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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q**

 

**[MarkOne]**

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

 

**Forthe quarterly period ended September 30, 2009**

 

**OR**

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

 

**Forthe transition period from                        to**

 

**CommissionFile Number: 000-53195**

 

**BehringerHarvard Multifamily REIT I, Inc.**

(Exact Name ofRegistrant as Specified in Its Charter)

 

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

 

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

(Address ofPrincipal Executive Offices) (ZIP Code)

 

**(866)655-3600**

(Registrant’sTelephone Number, Including Area Code)

 

**None**

(Former name,former address and former fiscal year, if changed since last 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

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  Yes  o   No  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act:

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

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes o No x

 

As of November 9,2009, the Registrant had 47,789,245 shares of common stock outstanding.

 

 

 

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

**Form 10-Q**

**QuarterEnded September 30, 2009**

 
| ** **     | **PART 1**                                                                                                                                       | ** ** |
|----------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **     | **FINANCIAL INFORMATION**                                                                                                                             | ** ** |
|           | ** **                                                                                                                                            | **Page**   |
| **Item 1.**    | **Financial Statements  (unaudited)**                                                                                                                 | ** ** |
| ** **     | ** **                                                                                                                                            | ** ** |
|           | Consolidated  Balance Sheets as of September 30, 2009 and December 31, 2008                                                                 | 3          |
|           |                                                                                                                                                  |       |
|           | Consolidated  Statements of Operations for the three and nine months ended  September 30, 2009 and 2008                                          | 4          |
|           |                                                                                                                                                  |       |
|           | Consolidated  Statements of Stockholders’ Equity for the year ended December 31, 2008  andfor the nine months ended September 30, 2009 | 5          |
|           |                                                                                                                                                  |       |
|           | Consolidated  Statements of Cash Flows for the nine months ended September 30, 2009  and 2008                                                    | 6          |
|           |                                                                                                                                                  |       |
|           | Notes  to Consolidated Financial Statements                                                                                                           | 7          |
|           |                                                                                                                                                  |       |
| **Item 2.**    | **Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                                       | 27         |
|           |                                                                                                                                                  |       |
| **Item 3.**    | **Quantitative  and Qualitative Disclosures About Market Risk**                                                                                       | 52         |
|           |                                                                                                                                                  |       |
| **Item 4(T).** | **Controls and  Procedures**                                                                                                                          | 52         |
|           |                                                                                                                                                  |       |
|           | **PART II**                                                                                                                                      | ** ** |
|           | **OTHER INFORMATION**                                                                                                                                 | ** ** |
|           |                                                                                                                                                  |       |
| **Item 1.**    | **Legal Proceedings**                                                                                                                                 | 54         |
| ** **     | ** **                                                                                                                                            | ** ** |
| **Item 1A.**   | **Risk Factors**                                                                                                                                      | 54         |
| ** **     | ** **                                                                                                                                            | ** ** |
| **Item 2.**    | **Unregistered  Sales of Equity Securities and Use of Proceeds**                                                                                      | 57         |
| ** **     | ** **                                                                                                                                            | ** ** |
| **Item 3.**    | **Defaults Upon  Senior Securities**                                                                                                                  | 59         |
| ** **     | ** **                                                                                                                                            | ** ** |
| **Item 4.**    | **Submission of  Matters to a Vote of Security Holders**                                                                                              | 59         |
| ** **     | ** **                                                                                                                                            | ** ** |
| **Item 5.**    | **Other Information**                                                                                                                                 | 59         |
| ** **     | ** **                                                                                                                                            | ** ** |
| **Item 6.**    | **Exhibits**                                                                                                                                          | 62         |
|           |                                                                                                                                                  |       |
| **Signature**  | 64                                                                                                                                                    |

 

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**PART I**

**FINANCIAL INFORMATION**

 

**Item 1. Financial Statements.**

 

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

**Consolidated Balance Sheets**

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

**(Unaudited)**

** **
| ** **                                                                                                                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                                              | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| **Assets**                                                                                                                                                                                              |       |                   |       |                  |       |
| Real estate:                                                                                                                                                                                            |       |                   |       |                  |       |
| Land                                                                                                                                                                                                    |       | $                      | 34,500     |                  | $          | — |   |
| Buildings and improvements                                                                                                                                                                              |       | 101,635                |       | —                |       |
|                                                                                                                                                                                                    |       | 136,135                |       | —                |       |
| Less accumulated depreciation                                                                                                                                                                           |       | (220                   | )          | —                |       |
| Total real estate, net                                                                                                                                                                                  |       | 135,915                |       | —                |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| Investments in unconsolidated real estate joint  ventures                                                                                                                                               |       | 147,696                |       | 96,505                |       |
| Cash and cash equivalents                                                                                                                                                                               |       | 63,514                 |       | 23,771                |       |
| Note and other receivables                                                                                                                                                                              |       | 3,969                  |       | 1                     |       |
| Receivables from affiliates                                                                                                                                                                             |       | 330                    |       | 299                   |       |
| Other assets, net                                                                                                                                                                                       |       | 1,604                  |       | 318                   |       |
| **Total assets**                                                                                                                                                                                        |       | $                      | 353,028    |                  | $          | 120,894 |   |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Liabilities and stockholders’  equity**                                                                                                                                                          |       |                   |       |                  |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **Liabilities**                                                                                                                                                                                         |       |                   |       |                  |       |
| Payables to affiliates                                                                                                                                                                                  |       | $                      | 486        |                  | $          | 627 |   |
| Distributions payable                                                                                                                                                                                   |       | 2,315                  |       | 832                   |       |
| Accrued offering costs payable to affiliates                                                                                                                                                            |       | 2,304                  |       | 6,918                 |       |
| Deferred lease revenues and other related  liabilities, net                                                                                                                                             |       | 15,465                 |       | —                |       |
| Tenant security deposits                                                                                                                                                                                |       | 160                    |       | —                |       |
| Accounts payable and other liabilities                                                                                                                                                                  |       | 2,018                  |       | 123                   |       |
| **Total liabilities**                                                                                                                                                                                   |       | 22,748                 |       | 8,500                 |       |
|                                                                                                                                                                                                    |       |                   |       |                  |       |
| **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, 42,010,624 and 15,347,792 shares issued and  outstanding at September 30, 2009 and December 31, 2008,  respectively |       | 4                      |       | 1                     |       |
| Additional paid-in capital                                                                                                                                                                              |       | 352,462                |       | 117,268               |       |
| Cumulative distributions and net loss                                                                                                                                                                   |       | (22,186                | )          | (4,875                | )          |
| **Total stockholders’ equity**                                                                                                                                                                     |       | 330,280                |       | 112,394               |       |
| **Total liabilities and  stockholders’ equity**                                                                                                                                                    |       | $                      | 353,028    |                  | $          | 120,894 |   |

 

*SeeNotes 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** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                             | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **                                                                             | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                   |       |                           |       |                          |       |   |   |   |   |
| **Rental revenues**                                                                    |       | $                              | 538        |                          | $          | — |   | $ | 538 |   | $ | — |   |
| ** **                                                                             |       |                           |       |                          |       |   |   |   |   |
| **Expenses**                                                                           |       |                           |       |                          |       |   |   |   |   |
| Property operating expenses                                                            |       | 139                            |       | —                        |       | 139 |   | — |   |
| Real estate taxes                                                                      |       | 67                             |       | —                        |       | 67 |   | — |   |
| Asset management and other fees                                                        |       | 492                            |       | 255                           |       | 1,037 |   | 660 |   |
| General and administrative                                                             |       | 889                            |       | 435                           |       | 2,263 |   | 977 |   |
| Acquisition expense                                                                    |       | 2,791                          |       | —                        |       | 2,791 |   | — |   |
| Depreciation and amortization                                                          |       | 351                            |       | 8                             |       | 374 |   | 38 |   |
| **Total expenses**                                                                     |       | 4,729                          |       | 698                           |       | 6,671 |   | 1,675 |   |
|                                                                                   |       |                           |       |                          |       |   |   |   |   |
| Interest income                                                                        |       | 409                            |       | 162                           |       | 684 |   | 813 |   |
| Equity in earnings (loss) of investments in  unconsolidated real estate joint ventures |       | (79                            | )          | 1,302                         |       | 2,135 |   | 3,159 |   |
| **Net income (loss)**                                                                  |       | $                              | (3,861     | )                             | $          | 766 |   | $ | (3,314 | ) | $ | 2,297 |   |
|                                                                                   |       |                           |       |                          |       |   |   |   |   |
| Weighted average number of common shares  outstanding                                  |       | 36,678                         |       | 14,267                        |       | 26,867 |   | 14,268 |   |
|                                                                                   |       |                           |       |                          |       |   |   |   |   |
| Basic and diluted income (loss) per share                                              |       | $                              | (0.11      | )                             | $          | 0.05 |   | $ | (0.12 | ) | $ | 0.16 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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

**Consolidated Statements of Stockholders’ Equity**

**(in thousands)**

**(Unaudited)**

 
| ** **                                                    | ** ** | **Convertible Stock**          | ** ** | **Common Stock** | ** ** | **Additional**                 | ** ** | **Cumulative  Distributions and** | ** ** | **Total**                | ** ** |
|---------------------------------------------------------------|------------|--------------------------------|------------|-----------------------|------------|--------------------------------|------------|----------------------------------------|------------|--------------------------|------------|
| ** **                                                    | ** ** | **Number**

**of Shares** | ** ** | **Par**

**Value**    | ** ** | **Number**

**of Shares** | ** ** | **Par**

**Value**                     | ** ** | **Paid-in**

**Capital** | ** ** | **Net  Income (Loss)** | ** ** | **Stockholders’  Equity** | ** ** |
|                                                          |       |                           |       |                  |       |                           |       |                                   |       |                     |       |   |   |   |   |
| Balance at January 1, 2008                               |       | —                         |       | $                     | —     |                           | 14,273     |                                   | $          | 1                        |       | $ | 114,567 |   | $ | (1,148 | ) | $ | 113,420 |   |
|                                                          |       |                           |       |                  |       |                           |       |                                   |       |                     |       |   |   |   |   |
| Net income                                                    |       | —                         |       | —                |       | —                         |       | —                                 |       | —                   |       | 2,630 |   | 2,630 |   |
| Issuance of convertible stock                                 |       | 1                              |       | —                |       | —                         |       | —                                 |       | 1                        |       | — |   | 1 |   |
| Issuances of common stock under:                              |       |                           |       |                  |       |                           |       |                                   |       |                     |       |   |   |   |   |
| Sale of common stock, net                                     |       | —                         |       | —                |       | 1,074                          |       | —                                 |       | 2,647                    |       | — |   | 2,647 |   |
| Incentive award plan                                          |       | —                         |       | —                |       | —                         |       | —                                 |       | 22                       |       | — |   | 22 |   |
| Redemptions of common stock                                   |       | —                         |       | —                |       | (17                            | )          | —                                 |       | (140                     | )          | — |   | (140 | ) |
| Distributions declared on common stock                        |       | —                         |       | —                |       | —                         |       | —                                 |       | —                   |       | (6,357 | ) | (6,357 | ) |
| Stock issued pursuant to Distribution Reinvestment  Plan, net |       | —                         |       | —                |       | 18                             |       | —                                 |       | 171                      |       | — |   | 171 |   |
| Balance at December 31, 2008                             |       | 1                              |       | —                |       | 15,348                         |       | 1                                      |       | 117,268                  |       | (4,875 | ) | 112,394 |   |
|                                                          |       |                           |       |                  |       |                           |       |                                   |       |                     |       |   |   |   |   |
| Net loss                                                      |       | —                         |       | —                |       | —                         |       | —                                 |       | —                   |       | (3,314 | ) | (3,314 | ) |
| Sale of common stock, net                                     |       | —                         |       | —                |       | 26,379                         |       | 3                                      |       | 232,169                  |       | — |   | 232,172 |   |
| Redemptions of common stock                                   |       | —                         |       | —                |       | (235                           | )          | —                                 |       | (1,908                   | )          | — |   | (1,908 | ) |
| Distributions declared on common stock                        |       | —                         |       | —                |       | —                         |       | —                                 |       | —                   |       | (13,997 | ) | (13,997 | ) |
| Stock issued pursuant to Distribution Reinvestment  Plan, net |       | —                         |       | —                |       | 519                            |       | —                                 |       | 4,933                    |       | — |   | 4,933 |   |
| Balance at September 30, 2009                            |       | 1                              |       | $                     | —     |                           | 42,011     |                                   | $          | 4                        |       | $ | 352,462 |   | $ | (22,186 | ) | $ | 330,280 |   |

 

*SeeNotes to Consolidated Financial Statements.*

 

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**BehringerHarvard Multifamily REIT I, Inc.**

**ConsolidatedStatements of Cash Flows**

**(inthousands)**

**(Unaudited)**

** **
| ** **                                                                                          | ** ** | **For the Nine**

**Months Ended**

**September 30, 2009** | ** ** | **For the Nine**

**Months Ended**

**September 30, 2008** | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **Cash flows from operating  activities**                                                           |       |                                                            |       |                                                            |       |
| Net income (loss)                                                                                   |       | $                                                               | (3,314     | )                                                               | $          | 2,297 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by (used in) operating activities: |       |                                                            |       |                                                            |       |
| Equity in earnings of investments in  unconsolidated real estate joint ventures                     |       | (2,135                                                          | )          | (3,159                                                          | )          |
| Distributions received from unconsolidated real  estate joint ventures                              |       | 4,474                                                           |       | 3,159                                                           |       |
| Depreciation and amortization                                                                       |       | 220                                                             |       | 38                                                              |       |
| Amortization of deferred financing costs                                                            |       | 78                                                              |       | —                                                          |       |
| Amortization of in-place lease intangibles                                                          |       | 77                                                              |       | —                                                          |       |
| Amortization of deferred revenue and other related  liabilities                                     |       | 28                                                              |       | —                                                          |       |
| Stock-based compensation                                                                            |       | —                                                          |       | 18                                                              |       |
| Changes in operating assets and liabilities:                                                        |       |                                                            |       |                                                            |       |
| Accrued interest on notes receivable                                                                |       | (146                                                            | )          | —                                                          |       |
| Accounts payable and other liabilities                                                              |       | 1,053                                                           |       | (81                                                             | )          |
| Other assets                                                                                        |       | (338                                                            | )          | (319                                                            | )          |
| Payables to affiliates                                                                              |       | 204                                                             |       | 61                                                              |       |
| Accounts receivable                                                                                 |       | —                                                          |       | 28                                                              |       |
| **Cash provided by operating  activities**                                                          |       | 201                                                             |       | 2,042                                                           |       |
|                                                                                                |       |                                                            |       |                                                            |       |
| **Cash flows from investing  activities**                                                           |       |                                                            |       |                                                            |       |
| Acquisition of wholly owned real estate                                                             |       | (123,095                                                        | )          | —                                                          |       |
| Investments in unconsolidated real estate joint  ventures                                           |       | (57,322                                                         | )          | (21,956                                                         | )          |
| Issuances of note receivable                                                                        |       | (2,183                                                          | )          | —                                                          |       |
| Return of investments in unconsolidated real  estate joint ventures                                 |       | 3,449                                                           |       | 1,022                                                           |       |
| Other                                                                                               |       | (166                                                            | )          | 40                                                              |       |
| **Cash used in investing  activities**                                                              |       | (179,317                                                        | )          | (20,894                                                         | )          |
|                                                                                                |       |                                                            |       |                                                            |       |
| **Cash flows from financing  activities**                                                           |       |                                                            |       |                                                            |       |
| Proceeds from sales of common stock                                                                 |       | 263,421                                                         |       | —                                                          |       |
| Offering costs paid                                                                                 |       | (35,795                                                         | )          | (18                                                             | )          |
| Distributions on common stock paid                                                                  |       | (7,583                                                          | )          | (3,941                                                          | )          |
| Redemptions of common stock                                                                         |       | (1,184                                                          | )          | (50                                                             | )          |
| Change in payables to affiliates                                                                    |       | —                                                          |       | (227                                                            | )          |
| Change in subscriptions for common stock                                                            |       | —                                                          |       | 53                                                              |       |
| Change in subscription cash received                                                                |       | —                                                          |       | (53                                                             | )          |
| **Cash provided by (used in)  financing activities**                                                |       | 218,859                                                         |       | (4,236                                                          | )          |
|                                                                                                |       |                                                            |       |                                                            |       |
| Net change in cash and cash equivalents                                                             |       | 39,743                                                          |       | (23,088                                                         | )          |
| Cash and cash equivalents at beginning of period                                                    |       | 23,771                                                          |       | 53,378                                                          |       |
| Cash and cash equivalents at end of period                                                          |       | $                                                               | 63,514     |                                                            | $          | 30,290 |   |

 

***SeeNotes to Consolidated Financial Statements.***

 

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**BehringerHarvard Multifamily REIT I, Inc.**

**Notes to Consolidated FinancialStatements**

**(Unaudited)**

 

**1.             Organizationand Business**

** **

***Organization***

 

Behringer Harvard MultifamilyREIT I, Inc. (which 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 30,2009, we believe we are in compliance with all applicable REIT requirements.

