment is dependent on the resolution of the issues describedabove, and there can be no assurance as new facts and circumstances arise thatdifferent accounting would not be required. A change in accounting could affectour recognition of earnings in future periods. As of September 30, 2010, no impairment charges related to ourinvestments with respect to any of the Fairfield Projects have been recorded.

 

**Cash Flow Analysis**

 

Cashand cash equivalents decreased for the nine months ended September 30,2010 by approximately $13.5 million as compared to an increase in cash and cashequivalents for the nine months ended September 30, 2009 of approximately$39.7 million.   During 2010, the Companyinvested $428.5 million in multifamily acquisitions and investments inunconsolidated  real estate joint ventures,essentially employing most of the proceeds from sales of common stock. In 2009,the Company invested $180.4 million in multifamily acquisitions and investmentsin unconsolidated real estate joint ventures while raising $263.4 million inproceeds from sales of common stock. We expect that acquisition expendituresand proceeds from our Initial Public Offering will continue to be significantfactors in our overall cash flow.

 

***For the nine months ended September 30, 2010as compared to the nine months ended September 30, 2009***

 

Similarto our discussion above related to “Results of Operations”, many of our cashflow results for 2010 are not comparable to similar results in 2009 due toincreased acquisition activity and related financing. In addition, our proceedsfrom our Initial Public Offering have increased in 2010 as compared to2009.  As a result, our cash flows forthe nine months ended September 30, 2010 reflect significant differencesfrom the cash flows for the nine months ended September 30, 2009.

 

Cashflows provided by operating activities for the nine months ended September 30,2010 were $1.2 million as compared cash flows provided by operating activitiesof $0.2 million for the same period in 2009. A substantial portion of our GAAPnet loss is due to non-cash charges, primarily related to depreciation andamortization, including amounts recognized from our investments inunconsolidated real estate joint ventures. We expect that that these non-cashcharges will continue to be significant adjustments to net cash provided byoperating activities. During 2010, these adjustments for equity losses inunconsolidated joint ventures, depreciation and amortization totaled $21.9million compared to $1.8 million deduction in the comparable prior period in2009. Also during 2010, we recognized approximately $9.3 million of acquisitionexpenses, approximately $8.7 million related to wholly owned acquisitions andapproximately $0.6 million related to acquisitions included within ourinvestments in unconsolidated real estate joint ventures. For the comparableperiod in 2009, there was approximately $3.6 million of acquisition expensesrelated to acquisitions included within our investments in unconsolidated realestate joint ventures and prior to 2009, acquisition expenses were capitalizedand not included in cash flows from operating activities.  Distributions received from our investmentsin unconsolidated real estate joint ventures were $5.4 million for the ninemonths ended September 30, 2010, compared to $4.5 million for thecomparable period in 2009. The increase was primarily due to additionalinvestments and improved operations for certain of the BHMP CO-JVs, offset bydecreases in the amounts of interest income earned by the applicable BHMPCO-JVs, primarily as a result of the conversion of loan receivables at TheEclipse, 55 Hundred, Bailey’s Crossing and The Venue BHMP CO-JVs. Cash flowfrom operating activities for the nine months ended September 30, 2010also benefited from increases in payables, primarily related to our whollyowned multifamily communities.

 

Cashflows used in investing activities for the nine months ended September 30,2010 and 2009 were $351.3 million and $179.3 million, respectively.  For the nine months ended September 30,2010, we acquired five wholly owned multifamily communities and invested infive new BHMP CO-JVs.  In connection withone of our wholly owned acquisitions, we assumed debt financing of $26.7million.  For the nine months ended September 30,2009, our primary investments were in two wholly owned multifamily communitiesacquisitions, unconsolidated real estate joint ventures related to fulfillingour loan and equity fundings of our 14 BHMP CO-JV investments as well asfunding for our wholly owned note receivable. As our Initial Public Offering continues in 

 

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2010,we would expect our new acquisitions to increase.  Providing a source of investing cash flow forthe nine months ended September 30, 2010 were BHMP CO-JV distributionsrelated to financings for six BHMP CO-JVs which were returns of investments inunconsolidated real estate joint ventures of $77.2 million.  These investments were initially fundedentirely with cash, and during 2010, financing was obtained for thecommunities. During the comparable period in 2009, returns of investments inunconsolidated real estate joint ventures primarily related to reimbursementsof excess capital contributions and non-operating cash flows.

 

Cashflows provided by financing activities for the nine months ended September 30,2010 and 2009 were $336.7 million and $218.9 million, respectively.  For the nine months ended September 30,2010, net proceeds from our Initial Public Offering were approximately $366.5million, compared to $263.4 million for the comparable period in 2009.  Additionally, financing proceeds increaseddue to obtaining new financing for four of our wholly owned multifamilycommunities from our credit facility as well as a financing for one of ourwholly owned multifamily communities. The acquisitions of these communitieswere initially funded entirely with cash and then financed, resulting in netproceeds of approximately $35.8 million. For the nine months ended September 30, 2010, distributionsincreased due to higher distribution rates and increased common stockoutstanding from our Initial Public Offering as compared to the nine monthsended September 30, 2009.  Our boardof directors increased the distribution rate from an effective annual rate of6.5% to 7.0% (based on a $10 share price) in March 2009, resulting inincreased distributions during 2010.

 

Ourboard of directors has declared an annual distribution rate of 7.0% for theperiod through August 31, 2010, and an annualized distribution rate of6.0% for the period from September 1, 2010 to September 30, 2010 aswell as the fourth quarter of 2010. The annual distribution rate, in each case,is based upon a $10 share price. We expect our total distributions declared tocontinue to rise, even with the lower distribution rate, because of the growingnumber of shares outstanding as we make continued sales under our InitialPublic Offering; though the lower distribution rate will allow a higherproportion of our distribution to be funded from earnings or cash flow fromoperating activities than would be the case with the prior distribution rate.We expect to fund increased distributions from earnings and cash flow on theincreased amount of investments and, to the extent necessary, from the proceedsof our Initial Public Offering.

 

**Liquidity and Capital Resources**

 

***General***

 

Ourprincipal demands for funds will continue to be investments in multifamilycommunities, on our own or through joint ventures, and for the payment of operatingexpenses and distributions. Generally, cash needs for items other than ourinvestments are expected to be met from operations, and cash needs for ourinvestments, including acquisition expenses, are expected to be met from thenet proceeds from our Initial Public Offering and other offerings of oursecurities as well as debt secured by our real estate investments.  However, there may be a delay between thesale of our shares, making investments in real estate and loans and the receiptof income from such investments, which could result in a delay in the benefitsto our stockholders of returns generated from our operations.  During this period, we may use proceeds fromour Initial Public Offering and our financings to fund distributions to ourstockholders.  During this period, we mayalso decide to temporarily invest any uninvested proceeds in investments atlower returns than our targeted investments in real estate and realestate-related assets.  These lowerreturns may affect our ability to make distributions or the amount actuallydisbursed.  We also intend to use our$150 million credit facility both to meet short-term and acquisition liquidityrequirements.

 

InJune 2010, our board of directors reduced our distribution rate from anannual rate of 7.0% to 6.0% (based on a $10 share price) beginning in the monthof September 2010.  Although therecontinues to be favorable fundamentals in our targeted multifamily investments,the board took this action in light of compression in capitalization rates duemainly from increased demand from multifamily investors.  As noted above, the lower distribution ratewill allow a higher proportion of our distribution to be funded from earningsor cash flow from operating activities than would be the case with the priordistribution rate.

 

***Short-Term Liquidity and Short-Term Debt***

 

Currently,our primary indicators of short-term liquidity are our cash and cashequivalents, the proceeds from our Initial Public Offering and our creditfacility. As of September 30, 2010, our cash and cash equivalents balancewas $64.1 million, compared to $77.5 million as of December 31, 2009. On adaily basis, cash is primarily affected by our net proceeds from our InitialPublic Offering.  As of September 30,2010, we sold approximately 82.1 million shares (including DRIP) of our commonstock with gross proceeds of approximately $817.4 million.  For the three and nine months ended September 30,2010, we received gross proceeds from our Initial Public Offering, includingour DRIP, of approximately $86.5 million and $387.0 million, respectively.  For the three 

 

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andnine months ended September 30, 2009, we received gross proceeds ofapproximately $101.3 million and $268.4 million, respectively.  We also expect our 2010 operating cash flowsto increase from a full year of operations from our 2009 acquisitions and asadditional investments are added to our portfolio.

 

Ourcash and cash equivalents are invested in bank demand deposits, bank moneymarket accounts and a high grade money market fund.  We manage our credit exposure by diversifyingour investments over several financial institutions.

 

Ourprimary operating expenditures are payments related to wholly owned propertyoperations, asset management fees and general and administrative expenses.  We currently meet these obligations from cashflow from operating activities.  Becausewe evaluate our investments fully loaded for all costs, we primarily fundacquisition expenses from the proceeds of our Initial Public Offering. As theamount of our real estate investments increases, we would expect these expensesto also increase.  Depending on the timingand magnitude, we may evaluate other short-term financing options.

 

OnMarch 26, 2010, we closed on a $150 million credit facility. We intend touse the facility to provide greater flexibility in our cash management. Ifcircumstances provide us with incentives to acquire investments in all-cashtransactions, we may draw on the credit facility for the fundings. When we haveexcess cash, we have the option to pay down the facility. Based on the value ofthe collateral currently pledged under the facility, we may draw approximately$107 million more as of September 30, 2010; however, future borrowingsunder the credit facility are subject to periodic revaluations, eitherincreasing or decreasing available borrowings. Also, we intend to increase theborrowing capacity by adding future wholly owned acquisitions to the facility’scollateral pool. The carrying amount of the credit facility and the weightedaverage interest rate for different periods is summarized as follows (amountsin millions):

 
| ** **                 | ** ** | **As of September 30, 2010** | ** ** | **For the Three Months Ended  September 30, 2010** | ** ** | **For the Nine Months Ended  September 30, 2010** | ** ** |
|----------------------------|------------|--------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                 | ** ** | **Amount**                                       | ** ** | **Weighted  Average**                                                            | ** ** | **Average  Amount**                                                             | ** ** | **Weighted  Average** | ** ** | **Maximum  Amount** | ** ** | **Average  Amount** | ** ** | **Weighted  Average** | ** ** | **Maximum  Amount** | ** ** |
| Credit Facility Borrowings |       | $                                                | 20.0       |                                                                             | 2.3        | %                                                                               | $          | 40.5 |   | 2.4 | % | $ | 65.0 |   | $ | 18.9 |   | 2.4 | % | $ | 65.0 |   |
|                            |            |                                                  |            |                                                                                  |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The range of our outstanding balances were $0 to $65.0 million for thenine months ended September 30, 2010. The balances fluctuate during thequarter and 2010 due to the timing and magnitude of investment acquisitions andcash balances primarily related to the gross proceeds raised in our InitialPublic Offering.