 

We invest in and operatemultifamily communities. These multifamily communities may include conventionalmultifamily assets, such as mid-rise, high-rise, and garden-style properties,and may also include student housing and age-restricted properties, typicallyrequiring residents to be age 55 or older. We intend to make investments inwholly owned investments and through co-investment arrangements with otherparticipants (“Co-Investment Ventures”). Further, we may either directly or indirectly invest in commercial realestate, options to acquire real estate, real estate-related securities,collateralized mortgage-backed securities, mortgage, bridge, mezzanine or otherloans and Section 1031 tenant-in-common interests, or in entities thatmake similar investments.  We completedour first investment in April 2007. As of September 30, 2009, we have made two wholly owned multifamilyinvestments, fourteen investments in Co-Investment Ventures and one wholly ownednote receivable. Eight of the investments are operating properties, and eightare in various stages of development.

 

We have no employees andare supported by related party service agreements. We are externally managed byour advisor, Behringer Harvard Multifamily Advisors I LP (“Behringer HarvardMultifamily Advisors I”), a Texas limited partnership. Behringer HarvardMultifamily Advisors I is responsible for managing our affairs on a day-to-daybasis and for identifying and making real estate investments on ourbehalf.  Substantially all of ourbusiness is conducted through our operating partnership Behringer HarvardMultifamily OP I LP, a Delaware limited partnership (“Behringer HarvardMultifamily OP I”). Our wholly owned subsidiary, BHMF, Inc., a Delawarecorporation (“BHMF Inc.”) owns less than 0.1% of Behringer Harvard MultifamilyOP I as its sole general partner. The remaining ownership interest in BehringerHarvard Multifamily OP I is held as a limited partner’s interest by our whollyowned subsidiary, BHMF Business Trust, a Maryland business trust.

 

***Offeringsof our Common Stock***

 

On November 22,2006, we commenced a private offering pursuant to Regulation D of theSecurities Act of 1933, as amended (the “Securities Act”) to sell a maximum ofapproximately $400 million of common stock to accredited investors (the “PrivateOffering”).  We terminated the PrivateOffering on December 28, 2007.  Wesold a total of approximately 14.2 million shares of common stock and raised atotal of approximately $127.3 million in gross offering proceeds in the PrivateOffering. Net proceeds after selling commissions, dealer manager fees, andother offering costs were approximately $114.3 million.

 

On September 5,2008, we commenced our initial public offering (the “Initial Public Offering”)of up to 200,000,000 shares of common stock offered at a price of $10.00 pershare pursuant to a Registration Statement on Form S-11 filed under theSecurities Act. The Initial Public Offering also covered the registration of upto an additional 50,000,000 shares of common stock at a price of $9.50 pershare pursuant to our distribution reinvestment plan (“DRIP”).  We reserve the right to reallocate shares ofour common stock between the primary offering and our DRIP.  As of September 30, 2009, we have sold atotal of approximately 28.0 million shares of common stock and raised a totalof approximately $279.3 million in gross offering proceeds in the InitialPublic Offering. Net proceeds, including DRIP proceeds, after selling commissions,dealer manager fees, and other offering costs were approximately $239.9million.

 

Our common stockis not currently listed on a national securities exchange. However, managementanticipates within four to six years after the termination of our publicoffering to begin the process of either listing the common stock on a nationalsecurities exchange or liquidating our assets, depending on then-prevailingmarket conditions**.**

 

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***Reclassification***

 

Certain financialinformation from the previous fiscal year has been revised to conform to thecurrent year presentation. This revision to the historical presentation doesnot reflect a material change to the information presented in the ConsolidatedStatements of Operations.  For the threeand nine months ended September 30, 2008, in order to combine theimmaterial amount, we combined the organization expenses caption of approximately$9,000 into the general and administrative caption.

 

**2.****            ****Interim Unaudited FinancialInformation**

 

The accompanyingconsolidated financial statements should be read in conjunction with theconsolidated financial statements and notes thereto included in our AnnualReport on Form 10-K for the year ended December 31, 2008 which wasfiled with the Securities and Exchange Commission (“SEC”) on March 31,2009. 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.

 

The results forthe interim periods shown in this report are not necessarily indicative offuture financial results. The accompanying consolidated balance sheet andconsolidated statement of stockholders’ equity as of September 30, 2009and consolidated statements of operations and cash flows for the periods ended September 30,2009 and 2008 have not been audited by our independent registered publicaccounting firm. In the opinion of management, the accompanying unauditedconsolidated financial statements include all adjustments necessary to presentfairly our consolidated financial position as of September 30, 2009 and December 31,2008 and our consolidated results of operations and cash flows for the periodsended September 30, 2009 and 2008. Such adjustments are of a normalrecurring nature.

 

Wehave evaluated subsequent events for recognition or disclosure through November 13,2009, which is the date the consolidated financial statements were issued.

 

**3.             Summary of Significant AccountingPolicies**

 

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

 

The preparation ofconsolidated financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities and disclosure of contingent assets and liabilities at the dateof the consolidated financial statements and the reported amounts of revenuesand expenses during the reporting period. These estimates include such items as the purchase price allocation forreal estate acquisitions; impairment of long-lived assets, notes receivable andequity-method real estate investments; revenue recognition of note receivableinterest income and equity in earnings of investments in unconsolidated realestate joint ventures; depreciation and amortization; and allowance fordoubtful accounts.  Actual results coulddiffer from those estimates.

 

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

 

Our consolidatedfinancial statements include our accounts, the accounts of variable interestentities in which we are the primary beneficiary and the accounts of othersubsidiaries over which we have control. All inter-company transactions, balances and profits have beeneliminated in consolidation.  Interestsin entities acquired are evaluated based on applicable GAAP, which requires theconsolidation of variable interest entities in which we are deemed to be theprimary beneficiary.  If the interest inthe entity is determined to not be a variable interest entity, 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.

 

***RealEstate and Other Related Intangibles***

 

For real estateproperties acquired by us or our Co-Investment Ventures classified as businesscombinations, we allocate the purchase price of those properties to thetangible assets acquired, consisting of land, inclusive of associated rights,and buildings, any assumed debt, identified intangible assets and liabilitiesand asset retirement obligations based on their relative fair values.  Identified intangible assets and liabilitiesconsist of the fair value of above-market and below-market leases and in-placeleases.  Goodwill is recognized as of theacquisition date and measured as the aggregate fair value of the considerationtransferred and any noncontrolling

 

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interests in the acquireeover 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 interests in the acquiree isless than the fair value of the identifiable net assets acquired.

 

The fair value of anytangible assets acquired, expected to consist of land and buildings, isdetermined 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.

 

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

 

We determine the value ofin-place lease values and tenant relationships based on our evaluation of thespecific characteristics of each tenant’s lease and our overall relationshipwith that respective tenant.  Theaggregate value of in-place leases and tenant relationships was determined byapplying a fair value model.  Theestimates of fair value of in-place leases includes an estimate of carryingcosts during the expected lease-up periods for the respective units consideringcurrent market conditions.  In estimatingfair value of in-place leases, we consider items such as real estate taxes,insurance, leasing commissions, legal expenses, tenant improvements and otheroperating expenses to execute similar deals as well as projected rental revenueand carrying costs during the expected lease-up period.  The estimate of the fair value of tenantrelationships also includes an estimate of the likelihood of renewal asdetermined by management.

 

We amortize the value ofin-place leases acquired to expense over the term of the leases. The value oftenant relationship intangibles will be amortized to expense over the initialterm and any anticipated renewal periods, but in no event will the amortizationperiod for intangible assets exceed the remaining depreciable life of thebuilding.  Intangible lease assets arerecorded within other assets, and intangible lease liabilities are recordedwithin deferred lease revenues and other related liabilities.

 

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

 

Initial valuations aresubject to change until our information is finalized, which is no later than 12months from the acquisition date.

 

Prior to January 1,2009, we allocated the purchase price of the real estate property we or ourCo-Investment Ventures acquired to the tangible assets acquired, consisting ofland, inclusive of associated rights, and buildings, any assumed debt,identified intangible assets and asset retirement obligations based on theirrelative fair values.  Upon thecompletion of a business combination, we recorded the tangible assets acquired,consisting of land, inclusive of associated rights, and buildings, any assumeddebt, identified intangible assets and asset retirement obligations based ontheir fair values.

 

***Impairmentof Long-Lived Assets and Investments in Unconsolidated Real Estate JointVentures***

 

For any properties whollyowned by us or our Co-Investment Ventures, we monitor events and changes incircumstances indicating that the carrying amounts of the real estate assetsmay not be recoverable.  When such eventsor changes in circumstances are present, we assess potential impairment bycomparing estimated future undiscounted operating cash flows expected to begenerated over the life of the asset including its eventual disposition, to thecarrying amount of the asset.  In theevent that the carrying amount exceeds the estimated future undiscountedoperating cash flows, we recognize an impairment loss to adjust the carryingamount of the asset to estimated fair value.

 

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For real estate we ownthrough an investment in an unconsolidated real estate joint venture or othersimilar real estate investment structure, at each reporting date we compare theestimated fair value of our real estate investment to the carrying value.  An impairment charge is recorded to theextent the fair value of our real estate investment is less than the carryingamount and the decline in value is determined to be other than a temporarydecline.

 

***Cashand Cash Equivalents***

 

We consider investmentsin bank deposits, money market funds and highly-liquid cash investments withoriginal maturities of three months or less to be cash equivalents.

 

***NotesReceivable***

 

Notesreceivable are reported at their outstanding principal balances net of anyunearned income and unamortized deferred fees and costs. Loan origination feesand certain direct origination costs are generally deferred and recognized asadjustments to interest income over the lives of the related loans.

 

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.

 

Weassess notes receivable for impairment in accordance with applicable GAAP.  Based on specific circumstances, we determinewhether it is probable that there has been an adverse change in the estimatedcash flows of the contractual payments for the notes receivable. We then assessthe impairment based on the probability to collect all contractual amounts. Ifthe impairment is probable, we recognize an impairment loss equal to thedifference between our or the Co-Investment Venture’s investment in the notereceivable and the present value of the estimated cash flows discounted at thenote receivable’s effective interest rate. Where we have the intent and theability to foreclose on our security interest in the property, we will use thecollateral’s fair value as a basis for the impairment.

 

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 are considered impaired,then judgments and estimates are required to determine the projected cash flowsfor the notes receivable, considering the borrower’s or, if applicable, theguarantor’s financial condition and the consideration and valuation of thesecured property and any other collateral. Changes in these facts or in ourjudgments and assessments of these facts could result in impairment losseswhich could be material to our consolidated financial statements.

 

***Investmentsin Unconsolidated Real Estate Joint Ventures***

 

We or our Co-InvestmentVentures account for certain investments in unconsolidated real estate jointventures using the equity method of accounting because we exercise significantinfluence over, but do not control, these entities.  These investments are initially recorded atcost and are adjusted for our share of equity in earnings and distributions.  We report our share of income and lossesbased on our economic interests in the entities.

 

We amortize any excess ofthe carrying value of our investments in joint ventures over the book value ofthe underlying equity over the estimated useful lives of the underlyingoperating property, which represents the assets to which the excess is mostclearly related.

 

***Revenue Recognition***

 

Rental income related to leases is recognized on anaccrual basis when due from residents, generally on a monthly basis.  Rental revenues for leases with unevenpayments and terms greater than one year are recognized on a straight-linebasis over the term of the lease.  Anydeferred revenue is recorded as a liability within deferred lease revenues andother related liabilities.

 

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***Acquisition Costs***

 

Acquisition costs forbusiness combinations, which are expected to include most wholly ownedproperties, are expensed when it is probable that the transaction will beaccounted for as a business combination and the purchase will be consummated.Acquisition costs related to investments in unconsolidated real estate jointventures are capitalized as a part of our basis in the investment. Pursuant toour Advisory Management Agreement (as defined below), our advisor or itsaffiliates are obligated to reimburse us for all investment-related expensesthe Company pursues but ultimately does not consummate. Prior to thedetermination of its status, amounts incurred are recorded in otherassets.  Acquisition costs and expensesinclude amounts incurred with our advisor or its affiliates and with thirdparties.

 

***Organization and******O******fferingCosts***

 

BehringerHarvard Multifamily Advisors I or its affiliates are obligated to pay all ofour Initial Public Offering and Private Offering organization and offeringcosts and we are required to make reimbursements in accordance with theAdvisory Management Agreement, as amended. Organization expenses are expensed as incurred.  Offering costs are recognized based onestimated amounts probable of reimbursement and are offset against additionalpaid-in capital.

 

***Redemptionsof Common Stock***

 

Weaccount for the possible redemption of our shares by classifying securitiesthat are convertible for cash at the option of the holder outside ofequity.  We do not reclassify the shares to be redeemedfrom equity to a liability until such time as the redemption has been formallyapproved.  The portion of theredeemed common stock in excess of the par value is charged to additionalpaid-in capital.

 

***IncomeTaxes***

 

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 qualify or remain qualifiedas a REIT.

 

We have evaluated thecurrent and deferred income tax related to state taxes, where we do not have aREIT exemption, and we have no significant tax liability or benefit as of September 30,2009 and December 31, 2008. In addition, we recognized no current taxexpense for the nine months ended September 30, 2009 and 2008 related tothe Texas margin tax or other jurisdictions other than our share ofnon-material amounts included in equity in earnings in investments inunconsolidated real estate joint ventures.

 

We recognize thefinancial statement benefit of an uncertain tax position only after determiningthat the relevant tax authority would more likely than not sustain the positionfollowing an audit. As of September 30, 2009, we have no significant uncertaintax positions.

 

***Stock-BasedCompensation***

 

We have a stock-basedincentive award plan for our directors and consultants and for employees,directors and consultants of our affiliates, and our advisor and itsaffiliates.  Compensation cost isrecognized for all stock-based payments granted after the effective date andfor all unvested awards granted prior to the effective date. Prior periodamounts were not restated. The tax benefits associated with these stock-basedpayments are to be classified as financing activities in the ConsolidatedStatements of Cash Flows.

 

We have issued a total of6,000 shares of restricted stock to our independent directors.  These restricted shares are fully vested. Thefair value of the restricted stock was recognized as compensation expense on astraight-line basis over the required service period. For the nine months endedSeptember 30, 2009 and 2008, we recognized stock-based compensationexpense of approximately $0 and $18,000, respectively.

 

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***Concentrationof Credit Risk***

 

We invest our cash andcash equivalents between several banking institutions and money market accountsin an attempt to minimize exposure to any one of these entities.  As of September 30,2009 and December 31, 2008, we had cash and cash equivalents deposited incertain financial institutions in excess of federally-insured levels.  We regularly monitor the financial stabilityof these financial institutions and believe that we are not exposed to anysignificant credit risk in cash and cash equivalents.

 

***Income per Share***

 

Basic earnings per shareis calculated by dividing net earnings available to common stockholders by theweighted average common shares outstanding during the period. Diluted earningsper share is calculated similarly, except that it includes the dilutive effectof the assumed exercise of securities, including the effect of shares issuableunder our stock-based incentive plans.

 

The Behringer HarvardMultifamily REIT I, Inc. Amended and Restated 2006 Incentive Award Plan (“IncentiveAward Plan”) authorized the grant of non-qualified and incentive stock options,restricted stock awards, restricted stock units, stock appreciation rights,dividend equivalents and other stock-based awards.  A total of 10,000,000 shares has beenauthorized and reserved for issuance under the Incentive Award Plan.  As of September 30, 2009, no optionshave been issued.  As of September 30,2009 and 2008, 6,000 shares of the restricted stock have been included in thebasic and dilutive earnings per share calculation.

 

Asof September 30, 2009 and December 31, 2008, we had 1,000 shares ofconvertible stock issued and outstanding, no shares of preferred stock issuedand outstanding, and had no options to purchase shares of common stockoutstanding.  The convertible stock isnot 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***

 

Our current businessconsists of investing in and operating multifamily communities. Substantiallyall of our consolidated net income is from investments in real estateproperties that we wholly own or own through joint ventures, which we accountfor under the equity method of accounting. Our management evaluates operatingperformance on an individual investment level. However, as each of our investmentshas similar economic characteristics in our consolidated financial statements,the Company is managed on an enterprise-wide basis with one reportable segment.

 

***Fair Value of Financial Instruments***

 

We believe the carrying values of cash and cash equivalents,notes receivable and receivables from affiliates approximate their fairvalues.  As of September 30, 2009and December 31, 2008, we had no assets or liabilities measured at fairvalue on a nonrecurring basis.

 

**4.             Recently Announced Accounting Pronouncements**

 

In June 2009, the Financial Accounting StandardsBoard (“FASB”) issued 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 is applicable for annualperiods after November 15, 2009 and interim periods thereafter.  We are currently assessing the impact, ifany, on our consolidated financial statements.

 

In May 2009, the FASB issued authoritativeguidance for subsequent events.  Thisguidance establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued.  It requires the disclosure of the date through which an entity hasevaluated subsequent events and the basis for that date; that is, whether thedate represents the actual date the financial statements were issued or wereavailable to be issued.  This guidance iseffective for interim and annual financial periods ending after June 15,2009.  We included the requireddisclosures in the accompanying notes to these consolidated financialstatements (see footnote 2).

 

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In April 2009, the FASB issued authoritativeguidance requiring an entity to provide disclosures about fair value offinancial instruments in interim financial information. This guidance is to beapplied prospectively and is effective for interim and annual periods after June 15,2009 with early adoption permitted for periods after March 15, 2009.  We included the required disclosures in theaccompanying notes to these consolidated financial statements (see footnote 3).

 

In April 2009,the FASB issued additional authoritative guidance for estimating fair valuewhen the volume and level of activity for the asset or liability havesignificantly decreased.  Based on thisguidance, if an entity determines that the level of activity for an asset orliability has significantly decreased and that a transaction is not orderly,further analysis of transactions or quoted prices is needed, and a significantadjustment to the transaction or quoted prices may be necessary to estimatefair value.  This guidance is to beapplied prospectively and is effective for interim and annual periods after June 15,2009 with early adoption permitted for periods after March 15, 2009. Theadoption of this guidance did not have a material impact on our financialstatements.

 

In November 2008,the FASB reached a consensus for authoritative guidance on equity methodinvestment accounting considerations which was issued to clarify how theapplication of equity method accounting will be affected in businesscombinations and noncontrolling interests. This guidance clarifies that an entity shall continue to use the costaccumulation model for its equity method investments. It also confirms pastaccounting practices related to the treatment of contingent consideration andthe use of the impairment model for equity method accounting. Additionally, itrequires an equity method investor to account for a share issuance by aninvestee as if the investor had sold a proportionate share of the investment.This guidance was effective January 1, 2009 and appliesprospectively.  The adoption of thisguidance did not have a material impact on our consolidated financialstatements.

 

**5.             RealEstate Investments**

** **

Wemake real estate investments through entities wholly owned by us or throughunconsolidated real estate joint ventures. As of September 30, 2009, we had two wholly owned real estateinvestments and fourteen investments in unconsolidated real estate jointventures. As of December 31, 2008, we had ten investments inunconsolidated real estate joint ventures. All of our investments in unconsolidated real estate joint ventures are BHMP CO-JVs (as defined below). We arenot limited to BHMPCO-JVs, and we may choose other joint venture partners or investmentstructures.

 

Thefollowing presents our wholly owned real estate investments and our investmentsin unconsolidated real estate joint ventures as of September 30,2009.  The investments are categorizedbased on the type of investment, on the stages in the development and operationof the investment and for investments in unconsolidated real estate jointventures based on its type of underlying investment.  The definitions of each stage are as follows:

 

·                  Stabilized / Comparable are communitiesthat are stabilized (the earlier of 90% occupancy or one year after completionof construction or acquisition) for both the current and prior reporting year.

 

·                  Stabilized / Non-comparable arecommunities that have been stabilized or acquired after January 1, 2008.

 

·                  Lease-ups are communities that arenon-stabilized and going through their initial leasing activity.

 

·                  Developments are communities currentlyunder construction.

 

Occupancy data ispresented upon stabilization of the property.

 

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**Investments in Real Estate**

** **
| ** **                     | ** ** | **Location**    | ** ** | **Purchase  date**    | ** ** | **Units** | ** ** | **Occupancy  rate** | ** ** | **Total real  estate, net  (in millions)** | ** ** |
|--------------------------------|------------|-----------------|------------|-----------------------|------------|-----------|------------|---------------------|------------|--------------------------------------------|------------|
| *Stabilized / Non-comparable:* |       |            |       |                  |       |      |       |                |       |                                       |       |
| The  Gallery at NoHo Commons   |       | Los Angeles, CA |       | 3rd Quarter 2009 |       | 438       |       | 91%                 |       | $                                          | 107.4      | (1) |
| Mariposa  Loft Apartments      |       | Atlanta, GA     |       | 3rd Quarter 2009 |       | 253       |       | 94%                 |       | 28.5                                       |       |
|                           |       |            |       |                  |       | 691       |       |                |       | $                                          | 135.9      |   |

** **

**Investments inUnconsolidated Real Estate Joint Ventures**(2)

 
| ** **                            | ** ** | **Location**        | ** ** | **Acquisition,  completion, or  estimated future  completion date** | ** ** | **Units** | ** ** | **Occupancy  rate** | ** ** | **BHMP  CO-JV  Ownership in  Property  Entity  (see footnote)** | ** ** | **Our  investment in  unconsolidated   real estate joint   venture  (in millions)** | ** ** |
|---------------------------------------|------------|---------------------|------------|---------------------------------------------------------------------|------------|-----------|------------|---------------------|------------|-----------------------------------------------------------------|------------|-------------------------------------------------------------------------------------|------------|
| **Equity Investments**                |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| *Stabilized / Comparable:*            |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| The  Reserve at Johns Creek Walk      |       | Atlanta, GA         |       | 3rd Quarter 2007                                               |       | 210       |       | 95%                 |       | (7)                                                             |       | $                                                                                   | 4.2        |   |
|                                  |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| *Stabilized / Non-comparable:*        |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| Verandah  at Meyerland                |       | Houston, TX         |       | 2nd Quarter 2009                                               |       | 301       |       | 88%                 |       | (6)                                                             |       | 3.8                                                                                 |       |
| Waterford  Place                      |       | Dublin, CA          |       | 3rd Quarter 2009                                               |       | 390       |       | 94%                 |       | (6)                                                             |       | 12.0                                                                                |       |
| Burrough’s  Mill Apartment Homes |       | Cherry Hill, NJ     |       | 3rd Quarter 2009                                               |       | 308       |       | 96%                 |       | (6)                                                             |       | 8.4                                                                                 |       |
|                                  |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| **Equity and Loan Investments**       |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| *Lease-ups:*                          |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| The  Eclipse                          |       | Houston, TX         |       | 2nd Quarter 2009                                               |       | 330       |       | n/a                 |       | (7) (8)                                                         |       | 5.8                                                                                 |       |
| Satori  (3)                           |       | Fort Lauderdale, FL |       | 4th Quarter 2009                                               |       | 279       |       | n/a                 |       | (7) (8)                                                         |       | 12.7                                                                                |       |
| The  Venue                            |       | Clark County, NV    |       | 4th Quarter 2009                                               |       | 168       |       | n/a                 |       | (7) (8)                                                         |       | 4.8                                                                                 |       |
|                                  |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| *Developments:*                       |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| 55  Hundred (3)                       |       | Arlington, VA       |       | 4th Quarter 2009                                               |       | 234       |       | n/a                 |       | (7) (8)                                                         |       | 13.8                                                                                |       |
| Skye  2905 (3) (4)               |       | Denver, CO          |       | 4th Quarter 2010                                               |       | 400       |       | n/a                 |       | (7) (8)                                                         |       | 12.6                                                                                |       |
| Veritas(5)                            |       | Henderson, NV       |       | 1st Quarter 2011                                               |       | 430       |       | n/a                 |       | (7) (8)                                                         |       | 15.0                                                                                |       |
|                                  |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| **Equity Investments**                |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| *Lease-ups:*                          |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| Forty55  Lofts                        |       | Marina del Rey, CA  |       | 4th Quarter 2010                                               |       | 140       |       | n/a                 |       | (6)                                                             |       | 25.8                                                                                |       |
|                                  |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| **Loan Investments**                  |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| *Developments:*                       |       |                |       |                                                                |       |      |       |                |       |                                                            |       |                                                                                |       |
| Grand  Reserve                        |       | Dallas, TX          |       | 1st Quarter 2010                                               |       | 149       |       | n/a                 |       | (8)                                                             |       | 5.3                                                                                 |       |
| Bailey’s  Crossing               |       | Alexandria, VA      |       | 1st Quarter 2010                                               |       | 414       |       | n/a                 |       | (8)                                                             |       | 12.6                                                                                |       |
| The  Cameron (3)                      |       | Silver Spring, MD   |       | 1st Quarter 2010                                               |       | 325       |       | n/a                 |       | (8)                                                             |       | 10.9                                                                                |       |
|                                  |       |                |       |                                                                |       | 4,078     |       |                |       |                                                            |       | $                                                                                   | 147.7      |   |
|                                  |       |                |       | Total Units                                                         |       | 4,769     |       |                |       |                                                            |       |                                                                                |       |

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(1)          Purchase price of The Gallery at NoHo Commons was$96.0 million, before normal closing costs and prorations.

 

(2)          Our ownership in all our investments in unconsolidatedreal estate joint ventures is 55% except for The Reserve at Johns Creek Walkwhich is 64%.

 

(3)          Includes retail space, wherethe total approximate square footage of retail space (“GLA”) for all theseinvestments totals 32,300 sq. ft.

 

(4)          Project formerly namedAlexan Prospect

 

(5)          Project formerly namedAlexan St. Rose

 

(6)          Wholly owned by BHMP CO-JV

 

(7)          Owned jointly withunaffiliated third parties

 

(8)          BHMP CO-JV has equitypurchase options in the Property Entity.

 

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***Investments in real estate***

 

In September 2009,we separately acquired two multifamily communities, The Gallery at NoHo Commonsand Mariposa Loft Apartments, totaling 691 units for an aggregate purchaseprice of approximately $124.8 million, paid in cash funded from the proceeds ofour Initial Public Offering.   Nomortgage debt was assumed or obtained in connection with the acquisitions.   See footnote 11 regarding a financingsubsequent to September 30, 2009 for The Gallery at NoHo Commons.  We did not have any wholly owned investmentsin real estate as of December 31, 2008.

 

Thefollowing two tables present certain additional information regarding ourmaterial acquisition, The Gallery at NoHo Commons. The amounts recognized formajor assets acquired and liabilities assumed as of the acquisition date are asfollows (in millions):

 
| Land                                                   |   | $ | 28.7  |   |
|--------------------------------------------------------|--------|---|-------|--------|
| Buildings and improvements                             |   | $ | 78.7  |   |
| Acquired intangible assets                             |   | $ | 2.3   |   |
| Deferred lease revenues and other related  liabilities |   | $ | (15.5 | )      |

 

·                  The deferred lease revenues and otherrelated liabilities relate to our assumption of an affordable housingobligation (see footnote 8).

 

·                  Since the date of acquisition,approximately $0.3 million of revenues and ($0.2) million of net loss wererecognized from the acquisition date to September 30, 2009.

 

Thefollowing pro forma is presented as if we acquired The Gallery at NoHo Commonson January 1, 2008.  Thisinformation is not necessarily indicative of what the actual results ofoperations would have been had we completed this transaction on January 1,2008, nor does it purport to represent our future operations (amounts inmillions, expect per share):

 
| ** **           | ** ** | **Pro forma for the   nine months ended  September 30,** | ** ** |
|----------------------|------------|---------------------------------------------------------------|------------|
| ** **           | ** ** | **2009**                                                      | ** ** | **2008** | ** ** |
| Revenue              |       | $                                                             | 7.5        |   | $ | 6.9 |   |
| Net income           |       | $                                                             | (0.6       | ) | $ | (0.9 | ) |
| Net income per share |       | $                                                             | (0.02      | ) | $ | (0.06 | ) |

 

·                  Included in the pro forma net income forthe nine months ended September 30, 2009 and 2008 is depreciation expenseof $2.8 million and $3.5 million, respectively.

 

Depreciation expense associated with all of ourwholly owned buildings and improvements for both the three and nine monthsended September 30, 2009 was approximately $0.2 million.

 

Cost of lease intangibles related to our whollyowned investments in real estate consisted of the value of in-placeleases.  As of September 30, 2009,the value of in-place leases was approximately $0.9 million and accumulatedamortization is less than $0.1 million. The amortization expense for the value of in-place leases will be fullyamortized in 2010.

 

***Investments in unconsolidated real estate joint ventures***

 

*BHMPCO-JV*

 

Wehave entered into fourteen separate joint ventures with Behringer HarvardMaster Partnership I LP (“BHMP Co-Investment Partner”) in which we are themanager. The 1% general partner of BHMP Co-Investment Partner is BehringerHarvard Institutional GP LP, which is an affiliate of Behringer HarvardMultifamily Advisors I, which is indirectly owned by our sponsor, BehringerHarvard Holdings, LLC. The 99% limited partner of BHMP Co-Investment Partner isStichting Depositary PGGM Private Real Estate Fund, a Dutch foundation actingin its capacity as depositary of and for the account and risk of PGGM PrivateReal Estate Fund, an investment vehicle for large Dutch pension funds (“PGGM”).  Substantially all of the capital provided tothe BHMP          Co-Investment Partneris from PGGM.  We have no directfinancial or other ownership interest in either of these entities.  Each 

 

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separate joint venturewith the BHMP Co-Investment Partner is referred to as a BHMP CO-JV.  We have established each BHMP CO-JV to makeinvestments in separate underlying properties.

 

PGGMhas committed to invest up to $200 million in co-investments with affiliates orinvestment programs of our sponsor.  Thisfunding commitment may be increased to $300 million.  Until the current funding commitment fromPGGM of $200 million has been placed in BHMP CO-JVs or in other co-investmentswith affiliates or investment programs of our sponsor, 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.

 

Generally,PGGM will co-invest in a BHMP CO-JV with a 45% equity interest, and we willco-invest with a 55% equity interest. Cash distributions are allocated pro rata based on each partner’scapital investments.  Although we are themanager of each BHMP CO-JV, each partner possesses equal substantive controland participating rights to approve initial and annual operating plans, initialand annual capital expenditures, any sales or dispositions of investments, andany method of refinancing or raising additional debt or equity capital.

 

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.

 

Generally,each BHMP CO-JV owns 100% of the voting equity interests and 99% of theeconomic interests in one subsidiary REIT and substantially all of its businessis conducted through its subsidiary REIT. Each subsidiary REIT has made equityinvestments in and/or notes receivable to entities that own one real estateoperating property or development project. Each individual operating property or development project hasestablished one or more separate legal entities for the sole purpose of holdingthe respective operating property or development project and obtaining legallyseparated debt and equity financing.  Thecollective group of each such operating property’s or development project’sseparate legal entities is referred to herein as a “Property Entity.”  Four of the Property Entities are wholly owned by theBHMP CO-JVs.  The remaining ten PropertyEntities are owned by BHMP CO-JVs and unaffiliated third parties who serve asgeneral and limited partners and are generally subsidiaries of commercialdevelopers which were organized to own, construct, and finance only oneparticular real estate project.  Each ofthese BHMP CO-JV investments in a Property Entity is evaluated forconsolidation at the BHMP CO-JV level using our principles of consolidation. Ofthese ten Property Entities, we have one investment reported on a consolidatedbasis by the BHMP CO-JV and the remaining investments are recorded asunconsolidated real estate joint ventures and reported with the equity methodof accounting by the respective BHMP CO-JVs.

 

In September 2009,we invested in three newly formed BHMP CO-JVs, which invested in three separatemultifamily communities containing a total of 838 units.   We contributed approximately $44.7 millionin equity to the BHMP CO-JVs for a 55% ownership interest in each BHMP CO-JV.The BHMP CO-JVs acquired wholly owned multifamily communities with investmentsin real estate of approximately $164.9 million and assumed or placed mortgagesof $86.5 million.