 

***Long-Term Liquidity, Acquisition and PropertyFinancing***

 

Ourprimary funding source for investments is the proceeds we receive from ourInitial Public Offering. In the offering, we may sell up to $2 billion in grossproceeds from our primary offering and $475 million in gross proceeds from ourDRIP. Total offering expenses are expected to be approximately 11% of the grossproceeds from our primary offering, netting approximately 89% that is generallyavailable for new investment, before funding of distributions and otheroperations as discussed above.  OnJune 29, 2010, our board of directors approved an extension of our initialpublic offering until no later than September 2, 2011. Under rules promulgatedby the SEC, we could extend our offering until February 29, 2012. Ourboard of directors has the discretion to extend the offering period for theshares being sold pursuant to our DRIP up to the sixth anniversary of thetermination of the primary offering until we have sold all shares availablepursuant to the DRIP.

 

Duringthe third quarter of 2010 and through October 31, 2010, gross proceedsraised from our Initial Public Offering have been trending down. In the firsttwo quarters of 2010, gross proceeds raised averaged $144.1 million perquarter. For the third quarter of 2010 and the month of October 2010,gross proceeds raised were $78.2 million and $23.6 million, respectively. Forthe third quarter of 2009 and the month of October 2009, gross proceedsraised were $98.6 million and $40.9 million, respectively.  The stock sales trends have not had an effecton our operations. Future stock sales are difficult to forecast but should weend our Initial Public Offering in 2011 we would expect our stock sales toincrease as investors who typically wait until the end of the offering perioddecide to invest. There is no assurance that this trend will continue for ourInitial Public Offering.

 

Wemay increase the number and diversity of our investments by entering into jointventures with partners such as the BHMP Co-Investment Partner. Through September 30,2010, we and the BHMP Co-Investment Partner have contributed approximately$337.2 million and $254.5 million, respectively, to the BHMP CO-JVs foracquisition of investments, primarily equity investments and mezzanine loans inmultifamily communities. As of September 30, 2010, approximately $45.5million of PGGM’s $300 million commitment remains unfunded; however, in theevent that certain investments are refinanced or new property debt is placedwithin two years from the date of the acquisition, the amount of unfundedcommitment may be increased.  PGGM is aninvestment vehicle 

 

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forDutch pension funds.  We understand PGGMhas assets that exceed over 4 billion euro. Accordingly, we believe PGGM hasadequate financial resources to meet its funding commitments and its BHMP CO-JVobligations.

 

Asof September 30, 2010, if the remaining BHMP Co-Investment Partner fundingcommitment is drawn on, our share would be approximately**$16.7million to BHMP CO-JVs. We anticipate raising this capital and capital forfuture investments in BHMP CO-JVs from the proceeds of our Initial PublicOffering.

 

Asof September 30, 2010, we and our BHMP CO-Investment Partner have sixequity investments in Property Entities that include other third partypartners. These Property Entities have property debt and/or other joint ventureobligations, and in certain cases guarantees by affiliates of the third partypartners. Where third party partners have obligations to fund their share ofcommitments, we believe these parties have the resources to meet their share ofthese obligations. However, in the event that these parties are unable to meettheir share of joint venture obligations, there could be adverse consequencesto the operations of the respective multifamily community and we and our BHMPCo-Investment Partner may have to fund any deficiency.  Our share of such deficiency could besignificant but we believe would be funded from the sources described underthis heading.

 

Foreach equity investment, we will also evaluate the use of new or existingproperty debt, including our $150 million credit facility. Accordingly,depending on how the investment is structured, we may utilize financing at ourcompany level (primarily related to our wholly owned investments), at the BHMPCO-JV level or at the Property Entity level, where there are unaffiliatedthird-party partners.  Based on currentmarket conditions and our investment and borrowing policies, we would expectour share of property debt financing to be approximately 50% to 60% followingthe investment of the proceeds raised from the Initial Public Offering and uponstabilization of our portfolio.  Ifproperty debt is used on wholly owned properties, we expect it to be secured bythe property (either individually or pooled for the credit facility), includingrents and leases. BHMP CO-JV and Property Entity level debt, which is alsosecured by the property, including rents and leases, has been used asconstruction financing for five Property Entities and permanent mortgage loansfor 11 multifamily communities.  PropertyEntity debt or BHMP CO-JV level debt is not an obligation or contingency for usbut does allow us to increase our access to capital.  Lenders for these mortgage loans payable haveno recourse to us or the applicable BHMP CO-JV other than carve-out guaranteesfor certain matters such as environmental conditions, misuse of funds andmaterial misrepresentations. We will generally seek non-recourse financing,particularly for stabilized communities. As of September 30, 2010, all of our debt, other than borrowingsunder our credit facility, is individually secured property debt.

 

Asof September 30, 2010, the total carrying amount of debt, including ourapproximate share is summarized as follows (amounts in millions):

 
| ** **                                        | ** ** | **Total Carrying  Amount** | ** ** | **Weighted Average  Interest Rate** | ** ** | **Maturity Dates** | ** **   | **Our Approximate  Share** | ** ** |
|---------------------------------------------------|------------|---------------------------------|------------|-----------------------------------------------|------------|-------------------------|--------------|---------------------------------|------------|
| *Company Level:*                                  |       |                            |       |                                          |       |                    |         |                            |       |
| Permanent mortgages — fixed interest rates   |       | $                               | 93.5       |                                          | 4.78%      |                    | 2013 to 2017 |                            | $          | 93.5 |   |
| Credit facility                                   |       | 20.0                            |       | Monthly LIBOR + 2.08%                         |       | 2017                    |         | 20.0                            |       |
|                                              |       |                            |       |                                          |       |                    |         |                            |       |
| *BHMP CO-JV Level:*                               |       |                            |       |                                          |       |                    |         |                            |       |
| Permanent mortgages — fixed interest rates   |       | 275.2                           |       | 4.42%                                         |       | 2013 to 2020            |         | 154.8                           |       |
|                                              |       |                            |       |                                          |       |                    |         |                            |       |
| *Property Entity Level:*                          |       |                            |       |                                          |       |                    |         |                            |       |
| Construction loans — variable interest rates |       | 291.0                           |       | Monthly LIBOR + 2.28%                         |       | 2010 to 2013            |         | 98.0                            |       |
| Permanent mortgages — fixed interest rates   |       | 23.0                            |       | 6.46%                                         |       | 2013                    |         | 11.8                            |       |
| Total                                             |       | $                               | 702.7      |                                          |       |                    |         |                            | $          | 378.1 |   |

 

·                              The table excludes debtsowed to BHMP CO-JVs or us.

 

·                              Our approximate share forBHMP CO-JV and Property Entity levels is calculated based on our share of theback-end equity interest, as applicable.

 

·                              Each construction loan hasprovisions allowing for extensions, generally two, one-year options if certainoperation performance levels have been achieved as of the maturity date.

 

·                              Certain of these debtscontain covenants requiring the maintenance of certain operating performancelevels.  As of September 30, 2010,we believe the respective borrowers were in compliance with these covenants.

 

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Contractualprincipal payments for mortgages and construction loans for each of the fiveyears from September 30, 2010 are as follows (in millions):

 
| ** **                              | ** ** | **Company  Level** | ** ** | **BHMP CO-JV  Level** | ** ** | **Property Entity  Level** | ** ** |
|-----------------------------------------|------------|--------------------|------------|----------------------------|------------|---------------------------------|------------|
| October —  December 2010 |       | $                  | 0.1        |                       | $          | 0.3                             |       | $ | 71.9 |   |
| 2011                                    |       | $                  | 0.6        |                       | $          | 1.3                             |       | $ | 133.7 |   |
| 2012                                    |       | $                  | 0.6        |                       | $          | 1.7                             |       | $ | 33.5 |   |
| 2013                                    |       | $                  | 25.1       |                       | $          | 56.7                            |       | $ | 74.9 |   |
| 2014                                    |       | $                  | —     |                       | $          | 0.4                             |       | $ | — |   |
| 2015 and thereafter                     |       | $                  | 67.1       |                       | $          | 214.9                           |       | $ | — |   |

 

Wewould expect to refinance these borrowings at or prior to their respectivematurity dates. There is no assurance that at those times market terms wouldallow financings at comparable interest rates or leverage levels. As a part ofthe BHMP CO-JV governing agreements, the BHMP CO-JV’s will not have individualor aggregate permanent financing leverage greater than 65% of the BHMP CO-JVproperty fair values unless the BHMP Co-Investment Partner approves a greaterleverage rate.  In addition, we wouldanticipate that for some of these communities, lower leverage levels may benecessary or beneficial which may require additional contributions from us orthe BHMP CO-JVs.  We expect to useproceeds from our Initial Public Offering to fund any such capitalcontributions.

 

As of September 30,2010, the BHMP CO-JVs had $291.0 million of construction financing held by fiveProperty Entities. These construction loans are the responsibility of theProperty Entity with three of these construction loans having guaranteesprovided by third party developers. Although not a responsibility of the BHMPCO-JV or us, during 2009 and through the third quarter of 2010, the BHMP CO-JVshave made investments in four Property Entities to retire or partially pay downthe construction loans. Our share of these loan payments by BHMP CO-JVs wereapproximately $47.1 million. Generally, the instances where the entire loanswere paid off were due to situations where the BHMP CO-JV was able to acquire100% of the ownership interest in the multifamily community and the lenderswere not willing to reduce the interest rate to market or were willing toaccept a discount to extinguish the construction loan. Generally, the instanceswhere the loans were partially paid down were due to situations where the BHMPCO-JV acquired less than 100% of the ownership in a community and the lendersrequired lower leverage. We believe we bettered our economic position in eachof these situations, either from a loan discount, a loan extension, prioritydistribution terms and/or the ability to refinance at lower interest rates.Although each situation has its own circumstances and involve different lendersand investors, the BHMP CO-JVs may decide to make additional investments in theremaining five multifamily communities with construction loans. Our share ofthese investments could be material and we would expect to use proceeds fromour Initial Public Offering to fund any such amounts. Such fundings couldaffect our ability to make other investments.

 

Inrelation to historical averages, favorable financing terms are currentlyavailable for high quality multifamily communities. As of September 30,2010, the weighted average interest rate on our wholly owned communities fixedinterest financings was 4.78%.  Duringthe nine months ended September 30, 2010, we assumed or closed on $42.5million of financing collateralized by our real estate investment in Acacia onSanta Rosa Creek and Mariposa Loft Apartments. The mortgage loans payable have a term of three and seven years withprincipal and interest or interest-only payments at a weighted average fixedinterest rate of 4.85%.

 

Asof September 30, 2010, the weighted average interest rate on BHMP CO-JVfixed interest financings was 4.42%. During the nine months ended September 30, 2010, eight BHMP CO-JVsclosed mortgage financings of $190.0 million. These mortgage loan payables havean initial term of five to ten years with a weighted average fixed interestrate of 4.17%.