 

Thesummarized financial data shown below presents the combined accounts of each ofthe BHMP CO-JVs and 100% of the accounts of the Property Entities where thereis a corresponding BHMP CO-JV equity investment. The Property Entities which wehave indirect equity investments through a BHMP CO-JV include The Reserve atJohns Creek Walk, Verandah at Meyerland, The Eclipse, 55 Hundred, Skye 2905,Veritas, Satori, Forty55 Lofts, Waterford Place, Burrough’s Mill ApartmentHomes and The Venue.  The PropertyEntities include 100% of their accounts, where the noncontrolling interestamounts represent the portion owned by unaffiliated third parties.  All inter-entity transactions, balances andprofits have been eliminated in the combined financial data.   The December 31, 2008 combined financialdata has been adjusted to reflect noncontrolling interest (amounts in millions):

 

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**Balance Sheet Data**

 
| ** **                                                     | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                     | ** ** | **2009**               | ** ** | **2008**              | ** ** |
| Land, buildings, and improvements, net                         |       | $                      | 355.6      |                  | $          | 136.3 |   |
| Construction in progress                                       |       | 217.5                  |       | 139.4                 |       |
| Notes receivable, net                                          |       | 46.9                   |       | 45.9                  |       |
| Cash and cash equivalents                                      |       | 4.1                    |       | 8.0                   |       |
| Other assets, including restricted cash                        |       | 8.4                    |       | 1.8                   |       |
| Total assets                                                   |       | $                      | 632.5      |                  | $          | 331.4 |   |
| * *                                                       | * *   | * *               | * *   | * *              | * *   |
| Property Entity level construction and mortgage  loans payable |       | $                      | 203.7      |                  | $          | 109.4 |   |
| BHMP CO-JV level mortgage loans payable                        |       | 133.8                  |       | 23.0                  |       |
| Accounts payable, interest payable and other  liabilities      |       | 35.4                   |       | 27.9                  |       |
| Total liabilities                                              |       | 372.9                  |       | 160.3                 |       |
| * *                                                       | * *   | * *               | * *   | * *              | * *   |
| Our members’ equity                                       |       | 139.9                  |       | 91.6                  |       |
| BHMP Co-Investment Partner’s equity                       |       | 113.5                  |       | 73.8                  |       |
| Noncontrolling interest                                        |       | 6.2                    |       | 5.7                   |       |
| Total equity                                                   |       | 259.6                  |       | 171.1                 |       |
| Total liabilities and equity                                   |       | $                      | 632.5      |                  | $          | 331.4 |   |

 

**Income Statement Data**

 
| ** **                                                                                   | ** ** | **For the Three Months Ended** | ** ** | **For the Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                                                                                   | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| ** **                                                                                   | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Revenues                                                                                     |       |                           |       |                          |       |   |   |   |   |
| Rental revenues                                                                              |       | $                              | 3.5        |                          | $          | 0.8 |   | $ | 5.9 |   | $ | 2.2 |   |
| Interest income                                                                              |       | 3.7                            |       | 2.7                           |       | 10.6 |   | 7.3 |   |
|                                                                                         |       | 7.2                            |       | 3.5                           |       | 16.5 |   | 9.5 |   |
|                                                                                         |       |                           |       |                          |       |   |   |   |   |
| Expenses                                                                                     |       |                           |       |                          |       |   |   |   |   |
| Property operating expenses                                                                  |       | 2.0                            |       | 0.2                           |       | 4.0 |   | 0.9 |   |
| Real estate taxes                                                                            |       | 0.5                            |       | 0.1                           |       | 1.0 |   | 0.3 |   |
| Interest expense                                                                             |       | 1.7                            |       | 0.4                           |       | 3.0 |   | 1.1 |   |
| Acquisition expenses                                                                         |       | 1.3                            |       | —                        |       | 1.5 |   | — |   |
| Depreciation and amortization                                                                |       | 1.8                            |       | 0.5                           |       | 3.2 |   | 1.5 |   |
|                                                                                         |       | 7.3                            |       | 1.2                           |       | 12.7 |   | 3.8 |   |
| Net income (loss)                                                                            |       | (0.1                           | )          | 2.3                           |       | 3.8 |   | 5.7 |   |
|                                                                                         |       |                           |       |                          |       |   |   |   |   |
| Net loss attributable to noncontrolling interest                                             |       | 0.1                            |       | 0.1                           |       | 0.1 |   | 0.2 |   |
|                                                                                         |       |                           |       |                          |       |   |   |   |   |
| Net income (loss) attributable to consolidated BHMP  CO-JV                                   |       | $                              | (0.2       | )                             | $          | 2.4 |   | $ | 3.9 |   | $ | 5.9 |   |
|                                                                                         |       |                           |       |                          |       |   |   |   |   |
| Our share of equity in earnings of investments in  unconsolidated real estate joint ventures |       | $                              | (0.1       | )                             | $          | 1.3 |   | $ | 2.1 |   | $ | 3.2 |   |

 

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The followingpresents the reconciliation between our member’s equity interest in thecombined BHMP CO-JVs and our total investments in unconsolidated real estatejoint ventures (amounts in millions):

 
| ** **                                                | ** ** | **September 30,**

**2009** | ** ** | **December 31,**

**2008** | ** ** |
|-----------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Balance of our member’s  equity in the BHMP  CO-JVs  |       | $                                | 139.9      |                            | $          | 91.6 |   |
| Other capitalized costs,  net of amortization             |       | 7.8                              |       | 4.9                             |       |
| Investments in  unconsolidated real estate joint ventures |       | $                                | 147.7      |                            | $          | 96.5 |   |

 

Included in the combined financial data are notesreceivable by BHMP CO-JVs to three Property Entities in various stages ofdevelopment.  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.  All advances have reachedtheir required maximum funding amounts. Below are the BHMP CO-JVs’ notesreceivable from the Property Entities as of September 30, 2009 (amounts inmillions):

 
| **Name of Underlying Property** | ** ** | **Amount**

**Advanced** | ** ** | **Interest**

**Rate** | ** ** | **Maturity Date**  | ** **      | **Option Period**

**Commencement After**

**Construction** | ** **                                            |
|---------------------------------|------------|--------------------------|------------|------------------------|------------|--------------------|-----------------|-------------------------------------------------------------|-------------------------------------------------------|
| Grand Reserve                   |       | $                        | 7.5        |                   | 10.0       | %                  | April 2012 |                                                        | 120 days after the earlier  of 1 year or 90% occupied |   |
| Bailey’s Crossing          |       | 22.1                     |       | 9.5                    | %          | July 2012     |            | 90 days                                                     |                                                  |
| The Cameron                     |       | 19.3                     |       | 9.5                    | %          | December 2012 |            | 90 days                                                     |                                                  |
| Total BHMP CO-JV Notes          |       | $                        | 48.9       |                   |       |               |            |                                                        |                                                  |   |
| Less: Deferred Financing  Fees  |       | (2.0                     | )          |                   |       |               |            |                                                        |                                                  |
| Net BHMP CO-JV Notes            |       | $                        | 46.9       |                   |       |               |            |                                                        |                                                  |   |

 

In the combined financial data, six notes receivableand notes payable between the BHMP CO-JVs and its Property Entities in whichthe BHMP CO-JVs have equity interests are eliminated.  For these six notes, all advances havereached their required maximum funding amounts. Below are the eliminated BHMP CO-JVs’notes receivable as of September 30, 2009 (amounts in millions):

 
| **Name of Underlying Property**                              | ** ** | **Amount Advanced** | ** ** | **Interest Rate** | ** ** | **Maturity Date**  | ** **      |
|--------------------------------------------------------------|------------|---------------------|------------|-------------------|------------|--------------------|-----------------|
| The Eclipse                                                  |       | $                   | 8.1        |              | 9.5        | %                  | April 2012 |   |
| 55 Hundred                                                   |       | 20.0                |       | 9.5               | %          | October 2012  |            |
| Satori                                                       |       | 14.8                |       | 10.0              | %          | October 2012  |            |
| Skye 2905                                                    |       | 14.8                |       | 10.0              | %          | April 2013    |            |
| The Venue                                                    |       | 5.8                 |       | 10.0              | %          | June 2013     |            |
| Veritas                                                      |       | 21.0                |       | 13.0              | %          | December 2013 |            |
| Total BHMP CO-JV Notes  Receivable Eliminated in Combination |       | $                   | 84.5       |              |       |               |            |   |

 

The option period for the BHMP CO-JV to purchase TheEclipse from the developer became effective on May 22, 2009, allowing thedeveloper and the BHMP CO-JV to begin negotiations for the BHMP CO-JV topurchase The Eclipse.  The option periodterminated on July 22, 2009 with no agreement reached, but the partiescontinue to negotiate the option. We have no obligation to purchase theproperty if a mutual agreement is not reached, in which case the notereceivable will be paid in accordance with its terms.  See footnote 11 regarding the closing of thistransaction subsequent to September 30, 2009.

 

Asof  September 30, 2009, other thanloans made by our BHMP CO-JVs or us to the Property Entities, there are nineconstruction loans and four mortgage notes relating to our investments, eachmade by an unaffiliated third party to the Property Entities.  Other than guarantees issued by the projectdevelopers or their affiliates, the Property Entities are solely responsiblefor amounts under their construction loans, mortgage loans and mezzanine loansas well as other liability balances. Neither we nor the BHMP CO-JVs have aprimary or secondary obligation on those obligations of the PropertyEntities.  All of the land, buildings andfixtures of the Property Entities are used as collateral for these loans.  As of September 30, 2009, $182.4 millionof the construction in progress is used as collateral for these loans.

 

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Four BHMP CO-JVs are solely responsible for theirrespective mortgage notes, which are secured by the respective wholly ownedunderlying properties. These loans are referred to as BHMP CO-JV mortgageloans. We have provided customary non-recourse carve-out guarantees (items suchas environmental conditions, misuse of funds, and material representations) tothe lenders for these BHMP CO-JV mortgage loans.

 

The following presents the carrying amount ofconstruction and mortgage loans payable as of September 30, 2009 made byparties other than BHMP CO-JVs or us (amounts in millions):

 

 
| **BHMP CO-JV Level Mortgage Loans**                             | ** ** | **Carrying**

**Amount** | ** **  | **Interest Rate**        | ** **              | **Maturity Date**  | ** **          | **Total Commitment** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------|-------------|--------------------------|-------------------------|--------------------|---------------------|----------------------|------------|
| Verandah at Meyerland                                           |       | $                        |  24.3  |                     | 6.17% — Fixed      |               | September 2011 |                 | N/A        |   |
| The Reserve at Johns Creek  Walk                                |       | 23.0                     |        | 6.46% — Fixed       |                    | March 2013    |                | N/A                  |       |
| Waterford Place                                                 |       | 60.5                     |        | 4.83% — Fixed       |                    | May 2013      |                | N/A                  |       |
| Burrough’s Mill Apartment  Homes                           |       | 26.0                     |        | 5.29% — Fixed       |                    | October 2016  |                | N/A                  |       |
| Total                                                           |       | $                        |  133.8 |                     |                    |               |                |                 |       |   |
|                                                            |       |                     |        |                     |                    |               |                |                 |       |
| **Property  Entity Level Construction and Mortgage Loans** | ** ** | **Carrying**

**Amount** | ** **  | **Interest Rate**        | ** **              | **Maturity Date**  | ** **          | **Total Commitment** | ** ** |
| The Eclipse                                                     |       | $                        |  20.8  |                     | Monthly LIBOR + 175 bps |               | April 2010     |                 | $          |  38.1 |   |
| Satori                                                          |       | 67.9                     |        | Monthly LIBOR + 140 bps  |                    | October 2010  |                | 73.9                 |       |
| 55  Hundred                                                     |       | 59.3                     |        | Monthly  LIBOR + 150 bps |                    | October 2010  |                | 69.8                 |       |
| Skye 2905                                                       |       | 30.9                     |        | Monthly LIBOR + 195 bps  |                    | May 2011      |                | 70.5                 |       |
| The Venue                                                       |       | 17.0                     |        | Monthly LIBOR + 225 bps  |                    | June 2012     |                | 20.3                 |       |
| Veritas                                                         |       | 7.8                      |        | Monthly LIBOR + 275 bps  |                    | December 2012 |                | 38.6                 |       |
| Total                                                           |       | $                        |  203.7 |                     |                    |               |                |                 | $          |  311.2 |   |

 

Monthly LIBOR at September 30, 2009 was 0.25%.

 

Each of the Property Entity level construction andmortgage loans has provisions allowing for extensions, generally two, one-yearoptions if certain operation performance levels have been achieved as of thematurity date.  An extension fee,generally 0.25% of the total loan balance, is required for each extension.

 

In April 2009, we received the December 31,2008 audited consolidated financial statements of Fairfield Residential LLC andits affiliates (“Fairfield Residential”), the developer for three multifamilycommunity developments in which we have invested through their respective BHMPCO-JVs (Bailey’s Crossing, The Cameron and 55 Hundred, or the “FairfieldProjects”).  In its opinion on theconsolidated financial statements, the auditor expressed concern that FairfieldResidential might not be able to continue to operate as a going concern throughthe end of 2009.  In September 2009,we received notice that the senior construction lender for the Bailey’sCrossing project declared the construction loan in technical, non-monetarydefault due to Fairfield Residential’s failure to provide certain requiredfinancial information. To preserve its rights, the BHMP CO-JV served a defaultnotice to the Bailey’s Crossing Property Entity related to its $22.1 millionmezzanine loan.

 

Because Fairfield Residential has guaranteedrepayment of each of the senior construction loans that fund construction ofthe Fairfield Projects, as well as completion of such projects, FairfieldResidential’s financial condition may give rise to an event of default underThe Cameron and the 55 Hundred senior construction loan agreements just as ithas under the Bailey’s Crossing construction loan agreement.  With respect to the Bailey’s Crossing seniorconstruction loan default, and in the event of another default under a seniorconstruction loan, under our intercreditor agreements with the seniorconstruction lenders or otherwise, we expect to have an opportunity to (a) curethe default, (b) purchase the senior construction loan or (c) otherwisenegotiate a solution acceptable to the senior construction lender.  Any such negotiations may require us to agreeto less desirable investment terms than we currently have.  In addition, such defaults or negotiationsmay change our analysis of the accounting for these investments, which couldresult in the BHMP CO-JVs accounting for the investments as joint ventures, orif the BHMP CO-JV is viewed as the primary beneficiary, to consolidate theinvestment(s). However, we believe that even if Fairfield Residential becomesinsolvent, we have sufficient collateral, contractual remedies and othercreditor rights for us to recover all of our investments in these developmentprojects.

 

Subsequent to the issuance of the 2008 consolidatedfinancial statements and continuing through November 13, 2009, weunderstand that the development project senior construction lenders havecontinued to fund the construction loan draws, including

 

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withrespect to the Bailey’s Crossing project subsequent to the default notice.  As of September 30, 2009, the amountsunfunded under each senior construction loan for Bailey’s Crossing, TheCameron, and 55 Hundred were approximately $34.5 million, $49.9 million and$10.5 million, respectively. We understand Fairfield Residential has reached anagreement with its senior credit facility lender for an additional extensionthrough November 16, 2009. In addition, Fairfield as project developer hascontinued to perform under the development agreement, meeting all constructionrequirements and schedules.  Constructionis expected to continue through the first half of 2010.

 

As of September 30, 2009, management’sassessment related to the Fairfield Projects is that the BHMP CO-JV loaninvestments are still properly accounted for as loans and equity accounting arestill appropriate for the BHMP CO-JV equity investment in unconsolidated realestate joint ventures.  The continuation of these accountingtreatments is dependent on the resolution of the issues described above, andthere can be no assurance as new facts and circumstances arise that differentaccounting would not be required. A change in accounting could affect ourrecognition of earnings in future periods. As of September 30,2009, no impairmentcharges related to our investments with respect to the Fairfield Projects havebeen recorded, and the value of our mezzanine investments in theFairfield Projects is approximately $33.8 million (approximately 9.6% of ourtotal assets).  For the three and ninemonths ended September 30, 2009, for the Fairfield Projects, the equity inearnings of investments in unconsolidated real estate joint ventures wasapproximately $0.8 million and $2.4 million, respectively.  Distributions to us from our investmentsrelated to the Fairfield Projects for the three and nine months ended September 30,2009 were approximately $0.8 million and $2.5 million, respectively.

 

Subsequent to September 30, 2009, the BHMPCO-JVs have had discussions with each of the Fairfield Project seniorconstruction lenders and each of the equity partners regarding potentialrenegotiations, including, but not limited to, restructuring the seniorconstruction loans and the BHMP CO-JV mezzanine loans and modifying existingFairfield Residential guarantees.  Thesediscussions are still tentative but are focusing on reduced debt leveragethrough additional first-priority, preferred return capital contributions andextension of terms of the loans. Our potential share of the BHMP CO-JV’s shareof such contributions could range between $39.0 million and $55.0 million.  However, there is no assurance that we willbe able to restructure the Fairfield Project senior construction loans andassociated guarantees on these or any other terms. As we or the BHMP CO-JVs arenot under any obligation to complete such restructurings and the terms of anypotential transaction are not finalized, we are not able to assess the changesin accounting, if any.

 

**6.****                                      Noteand Other Receivables**

 

As of September 30, 2009 and December 31,2008, we have approximately $2.3 million and less than $0.1 million,respectively, in a note receivable.   Thenote is secured by the Grand Reserve Project Entity, bears interest at 10.0%,and is due April 2012.  During 2009,we fully funded our loan commitment.  Ournote receivable is junior to a loan by the BHMP CO-JV.

 

As of September 30, 2009, we have a receivable ofapproximately $1.7 million related to a tax increment receivable from theCommunity Redevelopment Agency of the City of Los Angeles, net of imputed discount.  The tax increment receivable is collectablefrom excess real estate taxes through 2028 as defined in the agreement with theCommunity Redevelopment Agency. This receivable was acquired in connection withour acquisition of The Gallery at NoHo Commons.

 

**7.****                                      Stockholders’Equity**

 

***Capitalization***

 

As of September 30,2009 and December 31, 2008, we had 42,010,624 and 15,347,792 shares ofcommon stock outstanding, respectively, including 6,000 shares of restrictedstock issued to our independent directors for no cash, and 24,969 shares ownedby Behringer Harvard Holdings, LLC, an affiliate of our advisor, for cash of$200,001.