 

We also evaluate existingfinancing terms in light of current market terms.  If more favorable terms can be obtained,considering prepayment costs and availability and costs of refinancing, we mayalso prepay existing debt.  In July 2010,the Halstead BHMP CO-JV gave notice to the mortgage lender to payoff itsmortgage loan in full payable at a par price of $24.0 million withoutpenalty.  The mortgage loan payable, whichcarried a face rate of 6.17%, was paid off in September 2010. In October 2010,the Halstead BHMP CO-JV obtained a new mortgage loan for $15.7 million with alower effective interest rate of 3.79%. If other opportunities become available, we expect to use proceeds fromour Initial Public Offering and other sources described in this section to fundany such refinancing.

 

As of September 30,2010, we currently have one wholly owned community with a carrying value ofapproximately $54.6 million that is not encumbered by any secured debt.  In addition, four BHMP CO-JVs have whollyowned communities with total 

 

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carrying values ofapproximately $150.6 million that are not encumbered by any secured debt.  We currently intend to obtain securedfinancing for each of these multifamily communities.

 

Additionally, we may use ourcredit facility to provide bridge or long-term financing for wholly ownedacquisitions.  Where the credit facilityis used as bridge financing, we would use proceeds on a temporary basis untilwe could secure permanent financing. The proceeds of such permanent financingwould then be available to repay borrowings under the credit facility. However,the credit facility may be used on a longer term basis, similar to permanentfinancing.  Other potential futuresources of capital may include proceeds from arrangements with other jointventure partners, proceeds from the sale of our investments, if and when theyare sold, and undistributed cash flow from operating activities.

 

Foreach equity investment made by us or by the applicable BHMP CO-JV or PropertyEntity, we will also evaluate requirements for capital expenditures.  As of September 30, 2010, of the 28multifamily communities in which we have equity investments, four are BHMPCO-JVs multifamily communities in Property Entities with ongoing, insignificantconstruction expenditures which are anticipated to be funded from existingconstruction financing. We also have invested through BHMP CO-JVs in twomultifamily communities in lease up that are not encumbered with debt.  We expect to place permanent mortgage financingon these multifamily communities after stabilization.  Also related to our recent investment in the4550 Cherry Creek BHMP CO-JV, we expect to make deferred maintenanceexpenditures of $1 to 2 million.  We substantiallyfunded our share of these expenditures at the inception of the BHMPCO-JVs.  For the remaining multifamilycommunities, due to their recent construction, property capital expendituresare not expected to be significant in the near term. When they do occur, wewould expect recurring capital expenditures to be funded from the BHMP CO-JV orthe Property Entities’ cash flow from operating activities. For non-recurringcapital expenditures, we would look to the capital sources noted above. Otherthan as discussed above, as of September 30, 2010, neither we nor any ofthe BHMP CO-JVs have any other significant commitments for property capitalexpenditures for operating multifamily communities.

 

**Distributions**

 

Distributions are authorizedat the discretion of our board of directors based on its analysis of ourperformance over the****previousperiod, expectations of performance for future periods, including actual andanticipated operating cash flow,changes in market capitalization rates for investments suitable for ourportfolio,****capitalexpenditure needs, general financial condition and other factors that our boarddeems relevant.  The board’s decisionwill be influenced, in substantial part, by its obligation to ensure that wemaintain our status as a REIT.  Becausewe may receive income from interest or rents at various times during our fiscalyear, distributions may not reflect our income earned in that particulardistribution period.  Accordingly,distributions may be paid in anticipation of cash flow that we expect toreceive during a later period in order to make distributions relativelyuniform.

 

Until proceeds from ourInitial Public Offering are fully invested and generating sufficient operatingcash flow to fully fund the payment of distributions to stockholders, we haveand will continue to pay some or all of our distributions from sources otherthan operating cash flow.  We may, forexample, generate cash to pay distributions from financing activities,components of which may include proceeds from our Initial Public Offering andborrowings (including borrowings secured by our assets) in anticipation offuture operating cash flow.  In addition,from time to time, our Advisor may agree to waive or defer all****or a portion of the acquisition, assetmanagement or other fees or incentives due to them, pay general administrativeexpenses or otherwise supplement investor returns in order to increase theamount of cash****that we have available to paydistributions to our stockholders.

 

Thedistributions funded with cash for the nine months ended September 30,2010 and 2009 were approximately $18.5 million and $7.6 million, respectively.  Distributions funded through the issuance ofshares under our DRIP for the nine months ended September 30, 2010 and2009 were approximately $20.4 million and $4.9 million, respectively.  For the nine months ended September 30,2010 and 2009, cash flow from operating activities was $1.2 million and $0.2million, respectively. For the nine months ended September 30, 2010 and2009, distributions to stockholders funded with cash exceeded cash flow fromoperating activities by $17.3 million and $7.4 million, respectively. Suchdifferences were funded from proceeds from our Initial Public Offering.

 

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The following tables show thedistributions paid and declared for the nine months ended September 30,2010 and 2009 and cash flow from operating activities over the same periods (inmillions, except per share amounts):

 
| ** **     | ** ** | **Distributions Paid** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** **                                          | ** ** |
|----------------|------------|-----------------------------|------------|---------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| **2010**       | ** ** | **Cash**                    | ** ** | **Distributions  Reinvested  (DRIP)** | ** ** | **Total**  | ** ** | **Cash Flow  from Operating  Activities** | ** ** | **Total  Distributions  Declared** | ** ** | **Declared  Distributions  Per Share** | ** ** |
| Third Quarter  |       | $                           | 7.3        |                                  | $          | 8.3        |       | $                                                   | 15.6       |   | $ | 1.3 |   | $ | 15.3 |   | $ | 0.168 |   |
| Second Quarter |       | 6.2                         |       | 6.9                                   |       | 13.1       |       | 0.4                                                 |       | 13.9 |   | 0.175 |   |
| First Quarter  |       | 5.0                         |       | 5.2                                   |       | 10.2       |       | (0.5                                                | )          | 11.1 |   | 0.173 |   |
| Total          |       | $                           | 18.5       |                                  | $          | 20.4       |       | $                                                   | 38.9       |   | $ | 1.2 |   | $ | 40.3 |   | $ | 0.516 |   |

 
| ** **     | ** ** | **Distributions Paid** | ** ** | ** **                            | ** ** | ** ** | ** ** | ** **                                          | ** ** |
|----------------|------------|-----------------------------|------------|---------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| **2009**       | ** ** | **Cash**                    | ** ** | **Distributions  Reinvested  (DRIP)** | ** ** | **Total**  | ** ** | **Cash Flow  from Operating  Activities** | ** ** | **Total  Distributions  Declared** | ** ** | **Declared  Distributions  Per Share** | ** ** |
| Third Quarter  |       | $                           | 3.2        |                                  | $          | 2.7        |       | $                                                   | 5.9        |   | $ | (1.5 | ) | $ | 6.5 |   | $ | 0.177 |   |
| Second Quarter |       | 2.5                         |       | 1.6                                   |       | 4.1        |       | 1.1                                                 |       | 4.6 |   | 0.175 |   |
| First Quarter  |       | 1.9                         |       | 0.6                                   |       | 2.5        |       | 0.6                                                 |       | 2.9 |   | 0.165 |   |
| Total          |       | $                           | 7.6        |                                  | $          | 4.9        |       | $                                                   | 12.5       |   | $ | 0.2 |   | $ | 14.0 |   | $ | 0.517 |   |

 

The amount by which ourdistributions paid exceeded cash flow from operating activities for the ninemonths ended September 30, 2010 increased from the nine months ended September 30,2009, due to (i) acquisition expenses associated with increasedacquisition activity included in cash flow from operating activities, (ii) increasedinvestments in multifamily communities in lease up and (iii) proceedsraised from our Initial Public Offering (which resulted in additional shares onwhich distributions are paid). Acquisition expenses included in cash flow from operating activities fornine months ended September 30, 2010 and 2009 were approximately $9.3million and $3.6 million, respectively. Acquisition expenses are funded fromthe proceeds from our Initial Public Offering. See the section above entitled “Results of Operations” for ourdiscussion of operating results and trends related to multifamily communitiesin lease up.

 

Over the long term, as we raisecapital and invest in income producing multifamily communities, we expect thatmore of our distributions (except with respect to distributions related tosales of our assets) will be paid from cash flow from operating activities,including distributions from Co-Investment Ventures in excess of their reportedearnings and our operations from wholly owned multifamily communities prior todeductions for acquisition expenses. In addition to these projected resultsfrom increased investments, in June 2010, our board of directors reducedour distribution rate from an annual rate of 7.0% to 6.0% (based on a $10 shareprice) beginning the month of September 2010 and amended our advisorymanagement agreement effective July 1, 2010, reducing the current assetmanagement fee rate (with the potential for increases in the fee depending onachieving certain MFFO per share thresholds). Each of these changes willincrease the proportion of our distributions to be paid from cash flows fromoperating activities in the future than would otherwise be the case withoutthese changes.  However, operatingperformance cannot be accurately predicted due to numerous factors, includingour ability to raise and invest capital at favorable accretive yields, thefinancial performance of our investments, the types and mix of investments inour portfolio, favorable financing terms and the accounting treatment of ourinvestments in accordance with our accounting policies. As a result, futuredistribution rates may change over time and future distributions declared andpaid may continue to exceed cash flow from operating activities.

 

**Off-BalanceSheet Arrangements**

 

Ourprimary off-balance sheet arrangements relate to investments in unconsolidatedreal estate joint ventures.  As of September 30,2010, we have 22 investments in unconsolidated joint ventures, all of which areBHMP CO-JVs and are recorded on the equity basis of accounting.  None of these investments are variableinterest entities and are reported on the equity basis of accounting because wedo not have a controlling interest in the entity.  See the “Critical Accounting Policies andEstimates” section below for additional discussions of our consolidationpolices and critical assumptions.

 

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Asof September 30, 2010, the consolidated subsidiaries of BHMP CO-JVs aresubject to senior mortgage loans as described in the following table. Theseloans are senior to the equity investments by the BHMP CO-JVs. The lenders forthese mortgage loans have no recourse to us or the applicable BHMP CO-JV otherthan carve-out guarantees for certain matters such as environmental conditions,misuse of funds and material misrepresentations. These loans payable arereferred to as BHMP CO-JV level borrowings, all of which are mortgage loans (amounts in millions):

 
| **BHMP CO-JV Level Borrowings** | ** ** | **Loan Amount** | ** ** | **Loan Type** | ** **         | **Interest Rate** | ** **    | **Maturity Date**         | ** **                 |
|------------------------------------------------|------------|----------------------|------------|--------------------|--------------------|------------------------|---------------|--------------------------------|----------------------------|
| Waterford Place                                |       | $                    | 59.2       |               | 10-year amortizing |                   | 4.83% - Fixed |                           | May 2013 (1) (2) |   |
| 4550 Cherry Creek                              |       | 28.6                 |       | Interest-only      |               | 4.23% - Fixed          |          | March 2015 (1)            |                       |
| Calypso Apartments and Lofts                   |       | 24.0                 |       | Interest-only      |               | 4.21% - Fixed          |          | March 2015 (1)            |                       |
| 7166 at Belmar                                 |       | 22.8                 |       | Interest-only      |               | 4.11% - Fixed          |          | June 2015 (1)             |                       |
| Burroughs’s Mill Apartment Homes          |       | 26.0                 |       | Interest-only      |               | 5.29% - Fixed          |          | October 2016 (1) (3) |                       |
| Fitzhugh Urban Flats                           |       | 28.0                 |       | Interest-only      |               | 4.35% - Fixed          |          | August 2017 (1)           |                       |
| The Eclipse                                    |       | 20.8                 |       | Interest-only      |               | 4.46% - Fixed          |          | September 2017 (1)        |                       |
| Briar Forest Lofts                             |       | 21.0                 |       | Interest-only      |               | 4.46% - Fixed          |          | September 2017 (1)        |                       |
| Tupelo Alley                                   |       | 19.3                 |       | Interest-only      |               | 3.58% - Fixed          |          | October 2017 (1)          |                       |
| Forty55 Lofts                                  |       | 25.5                 |       | Interest-only      |               | 3.90% - Fixed          |          | October 2020 (1)          |                       |
| Total                                          |       | $                    | 275.2      |               |               |                   |          |                           |                       |   |

 

Asof September 30, 2010, Property Entities reported by BHMP CO-JVs on theconsolidated basis of accounting are subject to construction and mortgage loansas described in the following table. These loans are senior to any equity ordebt investments by the BHMP CO-JVs. The lenders for these loans have norecourse to us or the BHMP CO-JVs with recourse only to the applicable PropertyEntities and to affiliates of the project developers that have providedcompletion and repayment guarantees. These loans payable are referred to as Property Entity level borrowings (amounts in millions):

 
| **Property Entity Level Borrowings** | ** ** | **Loan Amount** | ** ** | **Loan Type** | ** **    | **Interest Rate** | ** **             | **Maturity Date**                   | ** **                               |
|-----------------------------------------------------|------------|----------------------|------------|--------------------|---------------|------------------------|------------------------|------------------------------------------|------------------------------------------|
| Bailey’s Crossing                              |       | $                    | 69.8       |               | Interest-only |                   | Monthly LIBOR+ 275 bps |                                     | November 2011 (2) (3) (4) |   |
| The Reserve at Johns Creek Walk                     |       | 23.0                 |       | Interest-only      |          | 6.46% - fixed          |                   | March 2013 (1)                      |                                     |
| 55 Hundred                                          |       | 52.7                 |       | Interest-only      |          | Monthly LIBOR+ 300 bps |                   | November 2013 (2) (3) (4) |                                     |
| Total                                               |       | $                    | 145.5      |               |          |                   |                   |                                     |                                     |   |

 

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(1)   Theseloans may generally not be prepaid without the consent of the lender and/orpayment of a prepayment penalty.

 

(2)   Theseloans may be eligible for extension periods of up to two years, subject tocertain conditions that may include certain fees and the commencement of monthlyprincipal payments.

 

(3)   Theseloans may generally be prepaid in full or in part without penalty.

 

(4)   Constructionloan.

 

As of September 30, 2010, fiveof the BHMP CO-JVs had mezzanine or mortgage loan investments outstanding inProperty Entities.  These PropertyEntities and their affiliates have provided the BHMP CO-JVs with collateralinterests in the underlying properties, development projects, improvements,their interests in the Property Entities and/or financial and performanceguarantees of the developer and certain of its affiliates.  These Property Entities have also obtained additional financing that issenior to the BHMP CO-JV mezzanine or mortgage loan investments, including forcertain BHMP CO-JVs, their equity investment. The senior loans with respect tothese Property Entities, as well as other senior loans in other PropertyEntities, are secured by the developments and improvements and may be furthersecured with repayment and completion guarantees from the unaffiliateddevelopers or their affiliates. We or the BHMP CO-JVs have no contractualobligations on these senior level financings obtained by the Property Entities.These senior level financings have rates and terms that are different from ourloan investment rates and terms.  Inaddition, the financial institutions providing these loans have, in some cases,independent unfunded obligations under the loan terms.

 

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

 

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**ContractualObligations**

 

Wehave contractual obligations related to our mortgage loan payables and creditfacility.  The following table summarizesour primary contractual obligations as of September 30, 2010 (amounts inmillions):

 
| **Mortgage loan** | ** ** | **Total** | ** ** | **October –  December  2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **Thereafter** | ** ** |
|------------------------|------------|-----------|------------|-----------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------------|------------|
| Principal payments     |       | $         | 93.5       |                                    | $          | 0.1      |       | $        | 0.6        |     | $          | 0.6      |       | $              | 25.1       |   | $ | — |   | $ | 67.1 |   |
| Interest expense       |       | 23.3      |       | 1.1                                     |       | 4.5      |       | 4.4      |       | 3.6      |       | 3.2      |       | 6.5            |       |
|                   |       | 116.8     |       | 1.2                                     |       | 5.1      |       | 5.0      |       | 28.7     |       | 3.2      |       | 73.6           |       |
|                        |            |           |            |                                         |            |          |            |          |            |          |            |          |            |                |            |  |  |  |  |  |  |  |

 
| **Credit Facility (1)** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Principal payments                |       | 20.0       |       | —     |       | —     |       | —     |       | —     |       | —     |       | 20.0       |       |
| Interest expense and fees         |       | 17.6       |       | 0.7        |       | 2.7        |       | 2.7        |       | 2.7        |       | 2.7        |       | 6.1        |       |
|                              |       | 37.6       |       | 0.7        |       | 2.7        |       | 2.7        |       | 2.7        |       | 2.7        |       | 26.1       |       |
| Total                             |       | $          | 154.4      |       | $          | 1.9        |       | $          | 7.8        |       | $          | 7.7        |       | $          | 31.4       |   | $ | 5.9 |   | $ | 99.7 |   |
|                                   |            |            |            |            |            |            |            |            |            |            |            |            |            |            |            |  |  |  |  |  |  |  |

 

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(1)          The principal amounts provided for our creditfacility are based on amounts outstanding as of September 30, 2010, whichare currently not due until final maturity of the credit facility.  If we are able to include additionalcollateral, we expect to increase the contractual principal obligations infuture periods. The interest expense and fees for the credit facility are basedon the minimum interest and fees due as of September 30, 2010 under thecredit facility. Amounts are included through the current stated maturity dateof April 2017.

 

Each of the BHMP CO-JV equity investments that include unaffiliatedthird-party partners also includes buy/sell provisions.  Under these provisions and during specificperiods, a partner could make an offer to purchase the interest of the otherpartner and the other partner would have the option to accept the offer orpurchase the offering partner’s interest at that price.  As of September 30, 2010, no such offersare outstanding.

 

The Bailey’s Crossing and The Cameron BHMP CO-JVs may become separatelyobligated to purchase a limited partnership interest in the related PropertyEntity at a price set through an appraisal process if the limited partners wereto exercise their rights to put their interests to the BHMP CO-JVs. Theobligations are for defined periods ranging from one to three years.  As the prices would be based on future eventsand valuations, we are not able to estimate this amount if exercised; howeverthe limited partners’ combined invested capital as of September 30, 2010is approximately $22.1 million.  Based onthis value, our combined share of these BHMP CO-JV obligations would beapproximately $12.2 million.

 

During2010, the Grand Reserve BHMP CO-JV exercised its right to cancel a contingentsell option held by the developer in the Property Entity.

 

The multifamily communities in which we have investments may havecommitments to provide affordable housing. Under these arrangements, wegenerally receive from the resident a below-market rent, which is determined bya local or national authority. In certain arrangements, a local or nationalhousing authority makes payments covering some or substantially all of thedifference between the restricted rent paid by residents and market rents. Inconnection with our acquisition of The Gallery at NoHo Commons, we assumed anobligation to provide affordable housing through 2048. As partial reimbursementfor this obligation, the housing authority will make level annual payments ofapproximately $2.0 million through 2028 and no reimbursement for the remaining20-year period. We may also be required to reimburse the housing authority ifcertain operating results are achieved on a cumulative basis during the term ofthe agreement. At the acquisition, we recorded a liability of $14.0 millionbased on the fair value of terms over the life of the agreement.  We will record rental revenue from thehousing authority on a straight line basis, recognizing a portion of thecollections from deferred lease revenues. As of September 30, 2010 and December 31,2009, we have approximately $16.2 million and $15.2 million, respectively, ofcarrying value for deferred lease revenues and other related liabilities.

 

Ourboard of directors has authorized a share redemption program. During the threemonths ended September 30, 2010, our board of directors approvedredemptions for 657,412 shares of common stock for approximately $5.7 million.During the nine months

 

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endedSeptember 30, 2010, our board of directors approved redemptions for1,215,647 shares of common stock for approximately $10.5 million. We havefunded and intend to continue funding these redemptions from the proceeds fromour Initial Public Offering.

 

OnOctober 7, 2010, we acquired a wholly owned multifamily community, locatedin Atlanta, Georgia, from an unaffiliated seller.  The purchase price was approximately $40.4million, excluding closing costs. Acquisition expenses of approximately $0.8million were recognized for the acquisition. No mortgage debt was assumed in the acquisition.

 

Subsequentto the quarter ended September 30, 2010, we entered into purchase and saleagreements for two multifamily communities for a total purchase price ofapproximately $80.9 million, excluding closing costs.  As of November 15, 2010, we have made atotal of $2.0 million in earnest money deposits on these multifamilycommunities.  If consummated, we expect thatthe acquisitions would be made through wholly owned subsidiaries of ouroperating partnership or newly created BHMP CO-JVs. The consummation of eachpurchase remains subject to substantial conditions, including, but not limitedto, (i) the satisfaction of the conditions to the acquisition contained inthe relevant contracts; (ii) no material adverse change occurring relatingto the multifamily community or in the local economic conditions; (iii) ourreceipt of sufficient net proceeds from the Initial Public Offering andfinancing proceeds to make the acquisition; and (iv) our receipt ofsatisfactory due diligence information, including environmental reports andlease information.  Other investments maybe identified in the future that we may acquire before or instead of thesemultifamily communities.