 

As of September 30,2009 and December 31, 2008, we had 1,000 shares of convertible stock ownedby our advisor issued for cash of $1,000. The convertible stock has no voting rights and, prior to conversion,does not participate in any earnings or distributions.  The convertible stock generally is convertibleinto shares of common stock with a value equal to 15% of the amount by which (1) ourenterprise value at the time of conversion, including the total amount ofdistributions paid to our stockholders, exceeds (2) the sum of theaggregate capital invested by our stockholders plus a 7% cumulative,non-compounded, annual return on such capital at the time of conversion, on acash-on-cash basis.  The convertiblestock can be converted when the excess value described 

 

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above is achieved anddistributed to stockholders or our common stock is listed on a nationalsecurities exchange.  The conversion mayalso be prorated in the event of certain termination of the Advisory ManagementAgreement.  Management has determinedthat the requirements for conversion have not been met as of September 30,2009.  Management reviewed the terms ofthe underlying convertible stock and determined the fair value approximated thenominal value paid for the shares at issuance.

 

As of September 30,2009 and December 31, 2008, we had no shares of preferred stock issued andoutstanding. Our board of directors has no present plans to issue preferredstock but may do so with terms established at its discretion and at any time inthe future without stockholder approval.

 

***Share RedemptionProgram***

 

On September 2, 2008, our board of directorsauthorized a share redemption program for investors who hold their shares formore than one year.  The purchase price for redeemed shares is set forthin the prospectus for our Initial Public Offering of common stock, assupplemented from time to time, and as of September 30, 2009 averaged$7.95 per share.  Our board of directors reserves the right in its solediscretion at any time, and from time to time, to (1) waive the one-yearholding period in the event of the death, disability, need for long-term care,or other exigent circumstances such as bankruptcy, a mandatory distributionrequirement under a stockholder’s IRA or with respect to shares purchased underor through our DRIP or automatic purchase plan, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program.  Under the terms of theplan, during any calendar year, we will not redeem in excess of 5% of theweighted average number of shares outstanding during the twelve-monthcalendar-based period immediately prior to the date of redemption.  Inaddition, our board of directors will determine whether we have sufficient cashfrom operations to repurchase shares, and such purchases will generally belimited to proceeds of our DRIP plus 1% of operating cash flow for the previousfiscal year.  We redeemed 235,340 shares of common stock forapproximately $1.9 million for the nine months ended September 30,2009.  No shares were redeemed for thenine months ended September 30, 2008.

 

***Distributions***

 

Wepaid our first distribution effective July 1, 2007.

 

Distributions, including DRIP, forthe nine months ended September 30, 2009 and for the year ended December 31,2008 were as follows (amounts in millions):

 
| ** **     | ** ** | **Distributions** | ** ** |
|----------------|------------|-------------------|------------|
| **2009**       | ** ** | **Declared**      | ** ** | **Paid** | ** ** |
| Third Quarter  |       | $                 |  6.5  |   | $ |  5.9 |   |
| Second Quarter |       | 4.6               |       | 4.1 |   |
| First Quarter  |       | 2.9               |       | 2.5 |   |
| Total          |       | $                 |  14.0 |   | $ |  12.5 |   |
|           |       |              |       |   |   |
| **2008**       | ** ** | ** **        | ** ** | ** ** | ** ** |
| Fourth Quarter |       | $                 |  2.4  |   | $ |  2.0 |   |
| Third Quarter  |       | 1.3               |       | 1.3 |   |
| Second Quarter |       | 1.3               |       | 1.3 |   |
| First Quarter  |       | 1.3               |       | 1.3 |   |
| Total          |       | $                 |  6.3  |   | $ |  5.9 |   |

 

**8.****                                      Commitmentsand Contingencies**

 

In theordinary course of business, we and/or our Co-Investment Ventures havecontracted with unaffiliated commercial property development companies andprovide equity and/or loans for a particular project (our “Project Commitments”). We generally fund an initial amount under our Project Commitments at contractinception and fund additional amounts as construction progresses, typicallyspanning one to three years.  As of September 30,2009, all of our Co-Investment Ventures have been BHMP CO-JVs.

 

As of September 30,2009, the BHMP CO-JVs held contracts for equity investments and/or loans with atotal commitment 

 

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value of approximately$296.0 million of which $263.1 million has been fully funded.

 

One ofour Property Entities in development, The Grand Reserve, had a $29 millionconstruction loan with Guaranty      Bank. On August 21, 2009, Guaranty Bank, thefinancial institution that held the senior loan on the Grand Reserve project,was closed by the Office of Thrift Supervision (the “OTS”), and the FDIC wasappointed as receiver of Guaranty Bank. On the same date, the FDIC transferredcertain of the assets and liabilities of Guaranty Bank, including the seniorloan on the Grand Reserve project, to BBVA Compass. Our aggregate investment inthe Grand Reserve project as of September 30, 2009 was $6.4 million,consisting of a senior mezzanine loan made through a joint venture with theBHMP Co-Investment Partner and a wholly owned junior mezzanine loan. As of November 13,2009, construction draws for the project have not been affected by the closureof Guaranty Bank or the transfer of the loan to BBVA Compass, and we havereceived no communication that future fundings will be affected.

 

TheBHMP CO-JVs may become obligated to purchase all or a portion of the interestson three Property Entities under contingent sell options held by otherinvestors on the Property Entities: Bailey’s Crossing, The Cameron and GrandReserve.  The options are generallyexercisable after completion of the development and for a period of three yearsthereafter.  The option price is set byagreement and is either based on the fair value of the project at exercise orthe cost of the project as defined in the respective agreement. The estimatedamount of the sell options is $63.6 million, and our estimated portion of thosecommitments is $35.0 million.  As of September 30,2009, no sell options are exercisable.

 

In theordinary course of business, the multifamily communities in which we haveinvestments in may have commitments to provide affordable housing. In some ofthese arrangements, a local or national housing authority makes paymentscovering substantially all of the difference between the restricted rent paidby residents and market rents. In connection with our acquisition of TheGallery at NoHo Commons, we assumed an obligation to provide affordable housingthrough 2048. As partial reimbursement for this obligation, the housingauthority will make level annual payments of approximately $2.0 million through2028 and no reimbursement for the remaining 20-year period. We may also berequired to reimburse the housing authority if certain operating results areachieved on a cumulative basis during the term of the agreement. At theacquisition, we recorded a liability of $13.9 million based on the fair valueof the terms over the life of the agreement. In addition, we will record rental revenue from the housing authority ona straight line basis, recognizing a portion of the collections as deferredlease revenues and other related liabilities. As of September 30, 2009, wehave recorded approximately $1.5 million in deferred lease revenues and otherrelated liabilities and for the three and nine months ended September 30,2009 recognized less than $0.1 million of deferred revenue amortization relatedto The Gallery at NoHo Commons affordable housing obligations.

 

**9.****                                     ****Related Party Arrangements**

 

Wehave no employees and are supported by related party service agreements.  Our advisor and certain of its affiliatesearn fees and compensation in connection with the acquisition, management andsale of our assets.  We are dependent onBehringer Harvard Multifamily Advisors I, Behringer Securities and BehringerHarvard Multifamily Management Services, LLC (“BHM Management”), an affiliateof our advisor, for certain services that are essential to us, including thesale of shares of our common stock, asset acquisition and dispositiondecisions, property management and leasing services and other generaladministrative responsibilities. In the event that these companies becomeunable to provide us with the respective services, we would be required toobtain such services from other sources.

 

Our advisory managementagreement, as it has been amended and restated (the “Advisory ManagementAgreement”), has a termination date of April 1, 2010 with the option to berenewed by either party for an unlimited number of successive one-yearterms.  The board of directors has a dutyto evaluate the performance of our advisor annually before the parties canagree to renew the agreement.

 

Effective through March 31, 2009, the AdvisoryManagement Agreement provided we reimburse our advisor and its affiliates forall Initial Public Offering organization and offering costs (the “O&OReimbursement”) incurred by them in an amount not to exceed 1.5% of the grossproceeds from our Initial Public Offering. O&O Reimbursements were paid at a capped amount of 1.5% of theactual gross proceeds at the time of each share sale. Additional amounts thatwere incurred by our advisor that we believed were probable of being owed wereaccrued.  Effective April 1, 2009,the AdvisoryManagement Agreement was amended, such that we will pay our advisor the O&OReimbursement for all Initial Public Offering organization and offering costsas well as all Private Offering organization and offering costs previouslyincurred by our advisor to the extent not previously reimbursed by us. Our reimbursements will no longer be subject to a cap at the time ofreimbursement but will be reimbursed by our advisor at the end of the InitialPublic Offering to the extent such amounts incurred by us exceed 1.5% of the grossproceeds from ourInitial Public Offering.  Further, if the 

 

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Advisory ManagementAgreement is terminated or not renewed for reasons other than a material breachby our advisor, the Advisory Management Agreement will require our advisor toreimburse the Initial Public Offering organization and offering costs only tothe extent such amounts incurred by us through the termination date exceed 15%of our gross Initial Public Offering.  InApril 2009 in connection with the amendment, a payment of $6.9 million wasmade to the advisor for prior O&O Reimbursement incurred but not previouslypaid. For the three months and nine months ended September 30, 2009, weincurred O&O Reimbursement of $2.3 million and $6.6 million,respectively.  We did not incur anyO&O Reimbursement for the three and nine months ended September 30,2008.  As of September 30, 2009, theamount by which our O&O Reimbursement exceeded 1.5% of our gross InitialPublic Offering was $7.5 million.

 

Our advisor and its affiliates were obligated to pay all of our PrivateOffering organization and offering costs. Under the Advisory ManagementAgreement through September 2, 2008, our only obligation for those costswas to pay a fee to our advisor and its affiliates under the Advisory ManagementAgreement.  We incurred this feeobligation at the rate of 1.5% of the actual gross Private Offering proceeds(the “O&O Fee”), regardless of whether the actual amount of PrivateOffering costs incurred by our advisor and its affiliates was higher or lower than the O&OFee. On September 2, 2008, the Advisory Management Agreement was amended,and our reimbursement was increased to now include Private Offering costsincurred by our advisor and its affiliates in excess of total amounts due under theO&O Fee.  For both the three monthsand nine months ended September 30, 2008, we incurred O&OReimbursement of $6.1 million due to the reimbursement of the remaining PrivateOffering costs.  The amount of O&O Fees recorded wasdetermined as 1.5% of the actual Private Offering proceeds received to date; noother amounts were considered by management to be probable ofreimbursement.  No O&O Fee wasrecorded during 2009.

 

Behringer Securities LP (“Behringer Securities”), anaffiliate of our advisor, serves as the dealer manager for the Initial PublicOffering and receives 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 BehringerSecurities as a dealer manager fee, except that no 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** | ** ** | **For the Nine Months Ended** | ** ** |
|---------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                | ** ** | **September 30,**         | ** ** | **September 30,**        | ** ** |
| **Sale of common stock**  | ** ** | **2009**                       | ** ** | **2008**                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Gross proceeds            |       | $                              |  98.6 |                          | $          |  — |   | $ |  263.4 |   | $ |  — |   |
| Less offering costs:      |       |                           |       |                          |       |   |   |   |   |
| O&O Reimbursement (1) |       | (2.3                           | )          | (6.1                          | )          | (6.6 | ) | (6.1 | ) |
| Dealer manager fees       |       | (2.5                           | )          | —                        |       | (6.6 | ) | — |   |
| Selling commissions       |       | (6.8                           | )          | —                        |       | (18.1 | ) | — |   |
| Total offering costs      |       | (11.6                          | )          | (6.1                          | )          | (31.3 | ) | (6.1 | ) |
| Sale of common stock, net |       | $                              |  87.0 |                          | $          |  (6.1 | ) | $ |  232.1 |   | $ |  (6.1 | ) |

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(1)          Prior to September 2,2008, the O&O Fee was recognized separately from the O&O Reimbursementand was $1.9 million

 

Includedin general and administrative expense for the three months ended September 30,2009 and 2008 is approximately $0.3 million and $0.1 million, respectively, foraccounting and legal personnel costs incurred on our behalf by ouradvisor.  For the nine months ended September 30,2009 and 2008, general and administrative expense incurred was $0.9 million and$0.2 million, respectively.

 

ThroughSeptember 1, 2008, our advisor and its affiliates received acquisition and advisory fees of2.5% of (1) the contract purchase price paid or allocated in respect ofthe development, construction or improvement of each asset acquired directly byus, including any debt attributable to these assets, or (2) when we madean investment indirectly through another entity, our pro rata share of thegross asset value of real estate investments held by that entity. Our advisor andits affiliates alsoreceived 2.5% of the funds advanced in respect of a loan or other investment. Our advisor andits affiliates are reimbursedfor all expenses related to the selection 

 

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and acquisition ofassets, whether or not acquired by us. Under the Advisory Management Agreementdated September 2, 2008, these rates were reduced to 1.75%.

 

Ouradvisor or its affiliates receive a non-accountable acquisition expensereimbursement in the amount of 0.25% of (a) funds advanced in respect of aloan or other investment, and (b) the funds paid for purchasing an asset,including any debt attributable to the asset, plus 0.25% of the funds budgetedfor development, construction or improvement in the case of assets that weacquire and intend to develop, construct or improve. We will also pay thirdparties, or reimburse the advisor or its affiliates, for any investment-relatedexpenses due to third parties in the case of a completed investment, including,but not limited to, legal fees and expenses, travel and communication expenses,costs of appraisals, accounting fees and expenses, third-party brokerage orfinder’s fees, title insurance, premium expenses and other closing costs; wehave no obligation to our advisor unless the acquisition is completed. Ouradvisor will be responsible, and we have no obligation, for paying all of theexpenses it incurs associated with persons employed by the advisor to theextent dedicated to making investments for us, such as wages and benefits ofthe investment personnel.  Our advisorwill also be responsible, and we have no obligation, for paying all of theinvestment-related expenses that we or our advisor incurs that are due to thirdparties with respect to investments we do not make.

 

Forthe three months ended September 30, 2009 and 2008, our advisor or itsaffiliates earned acquisition and advisory fees, including the acquisitionexpense reimbursement, of approximately $4.3 million and $0.1 million,respectively.  For the nine months ended September 30,2009 and 2008, acquisition and advisory fees earned were $4.7 million and $1.0million, respectively.  For the threemonths and nine months ended September 30, 2009, $1.8 million and $2.2million, respectively, were capitalized to investments in unconsolidated realestate joint ventures.

 

Ouradvisor or its affiliates receive debt financing fees of 1% of the amountavailable to us under debt financing which was originated, assumed orrefinanced by or for us. Our advisor or its affiliates may pay some or all ofthese fees to third parties with whom it subcontracts to coordinate financingfor us. For the three and nine months ended September 30, 2009, our advisoror its affiliates has earned debt financing fees of $0.4 million and $0.6million, respectively.   Our advisor andits affiliates didnot earn any debt financing fees in 2008.

 

On September 2,2008, the Company entered into an Amended and Restated Property ManagementAgreement (the “Property Management Agreement”) with our operating partnershipand our property manager, BHM Management. The Property Management Agreement hasa term of two years from the effective date of the original property managementagreement and will terminate on November 21, 2010 with automatic renewalperiods of two years. If no party gives written notice of termination to theother parties at least thirty days prior to the expiration date of theagreement, then it will automatically continue for consecutive two-yearperiods. The Property Management Agreement also provides that, in the event theCompany terminates its advisory management agreement with the advisor, theManager will have the right to terminate the agreement upon at least thirtydays 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 with respect to a particular property. We will reimburse the costsand expenses incurred by BHM Management on our behalf, including fees andexpenses of apartment locators and third-party accountants, the wages andsalaries and other employee-related expenses of all on-site employees of BHMManagement and other out-of-pocket expenses that are directly related to themanagement of specific properties.

 

TheProperty Management Agreement applies where we have control over the selectionof property management.  As of September 30,2009, six properties were under the Property Management Agreement.  For the three and nine months ended September 30,2009 and 2008, BHM Management or its affiliates earned minimal propertymanagement fees.   For all otherproperties, the third-party developer has selected the property manager or theproperty is still in development.

 

ThroughSeptember 1, 2008, our advisor and its affiliates received a monthly asset management feefor each asset held by us. This amount was calculated based upon one-twelfth of1% of aggregate asset value, as defined, as of the last day of the precedingmonth. Effective September 2, 2008, this fee is 0.75% of the higher of thecost of investment or value of the investment. For the three months ended September 30,2009 and 2008, our advisor and its affiliates earned asset management fees ofapproximately $0.5 million and $0.3 million, respectively.  For the nine months ended September 30,2009 and 2008, Behringer Harvard Multifamily Advisors I or its affiliatesearned asset management fees of approximately $1.0 million and $0.7 million,respectively.