 

**Fundsfrom Operations and Modified Funds from Operations**

 

Fundsfrom operations (“FFO”) is a non-GAAP performance financial measure that iswidely recognized as a measure of REIT operating performance.  We use FFO as defined by the NationalAssociation of Real Estate Investment Trusts to be net income (loss), computedin accordance with GAAP excluding extraordinary items, as defined by GAAP, andgains (or losses) from sales of property (including deemed sales andsettlements of pre-existing relationships), plus depreciation and amortizationon real estate assets, and after related adjustments for unconsolidatedpartnerships, joint ventures and subsidiaries and noncontrolling interests.  We believe that FFO is helpful to ourinvestors and our management as a measure of operating performance because itexcludes real estate-related depreciation and amortization, gains and lossesfrom property dispositions, and extraordinary items, and as a result, whencompared year to year, reflects the impact on operations from trends inoccupancy rates, rental rates, operating costs, development activities, generaland administrative expenses, and interest costs, which are not immediatelyapparent from net income.  Historical costaccounting for real estate assets in accordance with GAAP implicitly assumesthat the value of real estate and intangibles diminishes predictably overtime.  Since real estate values havehistorically risen or fallen with market conditions, many industry investorsand analysts have considered the presentation of operating results for realestate companies that use historical cost accounting alone to beinsufficient.  As a result, ourmanagement believes that the use of FFO, together with the required GAAPpresentations, is helpful for our investors in understanding ourperformance.  Factors that impact FFOinclude start-up costs, fixed costs, delay in buying assets, lower yields oncash held in accounts, income from portfolio properties and other portfolioassets, interest rates on acquisition financing and operating expenses.  In addition, FFO will be affected by thetypes of investments in our and/or our Co-Investment Ventures’ portfolios,which include, but are not limited to, equity and mezzanine, mortgage andbridge loan investments in existing operating properties and properties invarious stages of development and the accounting treatment of the investmentsin accordance with our accounting policies.

 

Inaddition to FFO, we use modified funds from operations (“Modified Funds fromOperations” or “MFFO”) which excludes from FFO acquisition expenses, impairmentcharges and adjustments to fair value for derivatives not qualifying for hedgeaccounting, to further evaluate our operating performance. We believe that MFFOwith these adjustments, like those already included in FFO, is helpful as ameasure of operating performance because it excludes costs that managementconsiders more reflective of investing activities or non-operating valuationchanges. As explained below, management’s evaluation of our operatingperformance excludes the items considered in the calculation based on thefollowing economic considerations:

 

·                                          *Acquisitionexpenses.* In evaluating investments in real estate, includingboth business combinations and investments accounted for under the equitymethod of accounting, management’s investment models and analysis differentiatecosts to acquire the investment from the operations derived from theinvestment. Prior to 2009, acquisition costs for both of these types ofinvestments were capitalized; however, beginning in 2009, acquisition costsrelated to business combinations are expensed. Both of these acquisition costshave been and will continue to be funded from the proceeds of our Initial PublicOffering and not from operations.  Webelieve by excluding expensed acquisition costs, MFFO provides usefulsupplemental information that is comparable for each type of our real estateinvestments and is consistent with management’s analysis of the investing andoperating performance of our properties. Acquisition expenses include those incurred with our Advisor or thirdparties.

 

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·                                          *Impairmentcharges.*   Animpairment charge represents a downward adjustment to the carrying amount of along-lived asset to reflect the current valuation of the asset even when theasset is held for the long-term.  Suchadjustment, when properly recognized under GAAP, may lag the underlyingconsequences related to rental rates, occupancy and other operating performancetrends.  The valuation is also based, inpart, on the impact of current market fluctuations and estimates of futurecapital requirements and long-term operating performance that may not bedirectly attributable to current operating performance.   Because MFFO excludes impairment charges,management believes MFFO provides useful supplemental information by focusingon the changes in our core operating fundamentals rather than changes that mayreflect only anticipated losses.

 

·                                          *Adjustmentsto fair value for derivatives not qualifying for hedge accounting.* Managementintends to use derivatives in the management of our debt and our interest rateexposure. We do not intend to speculate in these interest rate derivatives, andaccordingly, period to period changes in derivative valuations are not theprimary factors in management’s decision making process. We believe by excludingthe gains or losses from these derivatives, MFFO provides useful supplementalinformation on the realized economic impact of the hedges independent ofshort-term market fluctuations.

 

Byproviding MFFO, we believe we are presenting useful information that assistsinvestors to better align their analysis with management’s analysis oflong-term, core operating activities. MFFO also provides useful information in analyzing comparability betweenreporting periods. Because MFFO is primarily affected by the same factors asFFO but without non-operating valuation changes, we believe fluctuations inMFFO are more indicative of changes in operating activities, and MFFO is morecomparable in evaluating our performance over time and as compared to otherreal estate companies, which may not be as involved in acquisition activitiesand derivatives or as affected by impairments.

 

FFO or MFFO should not beconsidered as an alternative to net income (loss), as an indication of ourliquidity, nor is either indicative of funds available to fund our cash needs,including our ability to make distributions; both should be reviewed inconnection with other GAAP measurements. MFFO may also exclude impairment charges and unrealized gains and lossesrelated to fair value adjustments for derivatives not qualifying for hedgeaccounting. Although the related holdings are not held for sale or used intrading activities, if the holdings were sold currently, it could affect ouroperating results. Our FFO and MFFO as presented may not be comparable toamounts calculated by other REITs.

 

Our total MFFO increased by approximately$4.4 million and $7.9 million for the three and nine months ended September 30,2010, respectively, as compared to the comparable periods in 2009.  These increases are due to our acquisitionsof six wholly owned communities and 12 investments in BHMP CO-JVs that ownstabilized communities, and improved occupancy and operating performances inlease up properties, primarily Forty55 Lofts, The Eclipse, Satori and TheVenue.

 

For the three and ninemonths ended September 30, 2010, MFFO per share was impacted by theincrease in net proceeds realized from our Initial Public Offering. A portionof the proceeds from this issuance were temporarily invested in short-term cashequivalents until they could be invested in multifamily communities.  Due to lower interest rates on cashequivalent investments, interest earnings were minimal.  We expect to invest these proceeds inhigher-earning multifamily community investments consistent with our investmentpolicies.

 

Our MFFO was also impactedby our real estate investments in development and lease ups. Until theseinvestments reach stabilization, property operating costs and interest expensein excess of rental revenue will adversely impact MFFO per share. We believeour investment basis in these multifamily communities is favorable.  For example, our BHMP CO-JVs’ investments inForty55 Lofts, San Sebastian and Cyan/PDX, high quality projects acquired atbelow-replacement value, required a lease up period to achievestabilization.  When stabilized, theseassets will be well positioned for long-term returns. We believe theseinvestments and our other development investments will add value to ourstockholders over our longer-term investment horizon, even if this results inless current-period earnings. See the “Results of Operations” section above fora quantification of the results of our lease ups and development investments.

 

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Thefollowing section presents our calculation of FFO and MFFO and providesadditional information related to our operations (in millions, except per shareamounts):

 
| ** **                                | ** ** | **For the Three Months Ended  September 30,** | ** ** | **For the Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                | ** ** | **2010**                                                               | ** ** | **2009**                                                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net loss                                  |       | $                                                                      | (10.4      | )                                                                     | $          | (3.9 | ) | $ | (28.2 | ) | $ | (3.3 | ) |
| Real estate depreciation and amortization |       | 12.5                                                                   |       | 1.3                                                                   |       | 29.1 |   | 2.0 |   |
| FFO                                       |       | 2.1                                                                    |       | (2.6                                                                  | )          | 0.9 |   | (1.3 | ) |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| Acquisition expenses                      |       | 3.2                                                                    |       | 3.5                                                                   |       | 9.3 |   | 3.6 |   |
| MFFO                                      |       | $                                                                      | 5.3        |                                                                  | $          | 0.9 |   | $ | 10.2 |   | $ | 2.3 |   |
|                                      |       |                                                                   |       |                                                                  |       |   |   |   |   |
| GAAP weighted average common shares       |       | 91.3                                                                   |       | 36.7                                                                  |       | 78.5 |   | 26.9 |   |
| MFFO per share                            |       | $                                                                      | 0.06       |                                                                  | $          | 0.03 |   | $ | 0.13 |   | $ | 0.09 |   |

 

·                  The real estate depreciation and amortizationamount includes our consolidated real estate-related depreciation andamortization of intangibles and our similar share of Co-Investment Venturedepreciation and amortization, which is included in earnings of unconsolidatedreal estate joint venture investments.

 

·                  Acquisitionexpenses include our share of expenses incurred by us and our unconsolidatedinvestments in real estate joint ventures, including amounts incurred with ourAdvisor. Acquisition expenses also include operating expenses that wereidentified or given credit by the seller in the acquisition but are expensed inaccordance with GAAP.

 

The following additionalinformation is presented in evaluating the presentation of net loss inaccordance with GAAP and our calculations of FFO and MFFO:

 

·                  For the threeand nine months ended September 30, 2010, our share of the gain related tothe acquisition of a controlling interest by The Venue BHMP CO-JV wasapproximately $0.7 million.

 

·                  For the threeand nine months ended September 30, 2010, cash collected exceeded straightline revenue adjustments of $1.7 million and $1.2 million, respectively. Forthe three and nine months ended September 30, 2009, cash collectedexceeded straight line revenue adjustments of $1.5 million and $1.5 million,respectively.

 

·                  For the threeand nine months ended September 30, 2010, our share of the net gainrelated to the Halstead BHMP CO-JV early extinguishment of debt wasapproximately $0.1 million, respectively.

 

As noted above, we believe FFO and MFFO are helpfulto investors and our management as measures of operating performance.  FFOand MFFO are not indicative of our cash available to fund distributions sinceother uses of cash, such as capital expenditures and principal payment of debtrelated to investments in unconsolidated real estate joint ventures, are notdeducted when calculating FFO and MFFO.

 

**Critical Accounting Policies and Estimates**

 

Thefollowing critical accounting policies and estimates apply to both us and ourCo-Investment Ventures, respectively.

 

Management’sdiscussion and analysis of financial condition and results of operations isbased upon our consolidated financial statements, which have been prepared inaccordance with GAAP. The preparation of these financial statements requiresour management to make judgments, assumptions and estimates that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. We evaluate these judgments,assumptions and estimates for changes which would affect the reported amounts.These estimates are based on management’s historical industry experience and onvarious other judgments and assumptions that are believed to be reasonableunder the circumstances. Actual results may differ from these judgments,assumptions and estimates. Our significant judgments, assumptions and estimatesinclude the consolidation of variable interest entities (“VIEs”), accountingfor notes receivable, the allocation of the purchase price of acquiredproperties, evaluating our real estate-related investments for impairment andestimates of amounts due for offering costs.

 

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

 

Ourconsolidated financial statements include our accounts, the accounts ofvariable interest entities in which we are the primary beneficiary and theaccounts of other subsidiaries over which we have control.  All inter-company transactions, balances andprofits have been eliminated in consolidation. Interests in entities are evaluated based on applicable GAAP, whichrequires the consolidation of VIEs in which we are deemed to be the primarybeneficiary.  If the interest in theentity is determined to not be a VIE, then the entities are evaluated forconsolidation based on legal form, economic substance, and the extent to whichwe have control and/or substantive participation rights under the respectiveownership agreement.

 

Thereare judgments and estimates involved in determining if an entity in which wewill make an investment or have made an investment will be a VIE and if so, ifwe will be the primary beneficiary. The entity will be evaluated to determine ifit is a VIE by, among other things, calculating the percentage of equity beingrisked compared to the total equity of the entity. There are some guidelines asto what the minimum equity at risk should be, but the percentage can varydepending upon factors such as the type of financing, status of operations andentity structure and it will be up to our Advisor to determine that minimumpercentage as it relates to our business and the facts surrounding each of ouracquisitions. In addition, even if the entity’s equity at risk is a very largepercentage, our Advisor will be required to evaluate the equity at riskcompared to the entity’s expected future losses to determine if there couldstill in fact be sufficient equity in the entity. Determining expected futurelosses involves assumptions of various possibilities of the results of futureoperations of the entity, assigning a probability to each possibility using adiscount rate to determine the net present value of those future losses andallocating those losses between the equity owners, subordinated lenders orother variable interests. The determination will also be based on an evaluationof the voting and other rights of owners and other parties to determine if theequity interests possess minimum governance powers.  The evaluation will also consider therelation of these parties’ rights to their economic participation in benefitsor obligation to absorb losses.  Aspartnership and other governance agreements have various terms which may changeover time or based on future results, these evaluations require complexanalysis and weighting of different factors. A change in the judgments,assumptions, allocations and estimates outlined above could result inconsolidating an entity that should not be consolidated or accounting for aninvestment on the equity method that should in fact be consolidated, theeffects of which could be material to our results of operations and financialcondition.

 

ForVIEs and other investments, we must evaluate whether we have control of anentity. Such evaluation includes judgments in determining if provisions ingoverning agreements provide control of activities that will impact the entityor are protective or participating rights for us, our Co-Investment Ventures orother equity owners. This evaluation also includes an assessment of multiplegovernance terms, including their economic effect to the operations of theentity, how relevant the terms are to the recurring operations of the entityand the weighing of each item to determine in the aggregate which owner, ifany, has control. These assessments would affect whether an entity should beconsolidated or reported on the equity method, the effects of which could bematerial to our results of operations and financial condition.

 

***Notes Receivable***

 

Weand our Co-Investment Ventures report notes receivable at their outstandingprincipal balances net of any unearned income and unamortized deferred fees andcosts. Loan origination fees and certain direct origination costs are generallydeferred and recognized as adjustments to interest income over the lives of therelated loans.

 

Inaccounting for notes receivable by us or our Co-Investment Ventures, there arejudgments related to whether the investments are loans, investments in joint venturesor acquisitions of real estate. We evaluate whether the loans contain anyrights to participate in expected residual profits, the loans providesufficient collateral or qualifying guarantees or include other characteristicsof a loan. As a result of our review, neither our wholly owned loan nor theloans made through our BHMP CO-JVs contain a right to participate in expectedresidual profits. In addition, the Property Entities or project borrowersremain obligated to pay principal and interest due on the loans with sufficientcollateral, reserves or qualifying guarantees to account for the investments asloans.

 

Notesreceivables are assessed for impairment. Based on specific circumstances wedetermine the probability that there has been an adverse change in theestimated cash flows of the contractual payments for the notes receivable. Wethen assess the impairment based on the probability to collect all contractualamounts including factors such as the general or market-specific economicconditions for the project; the financial conditions of the borrower andguarantors, if any; the degree of any defaults by the borrower on any of itsobligations; the assessment of the underlying project’s financial viability andother collateral; the length of time and extent of the condition; and our orthe Co-Investment Venture’s intent and ability to retain its investment in theissuer for a period sufficient to allow for any anticipated recovery in themarket value. If the impairment is probable, we recognize an impairment lossequal to the difference between our or the Co-Investment Venture’s (all ofwhich have been made through BHMP CO-JVs) 

 

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investmentin the loan and the present value of the estimated cash flows discounted at theloan’s effective interest rate. Where we have the intent and the ability toforeclose on our security interest in the property, we will use the property’sfair value as a basis for the impairment.

 

Thereare judgments involved in determining the probability for an impairment tocollect contractual amounts. As these types of loans are generally investmentspecific based on the particular loan terms and the underlying projectcharacteristics, there is usually not any secondary market to evaluateimpairments. Accordingly, we must rely on our subjective judgments andindividual weightings of the specific factors. If loans are consideredimpaired, then judgments and estimates are required to determine the projectedcash flows for the loan, considering the borrower’s or, if applicable, theguarantor’s financial condition and the consideration and valuation of thesecured property and any other collateral.

 

Changesin these facts or in our judgments and assessments of these facts could resultin impairment losses which could be material to our results of operations andfinancial condition.

 

***Investments in Unconsolidated******Real******Estate Joint Ventures***

 

Asof September 30, 2010, all of our Co-Investment Ventures are BHMPCO-JVs.  We are the manager of each BHMPCO-JV’s affairs, but the operation of BHMP CO-JVs are conducted in accordancewith operating plans prepared by us and approved by us and the BHMP Co-InvestmentPartner.  In addition, without theconsent of both members of the BHMP CO-JV, the manager may not generallyapprove or disapprove on behalf of the BHMP CO-JV certain major decisionsaffecting the BHMP CO-JV, such as (i) selling or otherwise disposing of theinvestment or any other property having a value in excess of $100,000,(ii) selling any additional interests in the BHMP CO-JV, (iii) approvinginitial and annual operating plans and capital expenditures or(iv) incurring or materially modifying any indebtedness of the BHMP CO-JVin excess of $100,000.  As a result ofthe equal substantive participating rights possessed by each partner in theordinary course of business, no single party controls each venture;accordingly, we account for each BHMP CO-JV using the equity method ofaccounting.  The equity method ofaccounting requires these investments to be initially recorded at cost andsubsequently increased (decreased) for our share of net income (loss), includingeliminations for our share of inter-company transactions, and reduced whendistributions are received.

 

Eachof the Property Entities have different profit sharing interests, some of whichhave numerous allocation and distribution provisions where certain equityinvestors receive preferred interests or deferred participations. We allocateincome and loss for determining our equity in earnings of unconsolidated jointventures based on the underlying economic effect or participation in thebenefit or loss. Although our policy is to use the concepts of a hypotheticalliquidation at book value, judgment is required to determine which owners arebearing economic benefits or losses, particularly as properties move fromdevelopment to operations and guarantees and other priority payments are triggeredor removed. A change in these judgments could result in greater or lesseramounts of equity in earnings.

 

Whenwe or a BHMP CO-JV acquire a controlling interest in a business previouslyaccounted for as a noncontrolling investment, a gain or loss is recorded forthe difference between the fair value and the carrying value of the investmentin the real estate joint venture and in some instances pre-existingrelationships.  This analysis, which isfrom the perspective of market participants, requires determination of fairvalues for investments and contractual relationships where there are nosecondary markets.  Accordingly, we mustrely on our subjective judgments using models with the best availableinformation.  Changes in these judgmentscould significantly impact our results of operations and the carrying amount ofour assets and liabilities.

 

***Real Estate and Other RelatedIntangibles***

 

For real estate properties acquired by us or our Co-Investment Venturesclassified as business combinations, we allocate the purchase price, afteradjusting for contingent consideration and settlement of any pre-existingrelationships, to the tangible assets acquired, consisting of land, inclusiveof associated rights, and buildings, any assumed debt, identified intangibleassets and liabilities and asset retirement obligations based on their fairvalues.  Identified intangible assets andliabilities consist of the fair value of above-market and below-market leases,in-place leases and contractual rights. Goodwill is recognized as of the acquisition date and measured as theaggregate fair value of the consideration transferred and any noncontrollinginterests in the acquiree over the fair value of identifiable net assetsacquired.  Likewise, a bargain purchasegain is recognized in current earnings when the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree isless than the fair value of the identifiable net assets acquired.

 

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Thefair value of any tangible assets acquired, expected to consist of land andbuildings, is determined by valuing the property as if it were vacant, and the “as-if-vacant”value is then allocated to land, buildings and improvements.  Land values are derived from appraisals, andbuilding values are calculated as replacement cost less depreciation orestimates of the relative fair value of these assets using discounted cash flowanalyses or similar methods.  Buildingsare depreciated over their estimated useful lives ranging from 25 to 35 yearsusing the straight-line method.  Improvementsare depreciated over their estimated useful lives ranging from 3 to 15 yearsusing the straight-line method.  When weacquire rights to use land or improvements through contractual rights ratherthan fee simple interests, we determine the value of the use of these assetsbased on the relative fair value of the assets after considering thecontractual rights and the fair value of similar assets. Assets acquired underthese contractual rights are classified as intangibles and amortized on astraight-line basis over the shorter of the contractual term or the estimateduseful life of the asset. Contractual rights related to land or air rights thatare substantively separated from depreciating assets are amortized over thelife of the contractual term or, if no term is provided, are classified asindefinite-lived intangibles. Indefinite-lived intangible assets are evaluatedat each reporting period to determine whether the indefinite useful life isappropriate.

 

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 (i) the contractual amounts to be paid pursuant to the in-placeleases and (ii) estimates of current-market lease rates for the correspondingin-place leases, measured over a period equal to (1) the remainingnon-cancelable lease term for above-market leases, or (2) the remainingnon-cancelable lease term plus any fixed rate renewal options for below-marketleases. We record the fair value of above-market and below-market leases asintangible assets or intangible liabilities, respectively, and amortize them asan adjustment to rental income over the above determined lease term.

 

Thetotal value of identified real estate intangible assets acquired is furtherallocated to in-place lease values, in-place leasing commissions and tenantrelationships based on our evaluation of the specific characteristics of eachtenant’s lease and our overall relationship with that respective tenant. Theaggregate value of in-place leases acquired and tenant relationships isdetermined by applying a fair value model. The estimates of fair value ofin-place leases include an estimate of carrying costs during the expected leaseup periods for the respective spaces considering then current marketconditions. In estimating the carrying costs that would have otherwise beenincurred had the leases not been in place, we include such items as real estatetaxes, insurance and other operating expenses as well as projected rental revenueduring the expected lease up period based on then current market conditions.The estimates of the fair value of tenant relationships also include costs toexecute similar leases including leasing commissions, legal and tenantimprovements as well as an estimate of the likelihood of renewal as determinedon a tenant-by-tenant basis.

 

Weamortize the value of in-place leases and in-place tenant improvements over theremaining term of the respective leases. The value of tenant relationshipintangibles is amortized over the initial term and any anticipated renewalperiods, but in no event exceeding the remaining depreciable life of thebuilding. If a tenant terminates its lease prior to expiration of the initialterms, the unamortized portion of the in-place lease value and tenantrelationship intangibles is charged to expense.

 

Wedetermine the fair value of assumed debt by calculating the net present valueof the scheduled debt service payments using interest rates for debt withsimilar terms and remaining maturities that we believe we could obtain. Anydifference between the fair value and stated value of the assumed debt isrecorded as a discount or premium and amortized over the remaining life of theloan.

 

Wemake assumptions and estimates in determining the purchase price and theallocation of the price, including fair value inputs for contractualagreements, cash flow projections, market rental rates, physical and economicobsolescence, lease-up periods and discount rates.  For many of these inputs there is no marketprice for the same or similar asset or liability and accordingly judgment isrequired to determine amounts from the perspective of market participants. Achange in these assumptions or estimates could result in changes to amounts ofassets or liabilities or in the various categories of our real estate assets orrelated intangibles being overstated or understated which could result in anoverstatement or understatement of depreciation or amortization expense, rentalincome, or other income or expense categories.