 

Our advisor and its affiliates are paid adisposition fee if our advisor provides a substantial amount of services, asdetermined by our independent directors, in connection with the sale of one ormore properties.  In such an event, we will pay our advisor (1) in 

 

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thecase of the sale of real property, the lesser of:  (A) one-half ofthe aggregate brokerage commission paid (including the subordinate dispositionfee) or if none is paid, the amount that customarily would be paid, or (B) 3%of the sales price of each property sold, and (2) in the case of the saleof any asset other than real property, 3% of the sales price of suchassets.  This fee shall not be earned or paid unless and until thestockholders have received total distributions in an amount equal to or inexcess of the sum of the aggregate capital contributions by stockholders plus a7% cumulative, non-compounded, annual return on such capitalcontributions.  Subordinated disposition fees that are not payable at thedate of sale because stockholders have not yet received their required minimumdistributions will be deferred and paid at such time as these subordinationconditions have been satisfied.  No disposition fee has been earned as of September 30,2009.

 

Wewill pay a development fee to our advisor or its affiliates in an amount thatis usual and customary for comparable services rendered to similar projects inthe geographic 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 and its affiliates have earned no development fees since ourinception.

 

**For other expenses paid or incurred by the advisor inconnection with the services provided to us that are not covered by a fee, wewill reimburse our advisor, subject to the limitation that we will notreimburse our advisor for any amount by which its operating expenses (includingthe asset management fee) at the end of the four preceding fiscal quartersexceeds the greater of:  (A) 2% of our average invested assets (“AIA”),or (B) 25% of our net income (“NI”) 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 the 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.   For the trailing twelve months ended September 30,2009, total operating expenses of approximately $4.3 million exceeded 2% of ourAIA (which was approximately $2.1 million) by approximately $2.2 million. Our board of directors, including all of our independent directors, hasreviewed this analysis and unanimously determined the excess to be justifiedconsidering that we are currently in our acquisition and development stage,that certain investments are not stabilized and that we are continuing to raisecapital for our Initial Public Offering of common stock where the expensesincurred as a result of being a public company for audit and legal services,director and officer liability insurance and fees for board of directors aredisproportionate to the Company’s AIA and NI.**

** **

**10.****                              ****Supplemental Disclosures of CashFlow Information**

 

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

 
| ** **                                      | ** ** | **For the Nine Months Ended** | ** **   |
|-------------------------------------------------|------------|-------------------------------|--------------|
| ** **                                      | ** ** | **September 30,**        | ** **   |
| ** **                                      | ** ** | **2009**                      | ** **   | **2008** | ** ** |
| Non-cash investing  activities:                 |       |                          |         |   |   |
| Escrow and prepaid  acquisition costs           |       | $                             |  — |   | $ |  1,529 |   |
| Receivable from affiliates                      |       | $                             |  25     |   | $ |  18 |   |
| Accrued other assets                            |       | $                             |  — |   | $ |  8 |   |
|                                            |       |                          |         |   |   |
| Non-cash financing  activities:                 |       |                          |         |   |   |
| Accrued offering costs and  dealer manager fees |       | $                             |  2,444  |   | $ |  6,059 |   |
| Distributions payable                           |       | $                             |  2,315  |   | $ |  434 |   |
| Dividend reinvestments                          |       | $                             |  4,933  |   | $ |  — |   |
| Redemption payable                              |       | $                             |  725    |   | $ |  — |   |

 

**11.****                              ****Subsequent Events**

 

***Status of the Offering***

 

For the period October 1, 2009 through November 9,2009, we have sold approximately 5.5 million shares of common stock for grossproceeds of approximately $55.4 million.

 

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***Distributions Paid***

 

On October 2,2009, we paid total distributions of approximately $2.3 million, of which $1.2million were cash distributions and $1.1 million were pursuant to our DRIPrelating to distributions declared each day in the month of September 2009.On November 3, 2009, we paid total distributions of approximately $2.6million, of which $1.3 million were cash distributions and $1.3 million werepursuant to our DRIP relating to distributions declared each day in the monthof October 2009.

 

***Distributions Declared***

 

OnNovember 11, 2009, our board of directors declared distributions payableto the stockholders of record each day during the months of December 2009and January and February 2010.  The distributions authorized forDecember, January and February equal a daily amount of $0.0019178 pershare of common stock.  Distributions payable to each stockholder ofrecord during a month will be paid in cash on or before the 10th day of thefollowing month.  A portion of each distribution may constitute a returnof capital for tax purposes.  If the rate we are paying for each day inDecember, January and February was paid each day for a 365-dayperiod, it would equal a 7.0% annualized rate based on a purchase price of$10.00 per share.

 

***Acquisitions of Real Estate***

 

On November 10,2009, we acquired, through a wholly owned subsidiary of Behringer HarvardMultifamily OP I, a multifamilycommunity known as Grand Reserve Orange (formerly known as Avalon Orange),located in Orange, Connecticut, froman unaffiliated seller.  The purchase price for Grand Reserve Orange was $25.5million, excluding closing costs.  Nomortgage debt was assumed in connection with the acquisition.  Acquisition expenses of approximately $0.5million were recognized.

 

On November 13, 2009, the BHMP CO-JV that has investedin The Eclipse multifamily community acquired the remaining ownership interestsin The Eclipse Property Entity.  Prior tothe transaction, the BHMP CO-JV owned a 50.1% limited partnership interest inthe Property Entity and had invested $8.1million in a 9.5% mezzanine loan tothe Property Entity.  In addition, theProperty Entity was subject to a senior mortgage loan in the amount of $38.1million and a long-term ground lease with the State of Texas.  In connection with the transaction, the BHMPCO-JV acquired the remaining Property Entity interests in exchange for a$100,000 purchase price paid to the other owners and assumed the seniormortgage loan and the long-term ground lease. Simultaneous with the closing, the BHMP CO-JV converted its mezzanineloan investment to an equity investment in the Property Entity, paid off theentire amount of the outstanding balance of the senior mortgage loan at parplus accrued interest in the amount of $20.9 million and exercised an optionwith the State of Texas to terminate the ground lease and obtain fee simpletitle to the land for an option price of $4.6 million.  The BHMP CO-JV funded the transaction withcapital contributions from us and the BHMP Co-Investment Partner. Our share ofthe capital contribution was $14.0 million, which was funded from availablecash from the proceeds from our Initial Public Offering.

 

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

 

Subsequent to the quarterended September 30, 2009, we entered into a purchase and sale agreementfor a multifamily community for a total purchase price of approximately $38.9million, excluding closing costs.  As of November 13, 2009, we havemade a total of $1.2 million in earnest money deposits on this multifamilycommunity.  If consummated, we expect that the acquisition would be madethrough a wholly owned subsidiary of our operating partnership. Theconsummation of the purchase remains subject to substantial conditions,including, but not limited to, (1) the satisfaction of the conditions tothe acquisition contained in the relevant contracts; (2) no materialadverse change occurring relating to the multifamily communities or in thelocal economic conditions; (3) our receipt of sufficient net proceeds fromthe Initial Public Offering and financing proceeds to make the acquisition; and(4) our receipt of satisfactory due diligence information, includingenvironmental reports and lease information.  Other investments may beidentified in the future that we may acquire before or instead of thismultifamily community.

 

***Property Financing***

 

On October 28,2009, we closed on $51.3 million of financing collateralized by our real estateinvestment in The Gallery at NoHo Commons. The mortgage loan payable has a term of 7 years with interest-onlypayments at an annual rate of 4.72%.

 

***Valuation Policy and Share Redemption Program***

 

OnNovember 11, 2009, our board of directors adopted a valuation policy forshares of our common stock and approved certain amendments to the shareredemption program to be effective immediately. Under the amended and restated share redemption program, the per shareredemption price will be based on the most recently disclosed estimated valueper share as determined in accordance with the valuation policy.  In addition, under the amended and restatedshare redemption program, the cash available for redemption on any particulardate will generally be limited to the proceeds from our distributionreinvestment plan during the period consisting of the preceding four fiscalquarters for which financial statements are available, less any cash alreadyused for redemptions during the same period, plus, if we had positive operatingcash flow during such preceding four fiscal quarters, 1% of all operating cashflow during such preceding four fiscal quarters.

 

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

 

The followingdiscussion and analysis should be read in conjunction with the accompanyingconsolidated financial statements and the notes thereto:

 

**Overview**

 

Wewere incorporated on August 4, 2006 as a Maryland corporation and operateas a real estateinvestment trust (“REIT”) for federal and state 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, 2009, all of ourinvestments have been in high quality development and operating multifamilycommunities located in the top 50 metropolitan statistical areas (“MSAs”) inthe United States.

 

Our investment strategyis designed to provide our stockholders with a diversified portfolio, and ourmanagement and board of directors have extensive experience in investing innumerous types of real estate, loans and other investments to execute thisstrategy. We intend to primarily invest in, acquire and operate multifamilycommunities, using multiple strategies to acquire investments in high qualitymultifamily communities that produce stabilized rental income. We will investin and acquire a blended portfolio consisting of core, stabilized incomegenerating assets, assets that may benefit from enhancement or repositioningand development assets forstabilization to retain as core assets generatingincome with potential capital appreciation. Further, we may invest in commercialreal estate, including office buildings, shopping centers, business andindustrial parks, manufacturing facilities, warehouses and distributionfacilities and motel and hotel properties. We intend to make investments on ourown or through co-investment arrangements with other participants (“Co-InvestmentVentures”). Directly or through Co-Investment Ventures, we may invest in realestate-related securities, including securities issued by other real estatecompanies, either for investment or in change of control transactions completedon a negotiated basis or otherwise. We also may originate or invest incommercial mortgage-backed securities, mortgage, bridge, mezzanine or otherloans and Section 1031 tenant-in-common (“TIC”) interests (including thoseissued by programs sponsored by Behringer Harvard Holdings, LLC), or inentities that make investments similar to the foregoing. Although we intend toprimarily invest in real estate assets located in the United States, in thefuture, we may make investments in real estate assets located outside theUnited States. As of September 30, 2009, we have not made anyinternational investments. We will not make international investments until oneof our independent directors has at least three years of relevant experienceacquiring and managing such international investments.

 

Asof September 30, 2009, we own two wholly owned multifamily investments, fourteen investmentsin Co-Investment Ventures and one wholly owned note receivable.  As discussed below, we plan to utilizeavailable Co-Investment Ventures as a funding source when it is a qualifiedCo-Investment Venture investment and the Co-Investment Venture is an effectivestructure for the investment.  We intendto fund these investments with a combination of funding sources, includingproceeds from our Initial Public Offering, mortgage debt and unsecured orsecured debt facilities.

 

Infurtherance of our Co-Investment Venture strategy, we have entered intoseparate joint ventures with Behringer Harvard Master Partnership I LP (the “BHMPCo-Investment Partner”) in which Behringer Harvard Multifamily REIT I, Inc.is the manager. The1% general partner of BHMP Co-Investment Partner is Behringer HarvardInstitutional GP LP, which is an affiliate of Behringer Harvard MultifamilyAdvisors I, which is indirectly owned by our sponsor, Behringer HarvardHoldings, LLC. The 99% limited partner of BHMP Co-Investment Partner isStichting Depositary PGGM Private Real Estate Fund, a Dutch foundation actingin its capacity as depositary of and for the account and risk of PGGM PrivateReal Estate Fund, an investment vehicle for large Dutch pension funds (“PGGM”). Substantially all of the capitalprovided to the BHMP Co-Investment Partner is from PGGM. We have no directfinancial or other ownership interest in either of these entities.  Each separate joint venture with the BHMPCo-Investment Partner is referred to as a BHMP CO-JV.

 

Generally,each BHMP CO-JV owns 100% of the voting equity interests and 99% of theeconomic interests in one subsidiary REIT, and substantially all of itsbusiness is conducted through its subsidiary REIT. Each subsidiary REIT hasmade equity investments and/or notes receivable to entities that own one realestate operating property or development project.  Each individual operatingproperty or development project has established one or more separate legalentities for the sole purpose of holding the respective operating property ordevelopment project and obtaining legally separated debt and equity financing.  The collective group of each such operatingproperty’s or development project’s separate legal entities is referred toherein as a “Property Entity.”  Four of the Property Entities are whollyowned by the BHMP CO-JVs.  The remainingten Property Entities are owned by BHMP CO-JVs and unaffiliated third partieswho serve as general and limited partners and are generally subsidiaries ofcommercial developers which 

 

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were organized to own,construct, and finance only one particular real estate project.  Each of these BHMP CO-JV investments in aProperty Entity is evaluated for consolidation at the BHMP CO-JV level usingour principles of consolidation. Of these ten Property Entities, we have oneinvestment reported on a consolidated basis by the BHMP CO-JV, and theremaining investments are recorded as unconsolidated real estate joint venturesand reported with the equity method of accounting by the respective BHMPCO-JVs.

 

As of September 30,2009, four of the BHMP CO-JVs are investments in wholly owned multifamilycommunities, of which three are operating properties and one is inlease-up.  The remaining ten BHMP CO-JVsinclude three investments of mezzanine loans and seven investments of bothequity investments and mezzanine loans. The equity investments include other unaffiliated third parties. Forthese ten BHMP CO-JVs, there are options to acquire the property and/or convertour mezzanine loan to an equity interest.

 

Webelieve our strategy of investing through BHMP CO-JVs will allow us to increasethe number of our investments, thereby increasing our risk diversification, andproviding participation with greater economic interest in larger or moreselective real estate investments with greater access to high qualityinvestments. We intend to continue to invest through BHMP CO-JVs in operating communities,to-be-developed multifamily communities or newly constructed multifamilycommunities that have not yet stabilized, excluding residential properties forassisted living, student housing or senior housing. However, we are not limitedto co-investments with the BHMP Co-Investment Partner and may pursue otherCo-Investment Ventures if they provide greater diversification or investmentopportunities. We may also pursue direct investments consistent with ourinvestment policies.

 

PGGMhas committed to invest up to $200 million in co-investments with affiliates orinvestment programs of our sponsor.  Thisfunding commitment may be increased to $300 million.  Until the current funding commitment fromPGGM of $200 million has been placed in BHMP CO-JVs or in other co-investmentswith affiliates or investment programs of our sponsor, to the extent thatinvestments fit within the investment parameters agreed between PGGM RealEstate Fund and our sponsor, we expect a portion of our future real estateacquisitions and real estate under development activities will be made throughBHMP CO-JVs.  Generally PGGM will co-invest in a BHMPCO-JV with a 45% equity interest and we will co-invest with a 55% equityinterest. Our strategy is to utilize these combined funds to invest in Property Entities with otherthird parties, generally developers investing in multifamily communities. Forequity investments, the partners to these Property Entities will then be a BHMP CO-JV and the developer partner,although there could be other third-party participants.

 

EachProperty Entity arrangement withan unaffiliated developer is unique and heavily negotiated, but we willgenerally seek the following provisions:

 

Fordevelopment stage investments:

 

·                  *CompletionGuarantees* — The developer provides us with a guarantee ofcompletion and costs from a dedicated entity with cash, real estate and/orsecurities.  This entity is typically notthe developer entity or the Property Entity, but what is referred to as “the guarantee entity.”  We believe that this guarantee is animportant mitigant to the risk of completion of developments in excess ofbudgeted costs.

 

·                  *DeveloperFee Subordination* — We negotiate fee deferrals at variouslevels.  The fees, usually developer feesfor managing the development, are deferred and only received by the developerafter we have recouped certain of our investments, which may include ourmezzanine loan and any accrued and unpaid interest, equity investment andpreferred return.

 

·                  *CostOverrun Protection* — Generally, we will seek to mandate that any costoverruns, including those due to delayed completions, be borne by the developeror other capital partners, which essentially reduces their share of net profitfrom development to the extent of any such overrun.  Because this potential profit is asignificant source of compensation to the developer, the developer is highlymotivated to remain on budget.

 

For operating and development stage investments:

 

·                  *EquitySubordination* — We will seek to require the other partners toprovide an equity investment that is subordinate to our investment.  In these instances, some or all of ourreturns will take priority to the other partners’ equity.

 

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·                  *HurdleReturns* — We will seek to receive certain minimum returns before the otherpartners participate in operating cash flow or residual profits from a sale orother capital events. In these instances we may receive a preferred return onour capital investment or require that our capital investment earn a minimumrequired internal rate of return.

 

·                  *JointFunding Protection* — Although our structures do not require that anyof the partners fund capital calls for development or operating deficits, weseek to include higher preferred returns on these types of capitalcontributions. As we may have more incentive to keep the project funded, if theother partners do not contribute pro-rata with us, then these higher preferredreturns, which are generally the first allocation of distributable cash, wouldsignificantly dilute non-contributing partners.

 

Not all of these provisions may be included in each Property Entity arrangement,or if our investment is initially a loan, some of these provisions may only beeffective if we elect to make an equity investment. We believe these provisionswill help us achieve our return requirements and help mitigate certain of thereal estate project risks; however, there is no assurance we will achieve thoseobjectives.