 

***Investment Impairments***

 

Forproperties wholly owned by us or our Co-Investment Ventures, including allrelated intangibles, we monitor 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 including 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.  In addition,we evaluate indefinite-lived intangible assets for possible 

 

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impairmentat least annually by comparing the fair values with the carrying values.  Fair value is generally estimated byvaluation of similar assets.

 

Forreal estate we own through an investment in an unconsolidated real estate jointventure or other similar real estate investment structure, at each reportingdate we compare the estimated fair value of our real estate investment to thecarrying value.  An impairment charge isrecorded to the extent the fair value of our real estate investment is lessthan the carrying amount and the decline in value is determined to be otherthan a temporary decline.

 

Inevaluating our investments for impairment, we make several judgments,assumptions and estimates, including, but not limited to, the projected date ofdisposition of our investments in real estate, the estimated future cash flowsfrom our investments in real estate and the projected sales price of each ofour investments in real estate. Recently, domestic financial and real estatemarkets have experienced unusual volatility and uncertainty with fewernon-distressed secondary transactions available on which to base theseestimates and assumptions. Our estimates of fair value are based on informationavailable to management as to conditions present as of the assessment date. Achange in these judgments, assumptions and estimates could result inunderstating or overstating the book value of our investments which could bematerial to our financial statements.

 

***Fair Value***

 

In connection with our assessments anddeterminations of fair value for many real estate assets and financialinstruments, there are generally not available observable market price inputsfor substantially the same items. Accordingly, we make assumptions and use various estimates and pricingmodels, including, but not limited to, the estimated cash flows, costs to leaseproperties, useful lives of the assets, the cost of replacing certain assets,discount and interest rates used to determine present values and market rentalrates. Many of these estimates are from the perspective of market participantsand will also be obtained from independent third-party appraisals. However, wewill be responsible for the source and use of these estimates. A change inthese estimates and assumptions could be material to our results of operationsand financial condition.

 

***Offering Costs***

 

Indetermining the amount of offering costs to charge against additional paid incapital, we make estimates of the amount of the expected offering costs to bepaid to our Advisor. This estimate is based on our assessment for the timeperiod of the offering, including any follow-on offerings, and the amount ofshares sold during those periods. Our assumptions are based on current sharesales trends and comparisons to other similar initial public offerings,including those sponsored by Behringer Harvard Holdings, LLC. A change in theseestimates and assumptions could affect the amount of our additional paid incapital and recognition of amounts due to or from our Advisor.

 

**New Accounting Pronouncements**

 

InJune 2009, the Financial Accounting Standards Board (“FASB”) issued anamendment to the authoritative guidance on the consolidation of variableinterest entities.  This guidanceeliminates exceptions to consolidating qualifying special-purpose entities,contains new criteria for determining the primary beneficiary, and increasesthe frequency of required reassessments to determine whether a company is theprimary beneficiary of a variable interest entity.  This guidance also contains a new requirementthat any term, transaction, or arrangement that does not have a substantiveeffect on an entity’s status as a variable interest entity, a company’s powerover a variable interest entity, or a company’s obligation to absorb losses orits rights to receive benefits of an entity must be disregarded in evaluatingwhether an entity is a variable interest entity.  This guidance was applicable to us beginning January 1,2010.  The adoption of this guidance didnot have a material impact on our consolidated financial statements.

 

**Inflation**

 

Thereal estate market has not been affected significantly by inflation in the pastseveral years due to a relatively low inflation rate.  The majority of ourfixed-lease terms are less than 12 months and reset to market if renewed.  The majority of our leases also containprotection provisions applicable to reimbursement billings for utilities.  Should inflation return, due to the shortterm nature of our leases, multifamily investments are considered goodinflation hedges.

 

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**REIT Tax Election**

 

Wehave elected to be taxed as a REIT under Sections 856 through 860 of the Codeand have qualified as a REIT since the year ended December 31, 2007. To qualify as 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 notbe subject to federal income tax at the corporate level.  We are organizedand operate in such a manner as to qualify for taxation as a REIT under theCode, and we intend to continue to operate in such a manner, but no assurancecan be given that we will operate in a manner so as to remain qualified as aREIT.

 

**Item3.   Quantitative and Qualitative Disclosures About Market Risk.**

 

Our interest rate risk management objectives are tolimit the impact of interest rate changes on earnings and cash flows and tolower overall borrowing costs. To achieve the financing objectives, we borrowprimarily at fixed rates or variable rates with what we believe are the lowestmargins available and in some cases, the ability to convert variable rates tofixed rates either directly or through interest rate hedges.  With regard to variable rate financing, wemanage interest rate cash flow risk by continually identifying and monitoringchanges in interest rate exposures that may adversely impact expected futurecash flows and by evaluating hedging opportunities.

 

Asof September 30, 2010, we had approximately $93.5 million of outstandingdebt on our wholly owned communities at a weighted average, fixed interest rateof approximately 4.78%. Our BHMP CO-JVs with wholly owned communities and ourBHMP CO-JVs with equity in Property Entities had borrowed aggregate senior debtof approximately $275.2 million and $314.0 million, respectively (which amountconsists of third-party first mortgages and construction loans and excludes loansmade to the Property Entities by the BHMP CO-JVs or us).  Of this amount, approximately $298.2 millionwas at fixed interest rates with a weighted average of approximately 4.6% and$291.0 million was at variable interest rates with a weighted average of monthlyLIBOR plus 2.3%*.*

 

Asof September 30, 2010, we have only one wholly owned note receivable witha carrying value of approximately $2.6 million and a fixed interest rate of10%.  Our BHMP CO-JVs had notesreceivable from Property Entities of approximately $77.4 million, all of whichwere at fixed rates, with a weighted average interest rate of approximately10.7%.

 

Interestrate fluctuations will generally not affect our future earnings or cash flowson our fixed rate debt or fixed rate real estate loan receivable unless suchinstruments are traded or are otherwise terminated prior to maturity. However,interest rate changes will affect the fair value of our fixed rate instruments.As we do not expect to trade or sell our fixed rate debt instruments prior tomaturity and the amounts due under such instruments would be limited to theoutstanding principal balance and any accrued and unpaid interest, we do notexpect that fluctuations in interest rates,and the resulting change in fair value of our fixed rate instruments, wouldhave a significant impact on our operations.

 

Conversely, movements in interestrates on variable rate debt, loans receivable and real estate securities wouldchange our future earnings and cash flows, but not significantly affect thefair value of those instruments.  As of September 30,2010, we did not have any loans receivable or real estate securities withvariable interest rates.  We are exposedto interest rate changes primarily as a result of our variable rate debt usedto acquire or hold our wholly owned multifamily communities, which as of September 30,2010 related only to our credit facility, and our wholly owned cashinvestments. We quantify our exposure to interest rate risk based on howchanges in interest rates affect our net income.  We consider changes in the 30-day LIBOR rateto be most indicative of our interest rate exposure as it is a function of thebase rate for our credit facility and is reasonably correlated to changes inour earnings rate on our cash investments. We consider increases of 0.5%, 1.0%and 1.5% in the 30-day LIBOR rate to be reflective of reasonable changes we mayexperience in the current interest rate environment. The table below reflectsthe annual effect of an increase in the 30-day LIBOR to our net income relatedto our significant variable interest rate exposures for our wholly owned assetsand liabilities as of September 30, 2010 (amounts in millions, wherepositive amounts reflect an increase in income and bracketed amounts reflect adecrease in income):

 
| ** **                        | ** ** | **Increases in Interest Rates** | ** ** |
|-----------------------------------|------------|------------------------------------------------|------------|
| ** **                        | ** ** | **1.5%**                                       | ** ** | **1.0%** | ** ** | **0.5%** | ** ** |
| Credit facility interest  expense |       | $                                              | (0.3       | ) | $ | (0.2 | ) | $ | (0.1 | ) |
| Cash investments                  |       | 1.0                                            |       | 0.6 |   | 0.3 |   |
| Total                             |       | $                                              | 0.7        |   | $ | 0.4 |   | $ | 0.2 |   |

 

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There is no assurance that we would realize suchincome or expense as such changes in interest rates could alter our asset orliability positions or strategies in response to such changes. The table alsodoes not reflect changes in operations related to our unconsolidatedinvestments in real estate joint ventures, where we do not have control overfinancing matters and substantial portions of variable rate debt related tomultifamily development projects where interest is capitalized.

 

Wedo not have any foreign operations and thus we are not exposed to foreigncurrency fluctuations as of September 30, 2010.

 

**Item 4.  Controls and Procedures.**

 

**Evaluationof Disclosure Controls and Procedures**

 

Asrequired by Rule 13a-15(b) and Rule 15d-15(b) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”), ourmanagement, including our Chief Executive Officer and Chief Financial Officer,evaluated, as of September 30, 2010, the effectiveness of our disclosurecontrols and procedures as defined in Exchange Act Rule 13a-15(e) andRule 15d-15(e).  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures were effective as of September 30, 2010 to provide reasonableassurance that information required to be disclosed by us in this report isrecorded, processed, summarized and reported within the time periods specifiedby the rules and forms of the Exchange Act and is accumulated andcommunicated to management, including the Chief Executive Officer and ChiefFinancial Officer, as appropriate to allow timely decisions regarding requireddisclosures.

 

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.

 

**Changesin Internal Control over Financial Reporting**

 

Therehave been no changes in internal control over financial reporting during thequarter ended September 30, 2010 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II**

**OTHER INFORMATION**

 

**Item 1.  LegalProceedings.**

 

Inour normal course of business, we are subject to legal proceedings that are notsignificant to our operations. We are not party to, and our properties are notsubject to, any material pending legal proceedings.

 

**Item 1A.  Risk Factors.**

 

Pleasesee the risks factors contained in Part I, Item 1A set forth in ourAnnual Report on Form 10-K filed with the Securities and ExchangeCommission (“SEC”) on March 31, 2010. The following risk factor updates,supersedes and replaces, as appropriate, the risk factor under the similarheading in our Annual Report on Form 10-K.

 

***We and the other public Behringer Harvard sponsoredprograms have experienced losses in the past, and we may experience similarlosses in the future.***

 

Forthe year ended December 31, 2009 and the nine months ended September 30,2010, we had net losses of $8.3 million and $28.2 million, respectively.  Our losses can be attributed, in part, to theinitial start-up costs and operating expenses incurred prior to purchasingproperties and making investments in properties that are in lease up and havenot yet reached stabilization . In addition, depreciation and amortizationexpenses substantially reduced our income. Due to recent changes in accountingprinciples generally accepted in the United States which were effective in2009, acquisition expenses now also reduce income (prior to 2009 such expenseswere capitalized). Historically, other public programs sponsored by affiliatesof our advisor have also experienced losses, especially during the earlyperiods of their operation. For the reasons described above, we cannot assureyou that, in the future, we will be profitable or that we will realize growthin the value of our assets.