 

We believe thateconomic conditions in the major metropolitan markets of the United States willcontinue to provide adequate demand for properly positioned multifamilycommunities; such conditions include an assessment of job and salary growth,lifestyle trends, as well as single-family home pricing and availability ofcredit. Our multifamily asset acquisition strategy concentrates on multifamilycommunities located in the top 50 MSAs across the United States. The****U.S. Census population estimates are usedto determine the largest MSAs. Our top 50 MSA strategy will focus on acquiringproperties and other real estate assets that provide us with broad geographicdiversity. Investments in multifamily communities have benefited from thechanging demographic trends of the last ten years. These trends includecontinued growth in non-traditional households, the echo-boomer generationcoming of age and entering the housing market, low rates of inflation, andincreased immigration. Changes in domestic financial markets can affect thestability and direction of these historical trends and can significantly affectour strategy, both favorably and unfavorably. Demand for multifamily communities is also affected by changes in creditmarket liquidity, and repricing of risk affects the cost and availability offinancing for purchase of single family homes.

 

During the pasttwo years, real estate markets have continued to experience unusual volatilityand uncertainty. Based on research reports by real estate advisory firms, thegoing-in capitalization rate (“cap rate”) for all property types increased from6.5% in 2007 to 8.4% in early 2009 (the cap rate is the property’s netoperating income divided by its purchase price).  The NAREIT Index of the total return for allpublicly traded REITs fell approximately 70% from a high in 2006 through2008.  For multifamily investments, salesvolumes and sales prices have declined since 2007.  During this period, the vacancy rate formultifamily communities also continued to increase as rising joblessnessreduced demand while supply components increased, particularly so-called shadowrental alternatives from unsold condominiums and single-family residences.These factors are contributing to lower rental rates and persistent loweroccupancy levels.

 

However, we arebeginning to see indications that general and multifamily market trends maysoon bottom out. In the third quarter of 2009, gross domestic product increased3.5%, and while still declining, job losses slowed in the second and thirdquarter of 2009.  The seasonally adjustedU.S. Housing Price Index has shown positive growth since April 2009.  The NAREIT Index of the total returns for allpublicly traded REITs has increased since February 2009, withmonth-over-month growth reported in four of the five months through July 2009.  In the multifamily sector, although still atrecent lows, the decline in values of closed sales appears to haveleveled.  This has occurred even assellers have increased their average per-unit offer price in the second quarterof 2009.  We believe the improvement ofthe ratio of multifamily communities held for sale to the number of communitiesactually sold to be an early sign of improving multifamily fundamentals.  In our markets, we are seeing indicationsthat sellers are increasing their price expectations.

 

With our access tocapital, including the proceeds from our Initial Public Offering, availablemultifamily financing and the potential for additional joint ventureinvestments with the BHMP Co-Investment Partner, we believe we have the capitalresources, relationships and experience to be competitive in these markets.  With our strategy of investing in highquality multifamily communities in fundamentally sound long-term markets, wealso believe our investments will be well positioned to perform over theexpected holding period. As the economy improves, particularly in job growthand specifically in the demographic sectors which have the higher proportion ofmultifamily residents, we expect demand and multifamily effective rent toincrease in these kinds of investments. However, we do expect a slow recovery in employment and a consequential lagin vacancy improvements, so we may experience a decrease in net operatingincome in the interim, which may affect certain investment values and cashflow.

 

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Through2007, a significant portion of real estate financing was funded throughcollateralized mortgage-backed (“CMBS”) financing.  This market has ceased to operate since andit is reported by mortgage tracking advisors that approximately $250 billion ofCMBS debt is coming due by 2013, approximately 20% of all commercial realestate debt coming due during this period. Banks and thrifts hold the majority of commercial real estate debt, butthey may not have the capacity to increase their share due to their own capitalconstraints.  Accordingly, liquidity has tightened in most financialmarkets, including investment-grade debt, commercial and construction realestate financing and equity capital markets. The availability and the resulting terms for acquisition financing andrefinancing of existing mortgages have been significantly affected by thistightening in the capital markets.  Ingeneral, we expect leverage availability to be lower with greater emphasis onrecourse to the borrower and principal amortization. However for multifamilyinvestments, we believe financing options are better, particularly for highquality, well-capitalized investments. Accordingly, we believe with the proceeds from our offerings we have thecapital to meet these requirements.  Inaddition, government-sponsored entities such as Fannie Mae and Freddie Mac (“GSE”)have and may continue to provide needed financing, refinancing and creditenhancement to the multifamily sector. During 2009, we and one of our BHMP CO-JVs completed two financingstotaling $77.3 million at a weighted-average rate of 5.0%.  Although there can be no assurance that theGSEs or comparable financing will continue to be available or available atthese rates, these are positive terms in our investment strategy.

 

Thedeterioration of the capital markets has also affected the liquidity andpricing of mezzanine loans, currently a majority of our investment. Spreads onthese loans have widened dramatically with limited secondary markets. Webelieve this market condition has not materially affected our mezzanine andmortgage portfolio due to our strategy of investing in loans based on thequality of the underlying real estate, the security and collateral backing theloans, our investment structures (which allow us the option to convert our loaninvestments into equity ownership) and our intent and ability to hold theseloans to maturity.

 

Weevaluate our notes receivable and other real estate investments for impairmentbased on general and market specific factors. See “Critical Accounting Policiesand Estimates” discussed below.

 

As discussed furtherbelow, we expect to meet our short-term liquidity requirements through the netcash raised from our prior private offering, our Initial Public Offering andcash flow from operating activities of our current and future investments. Forpurposes of our long-term liquidity requirements, we expect that the net cashfrom our Initial Public Offering and from our current and future investmentswill generate sufficient cash flow to cover operating expenses and ourdistributions to stockholders. Also to the extent we hold unencumbered realestate investments, refinancing proceeds could be another source of capital.

 

We expect to use theproceeds from our Initial Public Offering to substantially increase the numberand amount of our investments in multifamily communities.  As of September 30, 2009, we sold atotal of approximately 28.0 million shares of common stock and raised a total of$279.3 million in gross proceeds from our Initial Public Offering.  In addition, we commenced the PrivateOffering to accredited investors on November 22, 2006 and terminated thatoffering on December 28, 2007. We sold a total of approximately 14.2 millionshares of common stock and raised a total of approximately $127.3 million ingross offering proceeds in the Private Offering.

 

**Property Portfolio**

 

Ourmultifamily investments include wholly owned multifamily communities,investments in unconsolidated real estate joint ventures and a wholly ownednote receivable.  Each of theseinvestments is categorized based on stages as defined below:

 

·                  Stabilized / Comparable are communities that are stabilized (theearlier of 90% occupancy or one year after completion of construction oracquisition) for both the current and prior reporting year.

 

·                  Stabilized / Non-comparable are communities that have been stabilizedor acquired after January 1, 2008.

 

·                  Lease-ups are communities that are non-stabilized and going through itsinitial leasing activity.

 

·                  Developments are communities currently under construction.

 

Presentedbelow are the carrying amounts for our wholly owned real estate investments,individual BHMP CO-JV investments and our note receivable as of September 30,2009 and December 31, 2008.  For theinvestments in unconsolidated real estate joint ventures in BHMP CO-JVs, weprovide information describing the underlying investment.  Also presented are the occupancy rates forstabilized multifamily communities, based on the number of individual units andthe approximate square footage 

 

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of retail space, referredto as gross leasable area (“GLA”) (amounts in millions):

 
| ** **                                                                                                                                        | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Wholly Owned Investments**                                                                                                                      |       |                         |       |                        |       |
| *Stabilized / Non-comparable:*                                                                                                                    |       |                         |       |                        |       |
| The Gallery at NoHo Commons / Los Angeles,  California                                                                                            |       | $                            | 107.4      | (9)                         | $          | — |   |
| Multi-story multifamily community with 438 rental units, 91% occupancy rate as of  September 30, 2009                                        |       |                         |       |                        |       |
|                                                                                                                                              |       |                         |       |                        |       |
| Mariposa Loft Apartments / Atlanta, Georgia                                                                                                       |       | 28.5                         |       | —                      |       |
| Multi-story multifamily community with 253 rental units, 94% occupancy rate as of  September 30, 2009                                        |       |                         |       |                        |       |
| Total wholly owned investments                                                                                                                    |       | $                            | 135.9      |                        | $          | — |   |
| ** **                                                                                                                                        | * *   | * *                     |       |                        |       |
| **Investments in Unconsolidated  Real Estate Joint Ventures**                                                                                     | * *   | * *                     |       |                        |       |
| *Stabilized / Comparable:*                                                                                                                        | * *   | * *                     |       |                        |       |
| The  Reserve at Johns Creek Walk / Atlanta, Georgia(2)                                                                                            |       | $                            | 4.2        |                        | $          | 4.8 |   |
| Garden-style  multifamily community with 210 rental units, 95% occupancy rate as of  September 30, 2009 and 90% as of December 31, 2008 |       |                         |       |                        |       |
| *Stabilized / Non-comparable:*                                                                                                                    |       |                         |       |                        |       |
| Verandah at Meyerland / Houston, Texas (3)                                                                                                        |       | 3.8                          |       | —                      |       |
| Low-rise multifamily community with 301 rental units, 88% occupancy rate as of  September 30, 2009                                           |       |                         |       |                        |       |
| * *                                                                                                                                          |       |                         |       |                        |       |
| Waterford Place / Dublin, California (3)                                                                                                          |       | 12.0                         |       | —                      |       |
| Low-rise multifamily community with 301 rental units, 94% occupancy rate as of  September 30, 2009                                           |       |                         |       |                        |       |
| * *                                                                                                                                          |       |                         |       |                        |       |
| Burrough’s Mill Apartment Homes / Cherry Hill, New  Jersey (3)                                                                               |       | 8.4                          |       | —                      |       |
| Low-rise multifamily community with 301 rental units, 96% occupancy rate as of  September 30, 2009                                           |       |                         |       |                        |       |
| *Lease-ups:*                                                                                                                                      |       |                         |       |                        |       |
| The  Eclipse / Houston, Texas(4)(5)                                                                                                               |       | 5.8                          |       | 7.0                         |       |
| Low-rise  multifamily community with 330 rental units                                                                                             |       |                         |       |                        |       |
|                                                                                                                                              |       |                         |       |                        |       |
| Satori  / Fort Lauderdale, Florida(4)(5)                                                                                                          |       | 12.7                         |       | 13.0                        |       |
| Mid-rise  multifamily community with approximately 279 rental units and 13,300 square feet  of GLA retail space                                   |       |                         |       |                        |       |
| * *                                                                                                                                          |       |                         |       |                        |       |
| Forty55  Lofts / Marina del Rey, California(3)                                                                                                    |       | 25.8                         |       | —                      |       |
| Low-rise  multifamily community with 140 rental units                                                                                             |       |                         |       |                        |       |
| * *                                                                                                                                          |       |                         |       |                        |       |
| The  Venue / Clark County, Nevada(4)(5)                                                                                                           |       | 4.8                          |       | 5.0                         |       |
| Garden-style  multifamily community with 168 units                                                                                                |       |                         |       |                        |       |
| *Developments:*                                                                                                                                   |       |                         |       |                        |       |
| Grand  Reserve / Dallas, Texas(1)                                                                                                                 |       | 5.3                          |       | 4.3                         |       |
| Townhome  multifamily community with 149 rental units                                                                                             |       |                         |       |                        |       |
|                                                                                                                                              |       |                         |       |                        |       |
| Bailey’s  Crossing / Alexandria, Virginia(1)                                                                                                 |       | 12.6                         |       | 12.6                        |       |
| Mid-rise  multifamily community with 414 rental units                                                                                             |       |                         |       |                        |       |

 

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| 55  Hundred / Arlington, Virginia(4)(5)                                                                           |   | 13.8   |   | 13.9   |   |
|-------------------------------------------------------------------------------------------------------------------|--------|--------|--------|--------|--------|
| High-rise  multifamily community with 234 rental units and approximately 7,200 square  feet of GLA retail space   |   |   |   |   |   |
|                                                                                                              |   |   |   |   |   |
|                                                                                                              |   |   |   |   |   |
| The  Cameron / Silver Spring, Maryland(1)                                                                         |   | 10.9   |   | 10.9   |   |
| High-rise  multifamily community with 325 rental units and approximately 7,300 square  feet of GLA retail space   |   |   |   |   |   |
|                                                                                                              |   |   |   |   |   |
| Veritas  / Henderson, Nevada(4)(5)(6)                                                                             |   | 15.0   |   | 14.4   |   |
| Garden-style  multifamily community with 430 rental units                                                         |   |   |   |   |   |
|                                                                                                              |   |   |   |   |   |
| Skye  2905 / Denver, Colorado(4)(5)(7)                                                                            |   | 12.6   |   | 10.6   |   |
| Low-rise  multifamily community with 400 units and approximately 4,500 square feet of  GLA retail space           |   |   |   |   |   |
| Total investments in unconsolidated real estate  joint ventures                                                   |   | $      | 147.7  |   | $      | 96.5 |   |
| ** **                                                                                                        |   |   |   |   |   |
| **Note and Other Receivables**                                                                                    |   |   |   |   |   |
| Grand  Reserve / Dallas, Texas(8)                                                                                 |   | $      | 2.3    |   | $      | — |   |
| Townhome  multifamily community with 149 rental units                                                             |   |   |   |   |   |
|                                                                                                              |   |   |   |   |   |
| Tax  Increment Receivable                                                                                         |   | 1.7    |   | — |   |
| Due from  Community Redevelopment Agency, Los Angeles, California in connection with  The Gallery of NoHo Commons |   |   |   |   |   |
|                                                                                                              |   | $      | 4.0    |   | $      | — |   |

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(1)         Mezzanine investment by a BHMP CO-JV to aProperty Entity

(2)         Equity investment by a BHMP CO-JV in ajoint venture with an unaffiliated third party

(3)         Wholly owned BHMP CO-JV equity investment

(4)         Mezzanine investment and an equityinvestment by a BHMP CO-JV in a joint venture with unaffiliated third parties

(5)         Option to convert mezzanine loan to anequity investment in the Property Entity

(6)         Project formerly named Alexan St. Rose

(7)         Project formerly named Alexan Prospect

(8)         Our wholly owned mezzanine investment toa Property Entity (see notes to consolidated financial statements in Part I,Item 1 of this quarterly report, footnote 6)

(9)         Purchase price for The Gallery at NoHoCommons was $96.0 million, before normal closing costs and prorations

 

The increased carrying amounts on our investments asof  September 30, 2009 are largelydue to acquiring two wholly owned multifamily communities made during thequarter of approximately $124.8 million, investing in four BHMP CO-JV ofapproximately $50.0 million and additional contributions on existing notesreceivable for approximately $6.0 million.

 

**Critical Accounting Policies andEstimates**

** **

The following critical accounting policies andestimates apply to both us and our Co-Investment Ventures, respectively.

 

Management’s discussion and analysis of financialcondition and results of operations is based upon our consolidated financialstatements, which have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”). The preparation ofthese financial statements requires our management to make judgments,assumptions and estimates that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. We evaluate these judgments, assumptions and estimates forchanges which would affect the reported amounts. These estimates are based onmanagement’s historical industry experience and on various other judgments andassumptions that are believed to be reasonable under the circumstances. Actualresults may differ from these judgments, assumptions and estimates. Oursignificant judgments, assumptions and estimates include the consolidation ofvariable interest entities (“VIEs”), the allocation of the purchase price ofacquired properties and evaluating our real estate-related investments forimpairment.

 

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

 

Ourconsolidated financial statements will include our accounts, the accounts ofVIEs in which we are the primary beneficiary and the accounts of othersubsidiaries over which we will have control. All inter-company transactions,balances and profits are eliminated in consolidation. Interests in entitiesacquired will be evaluated for consolidation and consolidated if we are deemedto be the primary beneficiary of the VIE. If the interest in the entity isdetermined to not be a VIE, then the entity will be evaluated for consolidationbased on legal form, economic substance, and the extent to which we havecontrol and/or substantive participation rights under the respective ownershipagreement.

 

Thereare judgments and estimates involved in determining if an entity in which wewill make an investment will be a VIE and if so, if we will be the primarybeneficiary. The entity will be evaluated to determine if it is a VIE by, amongother things, calculating the percentage of equity being risked compared to thetotal equity of the entity. There are some guidelines as to what the minimumequity at risk should be, but the percentage can vary depending upon theindustry or the type of operations of the entity and it will be up to ouradvisor to determine that minimum percentage as it relates to our business andthe facts surrounding each of our acquisitions. In addition, even if the entity’sequity at risk is a very low percentage, our advisor will be required toevaluate the equity at risk compared to the entity’s expected future losses todetermine if there could still in fact be sufficient equity in the entity.Determining expected future losses involves assumptions of variouspossibilities of the results of future operations of the entity, assigning aprobability to each possibility using a discount rate to determine the netpresent value of those future losses and allocating those losses between theequity owners, subordinated lenders or other variable interests. Thedetermination will also be based on an evaluation of the voting rights of partnersin relation to their economic participation in benefits or obligation to absorblosses.  As partnership agreements havevarious terms which may change over time or based on future results, theseevaluations require complex analysis and weighting of different factors. Achange in the judgments, assumptions, allocations and estimates outlined abovecould result in consolidating an entity that should not be consolidated oraccounting for an investment on the equity method that should in fact be consolidated,the effects of which could be material to our results of operations andfinancial condition.