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.**

 

**Use of Proceeds from Registered Securities**

 

OnSeptember 2, 2008, our Registration Statement on Form S-11 (FileNo. 333-148414), covering a public offering (our “Initial Public Offering”)of up to 250,000,000 shares of common stock, was declared effective under theSecurities Act of 1933. Our Initial Public Offering commenced on September 5,2008 and is ongoing.  On June 29, 2010, our board of directorsapproved an extension of our offering of 250,000,000 shares of our common stockpursuant to our initial public offering until no later than September 2,2011.  Under rules promulgated bythe SEC, we could extend our offering until February 29, 2012. Our boardof directors has the discretion to extend the offering period for the sharesoffered under the DRIP up to the sixth anniversary of the termination of theprimary offering.  We may reallocate the shares of common stock beingoffered between the primary offering and the distribution reinvestment plan.

 

Weare offering a maximum of 200 million shares in our primary offering at anaggregate offering price of up to $2 billion, or $10.00 per share withdiscounts available to certain categories of purchasers.  The 50 millionshares offered under the DRIP are initially being offered at an aggregateoffering price of $475 million, or $9.50 per share.  Behringer SecuritiesLP, an affiliate of our advisor, is the dealer manager of the Initial PublicOffering.  As of September 30, 2010, we had sold approximately 82.1million shares of our common stock in our Initial Public Offering on a bestefforts basis pursuant to the offering for gross offering proceeds ofapproximately $817.4 million.

 

Fromthe commencement of the Initial Public Offering through September 30,2010, we incurred expenses of approximately $95.6 million in connection withthe issuance and distribution of the registered securities pursuant to theoffering all of which was paid to our advisor.

 

Fromthe commencement of the Initial Public Offering through September 30,2010, the net offering proceeds to us from the Initial Public Offering,including the distribution reinvestment plan, after deducting the total expensesincurred described above, were approximately $721.8 million.  From thecommencement of the Initial Public Offering through September 30, 2010, wehad used approximately $686.5 million of such net proceeds to purchaseinterests in real estate, net of notes payable.  Of the amount used for 

 

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thepurchase of these investments, $16.8 million was paid to our advisor, BehringerHarvard Multifamily Advisors I, as acquisition and advisory fees andacquisition expense reimbursement.

 

**Recent Shares of Unregistered Securities**

 

Duringthe period covered by this Quarterly Report, we did not sell any equitysecurities that were not registered under the Securities Act of 1933.

 

**Share Redemption Program**

 

Ourboard of directors has adopted a share redemption program that permitsstockholders to sell their shares back to us after they have held them for atleast one year, subject to the significant conditions and limitations of theprogram.  Our board of directors canamend the provisions of our share redemption program without the approval ofour stockholders.  The terms on which weredeem shares may differ between redemptions upon a stockholder’s death, “qualifyingdisability” (as defined in the share redemption program) or confinement to along-term care facility (collectively referred to herein as “ExceptionalRedemptions”) and all other redemptions (referred to herein as “OrdinaryRedemptions”).  The purchase price forshares redeemed under the redemption program is set forth below.

 

Inthe case of Ordinary Redemptions, the purchase price per share will equal 90%of (i) the most recently disclosed estimated value per share as determinedin accordance with our valuation policy, less (ii) the aggregatedistributions per share of any net sale proceeds from the sale of one or moreof our assets, or other special distributions so designated by our board ofdirectors, distributed to stockholders after the valuation was determined (the “ValuationAdjustment”); provided, however, that the purchase price per share shall notexceed: (1) prior to the first valuation conducted by the board ofdirectors, or a committee thereof (the “Initial Board Valuation”), under thevaluation policy, 90% of (i) average price per share the originalpurchaser or purchasers of shares paid to us for all of his or her shares (asadjusted for any stock dividends, combinations, splits, recapitalizations andthe like with respect to our common stock) (the “Original Share Price”) less (ii) theaggregate distributions per share of any net sale proceeds from the sale of oneor more of our assets, or other special distributions so designated by theboard of directors, distributed to stockholders prior to the redemption date(the “Special Distributions”); or (2) on or after the Initial BoardValuation, the Original Share Price less any Special Distributions.

 

Inthe case of Exceptional Redemptions, the purchase price per share will be equalto: (1) prior to the Initial Board Valuation, the Original Share Priceless any Special Distributions; or (2) on or after the Initial BoardValuation, the most recently disclosed valuation less any Valuation Adjustment,provided, however, that the purchase price per share may not exceed theOriginal Share Price less any Special Distributions.

 

Notwithstandingthe redemption prices set forth above, our board of directors may determine,whether pursuant to formulae or processes approved or set by our board ofdirectors, the redemption price of the shares, which may differ betweenOrdinary Redemptions and Exceptional Redemptions; provided, however, that wemust provide at least 30 days’ notice to stockholders before applying this new pricedetermined by our board of directors.

 

Anyshares approved for redemption will be redeemed on a periodic basis asdetermined from time to time by our board of directors, and no less frequentlythan annually. We will not redeem, during any twelve-month period, more than 5%of the weighted average number of shares outstanding during the twelve-monthperiod immediately prior to the date of redemption. Generally, the cashavailable for redemption on any particular date will be limited to the proceedsfrom our distribution reinvestment plan during the period consisting of thepreceding four fiscal quarters for which financial statements are available,less any cash already used for redemptions during the same period, plus, if wehad positive operating cash flow during such preceding four fiscal quarters, 1%of all operating cash flow during such preceding four fiscal quarters.  The redemption limitations apply to allredemptions, whether Ordinary or Exceptional Redemptions.

 

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Duringthe three months ended September 30, 2010, our board of directorsapproved the redemption of shares as follows:

 
| **2010**           | ** ** | **Total Number of  Shares Redeemed** | ** ** | **Average Price  Paid Per Share** | ** ** | **Total Number of Shares  Purchased as Part of  Publicly Announced Plans  or Programs** | ** ** | **Maximum Number of  Shares That May Be  Purchased Under the  Plans or Programs** | ** ** |
|--------------------|------------|-----------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------|------------|
| July               |       | —                                              |       | $                                                | —     |                                                                                                                                 | —     |                                                                                                                           |       |   |
| August             |       | —                                              |       | —                                           |       | —                                                                                                                               |       |                                                                                                                           |       |
| September (1) |       | 657,412                                             |       | 8.68                                             |       | 657,412                                                                                                                              |       | (2)                                                                                                                            |       |
|               |       | 657,412                                             |       | $                                                | 8.68       |                                                                                                                                 | 657,412    |                                                                                                                           |       |   |

 

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(1)          The September 2010 redemptions were paid in October 2010.

 

(2)          A description of the maximum number of shares thatmay be purchased under our redemption program is included           in the narrative preceding thistable.

 

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

 

None.

 

**Item 4.   (Removed and Reserved)**

 

**Item 5.  Other Information.**

 

OnNovember 11, 2010, we entered into a letter agreement with our Advisorpursuant to which our Advisor deferred until no later than March 31, 2011our obligation to reimburse it for organization and offering expenses paid orincurred by it in connection with our Initial Public Offering.  As of September 30, 2010, $2.7 millionof such reimbursement was accrued and unpaid.

 

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** **

**Item 6.      Exhibits.**

 
| **Ex.** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|---------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| 3.1     |       | Articles of Restatement,  incorporated by reference to Exhibit 3.1.2 to the Company’s  Form 8-K filed on September 8, 2008                                                                                                                                                                                                                                                                                                             |
| 3.2     |       | Fourth Amended and  Restated Bylaws, incorporated by reference to Exhibit 3.2 to the  Company’s Form 8-K filed on March 1, 2010                                                                                                                                                                                                                                                                                                        |
| 4.1     |       | Subscription Agreement,  incorporated by reference to Exhibit A to the Company’s Post-Effective  Amendment No. 8 to its Registration Statement on Form S-11 filed on  October 27, 2010, Commission File No. 333-148414                                                                                                                                                                                                       |
| 4.2     |       | Amended and Restated  Distribution Reinvestment Plan, incorporated by reference to Exhibit B  to the Company’s Post-Effective Amendment No. 8 to its Registration  Statement on Form S-11 filed on October 27, 2010, Commission File  No. 333-148414                                                                                                                                                                         |
| 4.3     |       | Amended and Restated  Automatic Purchase Plan, incorporated by reference to Exhibit C to the  Company’s Post-Effective Amendment No. 8 to its Registration Statement  on Form S-11 filed on October 27, 2010, Commission File  No. 333-148414                                                                                                                                                                                |
| 4.4     |       | Amended and Restated Share  Redemption Program, incorporated by reference to Exhibit 4.4 to the  Company’s Form 10-Q filed on November 13, 2009                                                                                                                                                                                                                                                                                        |
| 4.5     |       | Statement regarding  restrictions on transferability of shares of common stock (to appear on stock  certificate or to be sent upon request and without charge to stockholders  issued shares without certificates), incorporated by reference to  Exhibit 4.5 to the Company’s Registration Statement on Form S-11/A  filed on May 9, 2008, Commission File No. 333-148414                                                        |
| 10.1    |       | Membership Interests  Purchase Agreement by and between Lakeshore Aqua Rental LLC and Magellan Aqua  LLC as seller and Behringer Harvard Multifamily OP I LP as buyer, dated  September 3, 2010, incorporated by reference to Exhibit 10.49 to  the Company’s Post-Effective Amendment No. 8 to its Registration  Statement on Form S-11 filed on October 27, 2010, Commission File  No. 333-148414                     |
| 10.2    |       | First Amendment to  Membership Interests Purchase Agreement by and between Lakeshore Aqua Rental  LLC and Magellan Aqua LLC as seller and Behringer Harvard Multifamily OP I LP  as buyer, dated September 22, 2010, incorporated by reference to  Exhibit 10.50 to the Company’s Post-Effective Amendment No. 8 to  its Registration Statement on Form S-11 filed on October 27, 2010,  Commission File No. 333-148414 |
| 10.3*   |       | Letter Agreement, dated  November 11, 2010, between Behringer Harvard Multifamily REIT  I, Inc. and Behringer Harvard Multifamily Advisors I, LLC                                                                                                                                                                                                                                                                                                |
| 31.1*   |       | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                                                                                                                                                  |
| 31.2*   |       | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002                                                                                                                                                                                                                                                                                                                                                  |
| 32.1*   |       | Certifications of Chief  Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as  created by Section 906 of the Sarbanes-Oxley Act of 2002**                                                                                                                                                                                                                                                                                     |

 

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*Filedherewith.

 

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

 

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**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 MULTIFAMILY REIT I, INC.** |
|--------------------------------|------------------------------------------------------|
|                           |                                                 |   |
|                           |                                                 |   |
| Dated:  November 15, 2010 |                                                 | /s/  Howard S. Garfield |
|                           |                                                 | Howard  S. Garfield |
|                           |                                                 | Chief  Financial Officer |
|                           |                                                 | (Principal  Financial Officer) |

 

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