 

***Notes Receivable***

 

Notesreceivable are reported at their outstanding principal balances net of anyunearned income and unamortized deferred fees and costs. Included in notesreceivable are both mortgage notes receivable and mezzanine notesreceivable.  Loan origination fees andcertain direct origination costs are generally deferred and recognized asadjustments to interest income over the lives of the related loans.

 

Inaccounting for notes receivable by us or our Co-Investment Ventures, there arejudgments related to whether the investments are loans, investments in jointventures or acquisitions of real estate. We evaluate whether the loans containany rights 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 BHMPCO-JVs contain a right to participate in expected residual profits. Inaddition, the PropertyEntities or project borrower remain obligated to pay principal and interest dueon the loan with sufficient collateral, reserves or qualifying guarantees toaccount for the investments as loans.

 

Weassess notes receivable 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. We thenassess 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 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 project characteristics,there is usually not any secondary market to evaluate impairments. Accordingly,we must rely on our subjective judgments and individual weightings of thespecific factors. If loans are considered impaired, then judgments andestimates are required to determine the projected cash flows for the loan,considering the borrower’s or, if applicable, the guarantor’s financialcondition and the consideration and valuation of the secured property and anyother collateral.

 

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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******Real******Estate Joint Ventures***

 

As of September 30,2009, all of our Co-Investment Ventures are BHMP CO-JVs.  We are the manager of each BHMP CO-JV’saffairs, but the operation of BHMP CO-JVs are conducted in accordance withoperating 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 approve ordisapprove on behalf of the BHMP CO-JV certain major decisions affecting theBHMP CO-JV, such as (i) selling or otherwise disposing of the investmentor any other property having a value in excess of $100,000, (ii) sellingany additional interests in the BHMP CO-JV or its subsidiary REIT (with limitedexceptions relating to the subsidiary REIT maintaining its status as a realestate investment trust or the sale of an interest to the developer of theproject), (iii) approving initial and annual operating plans and capitalexpenditures or (iv) incurring or materially modifying any indebtedness orrefinancing of the BHMP CO-JV or the subsidiary REIT.  As a result of the equal substantiveparticipating rights possessed by each partner, no single party controls eachventure; 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),including eliminations for our share of inter-company transactions, and reducedwhen distributions are received.

 

Eachof the PropertyEntities have different profit sharing interests, some of which have numerousallocation and distribution provisions where certain equity investors receivepreferred interests or deferred participations. We allocate income and loss fordetermining our equity in earnings of unconsolidated joint ventures based onthe underlying economic effect or participation in the benefit or loss.Although our policy is to use the concepts of a hypothetical liquidation atbook value, judgment is required to determine which owners are bearing economicbenefits or losses, particularly as properties move from development tooperations and guarantees and other priority payments are triggered or removed.A change in these judgments could result in greater or lesser amounts of equityin earnings.

 

***Investment Impairments***

 

Forreal estate we wholly own or record on a consolidated basis, we monitor eventsand changes in circumstances indicating that the carrying amounts of the realestate assets may not be recoverable. When such events or changes incircumstances are present, we assess potential impairment by comparingestimated future undiscounted operating cash flows expected to be generatedover the life of the asset and from its eventual disposition, to the carryingamount of the asset. In the event that the carrying amount exceeds theestimated future undiscounted operating cash flows, we will recognize animpairment loss to adjust the carrying amount of the asset to estimated fairvalue.

 

Forreal estate we may own through an investment in a joint venture, TIC interestor other similar investment structure, at each reporting date we compare theestimated fair value of our investment to the carrying value. An impairmentcharge will be recorded to the extent the fair value of our investment is lessthan the carrying amount and the decline in value is determined to be otherthan a temporary decline.

 

Inevaluating our investments for impairment, our advisor 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 to base these estimates andassumptions on. Our estimates of fair value are based on information availableto management as to conditions present as of the assessment date. A change inthese judgments, assumptions and estimates could result in understating oroverstating the book value of our investments which could be material to ourfinancial statements.

 

***Real Estate***

 

For acquired realestate properties, we allocate the purchase price of those properties to thetangible assets acquired, consisting of land, inclusive of associated rights,and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their relative fair values. Identifiedintangible assets consist of the fair value of above-market and below-marketleases, in-place leases, in-place leasing commissions and tenantrelationships.  Goodwill is recognized asof the acquisition date and measured as the aggregate fair value of theconsideration transferred and any noncontrolling interests in the acquiree overthe fair

 

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value of identifiable netassets acquired.  Likewise, a bargainpurchase gain is recognized in current earnings when the aggregate fair valueof the consideration transferred and any noncontrolling interests in theacquiree is less than the fair value of the identifiable net assetsacquired.  Acquisition-related costs areexpensed in the period incurred.

 

The fair value of thetangible assets acquired, consisting of land and buildings, is determined byvaluing the property as if it were vacant, and the “as-if-vacant” value willthen be allocated to land and buildings. Land values will be derived fromappraisals, and building values will be calculated as replacement cost lessdepreciation or our advisor’s estimates of the relative fair value of theseassets using discounted cash flow analyses or similar methods. The value of thebuilding is depreciated over the estimated useful life of 25 to 35 years, usingthe straight-line method.  Improvementsare depreciated over their estimated useful lives ranging from 3 to 15 yearsusing the straight-line method.

 

We determine the value of above-market andbelow-market in-place leases for acquired properties based on the present value(using an interest rate that reflects the risks associated with the leasesacquired) of the difference between (1) the contractual amounts to be paidpursuant to the in-placeleases and (2) management’s estimate of current-market lease rates for thecorresponding in-place leases, measured over a period equal to (a) theremaining non-cancelable lease term for above-market leases, or (b) theremaining non-cancelable lease term plus any fixed rate renewal options forbelow-market leases. We record the fair value of above-market and below-marketleases as intangible assets or intangible liabilities, respectively, andamortize them as an adjustment to rental income over the above determined leaseterm.

 

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 expectedlease-up 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 rentalrevenue during the expected lease-up period based on then current marketconditions. The estimates of the fair value of tenant relationships alsoinclude costs to execute similar leases including leasing commissions, legaland tenant improvements as well as an estimate of the likelihood of renewal asdetermined by our advisor on a tenant-by-tenant basis.

 

Weamortize the value of in-place leases and in-place tenant improvements over theinitial 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 mortgage payments using interest rates for debt with similarterms and remaining maturities that our advisor believes 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.

 

Prior to January 1,2009, we allocated the purchase price of the real estate we acquired to thetangible assets acquired, consisting of land, inclusive of associated rights,and buildings, any assumed debt, identified intangible assets and assetretirement obligations based on their relative fair values in accordance. Uponthe completion of a business combination, we recorded the tangible assetsacquired, consisting of land, inclusive of associated rights, and buildings,any assumed debt, identified intangible assets and asset retirement obligationsbased on their fair values.

 

Inallocating the purchase price of each of our properties, our advisor makesassumptions and uses various estimates, including, but not limited to, theestimated useful lives of the assets, the cost of replacing certain assets,physical and economic obsolescence, discount rates used to determine presentvalues, market rental rates and the period required to lease the property up toits occupancy at acquisition if it were vacant. Many of these estimates will beobtained from independent third-party appraisals. However, our advisor will beresponsible for the source and use of these estimates. A change in theseestimates and assumptions could result in the various categories of our real estateassets or related intangibles being overstated or understated which couldresult in an overstatement or understatement of depreciation or amortizationexpense or rental income. These variances could be material to our results ofoperations and financial condition.

 

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** **

**Results of Operations**

** **

Forthe three months ended September 30, 2009, we are reporting a net loss of$3.8 million, compared to a net income of $0.8 million for the three monthsended September 30, 2008. For the nine months ended September 30,2009, we are reporting a net loss of $3.3**million,compared to a net income of $2.3 million for the nine months ended September 30,2008. The decrease in net income is primarily due to our 2009 acquisitions oftwo wholly owned multifamily communities and four acquisitions by BHMP CO-JVs,where our share of acquisition expenses was $3.6 million.  Also contributing to the decrease areadditional costs in general and administrative and asset management expenses asa result of our larger portfolio as well as a reduction in interest income dueto lower interest rates on our cash equivalents.   We expect that as we complete theinvestments of the proceeds from our Initial Public Offering that earnings onour real estate investments will have a higher contribution to our net incomewhile general and administrative and asset management expenses and interestincome from our cash equivalents will be proportionally less significant to ouroverall operating results.  However,acquisition expenses during this acquisition and development stage could besignificant, resulting in net losses until we have substantially invested theproceeds from our Initial Public Offering.

 

Forthe three and nine months ended September 30, 2009 and 2008, our primaryinvestments have been mezzanine and mortgage development loans in Property Entities, substantiallythrough our BHMPCO-JVs.  As of September 30,2008, we and our BHMPCO-JVs made investments in nine properties under development and one operatingmultifamily community. During the three months ended September 30, 2009,we invested in four additional BHMP CO-JV operation multifamily communities.  In addition, three of the properties underdevelopment are now leasing but have not yet reached stabilized operations.

 

Priorto September 2009, we did not have any investments in wholly ownedmultifamily communities.  In September 2009,we made two investments in wholly owned operating multifamily communities.  With these acquisitions, we are reportingrental revenues and operating costs as well as real estate assets andliabilities on a consolidated basis for first time for the three months ended September 30,2009.

 

Accordingly,many of our results for the three and nine months ended September 30, 2009are not directly comparable to the three and nine months ended September 30,2008, where ourresults of operations for each period presented reflect significant increasesin substantially all reporting categories for the current period. This willlikely be the case until we substantially invest the proceeds from the InitialPublic Offering.

 

***The threemonths ended September 30, 2009 as compared to the three months ended September 30,2008***

 

*Rental Revenues. *Rentalrevenues for the threemonths ended September 30, 2009 were approximately $0.5million. These rental revenues are from our acquisitions of two whollyowned multifamily communities made in September 2009. We expect continuedincreases in these revenues as a result of owning and acquiring additional realestate investments.  We did not have anyrental revenue in 2008.

 

*Property Operating Expenses. *Propertyoperating expenses for the three months ended September 30, 2009 were approximately $0.1million. These expenses are from our acquisitions of wholly ownedmultifamily communities in September 2009. We expect continued increasesin these expenses as a result of owning and acquiring additional real estateinvestments.  We did not have anyproperty operating expense in 2008.

 

*Asset Management and Other Fees.*Asset management fees for the threemonths ended September 30, 2009 and 2008 were approximately $0.5 millionand $0.3 million, respectively. These fees are based on the amount of ourgross real estate investments and the time period in place.  Accordingly, the increase is due to thetiming and funded amounts of our investments for 2009 compared to 2008.  We expect continued increases in these feesas a result of owning and acquiring additional real estate investments.

 

*Generaland Administrative Expenses*. General and administrative expenses for the threemonths ended September 30, 2009 and 2008 were approximately $0.9 millionand $0.4 million, respectively, and included corporate general andadministrative expenses incurred and reimbursable, as well as compensation ofour board of directors, auditing and tax fees, and legal fees. The significantincreases in the three months ended September 30, 2009 as compared to thethree months ended September 30, 2008 were due to higher administrativecosts related to our Initial Public Offering which occurred in September 2008which were not reflected in results 

 

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of operations for theperiod ended September 30, 2008. The increases included corporate legal and accounting reimbursements toour advisor for $0.2 million, outside audit and legal fees for $0.1 million,and other miscellaneous administrative expenses for $0.2 million.  We expect further increases as a result ofowning and acquiring additional joint venture interests and other real estateinvestments.

 

*AcquisitionExpenses. *Acquisition expenses for the three monthsended September 30, 2009 relate to our acquisition of The Gallery at NoHoCommons and Mariposa Loft Apartments. Of the total expenses of $2.8 million,approximately $2.5 million were incurred with our advisor.  As we make additional wholly ownedinvestments, 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 “Funds from Operations and Modified Funds fromOperations” for additional discussion.

 

*Depreciationand Amortization. *Depreciation and amortization expense forthe three months ended September 30, 2009 was approximately $0.4 million,primarily relating to our acquisition of The Gallery at NoHo Commons andMariposa Loft Apartments. Depreciation and amortization expense primarilyincludes depreciation of our wholly owned multifamily communities andamortization of acquired in-place leases. As we make additional wholly owned investments, we expect depreciationand amortization expense to increase and to be a significant factor in our GAAPreported results.  In 2008, we did nothave any wholly owned investments. See the section below “Funds from Operationsand Modified Funds from Operations” for additional discussion.

 

*InterestIncome.*Interestincome, which primarily included interest earned on our cash equivalents, forthe three months ended September 30, 2009 and 2008 was approximately $0.4million and $0.2 million respectively, Although we had higher average investment balances for the three monthsended September 30, 2009 as compared to the same period in 2008, ouraverage interest rate for three months ended September 30, 2009 wasapproximately 1.0% compared to approximately 2.2% for the same period in 2008due to market rate declines in short-term interest rates.  Our interest income on bank deposits is afunction of the timing and magnitude of our capital raise and our acquisitionactivity, where we expect both to increase. For the three months ended September 30, 2009, interest income alsoincluded earnings on a direct, wholly owned note receivable of approximately$0.1 million with no investment or earnings for the prior period in 2008.

 

*Equity inEarnings (Loss) of Investments in Unconsolidated Real Estate Joint Ventures.*Equity loss in earnings of joint ventureinvestments for the three months ended September 30, 2009 wasapproximately $0.1 million compared to equity in earnings of approximately $1.3million for the three months ended September 30, 2008, and included ourshare in earnings from our unconsolidated real estate joint ventureinvestments. The decrease is mainly due to the acquisition of three BHMP CO-JVoperating multifamily communities made in September 2009. Our portion ofacquisition expenses associated with these investments was recognized in September 2009and was approximately $0.7 million. Additionally, properties underlying two of our investments, Satori andThe Venue, began leasing, which incurred operational expenses with nooffsetting rental revenues. These losses were partially offset by increasedearnings due to additional fundings, particularly for loan investments. During thetwelve months ended September 30, 2009, we made $70.7 million of newinvestments in BHMP CO-JVs.  Of this amount, approximately $19.5million related to loan investments in Property Entities and approximately$51.2 million related to equity investments in Property Entities. A breakdown ofour approximate equity earnings by type of underlying investments for the threemonths ended September 30, 2009 and 2008 is as follows (amounts inmillions):

 
| ** **                  | ** ** | **For the  three months ended  September 30,** | ** ** |
|-----------------------------|------------|-----------------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| Loan investments            |       | $                                                   | 2.0        |   | $ | 1.5 |   |
|                        |       |                                                |       |   |   |
| Equity investments:         |       |                                                |       |   |   |
| Stabilized / Comparable     |       | (0.1                                                | )          | (0.2 | ) |
| Stabilized / Non-comparable |       | (0.5                                                | )          | — |   |
| Lease-ups                   |       | (1.4                                                | )          | — |   |
| Developments                |       | (0.1                                                | )          | — |   |
|                        |       | (2.1                                                | )          | (0.2 | ) |
| Total                       |       | $                                                   | (0.1       | ) | $ | 1.3 |   |

 

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Earningsfrom underlying loan investments increased due to additional advances in Property Entities for the GrandReserve, Veritas, and Skye 2905. Our weighted average interest rate for all ofthe loan investments was approximately 10.2% as of September 30, 2009compared to 9.7% as of September 30, 2008. Equity in earnings from all ofthe equity investments was a loss for both periods and was primarily related tothe three propertiesunderlying our investments that began leasing, but have not yet reachedstabilized operations, The Eclipse, Satori and The Venue, and our recentinvestment in Forty55 Lofts. These losses were recognized due to thesecommunities recently being placed in service, where interest expense anddepreciation exceeded the unstabilized net operating income as well as one-timeacquisition expenses, where our share of those expenses was approximately $0.7million.  Although all of the underlyingequity investments produced a loss in equity in earnings, our investments inThe Reserve at Johns Creek Walk, Satori, The Venue and The Eclipse providedcash distributions to us for the three months ended September 30, 2009 ofapproximately $0.4 million and the loss in equity in earnings for The Eclipse,Satori and The Venue had no affect on our cash flow as the operating deficitwas included in the development budget and was covered by construction loandraws.  The stabilized / non-comparableactivity related to investments in Verandah at Meyerland, Waterford Place andBurrough’s Mill Apartment Homes. These investments were made in the second andthird quarters of 2009.  As of September 30,2009, the average occupancy rate for those investments was 93%.  We expect to receive distributions from theinvestment but due to interest expense and deprecation exceeding net operatingincome, we expect a loss in earnings.

 

***The nine monthsended September 30, 2009 as compared to the nine months ended September 30,2008***

 

*Rental Revenues. *Rentalrevenues for the ninemonths ended September 30, 2009 and 2008 were approximately $0.5million. These rental revenues are from our acquisitions of two whollyowned multifamily communities made in September 2009. We expect continuedincreases in these revenues as a result of owning and acquiring additional realestate investments.  We did not have anyrental revenue in 2008.

 

*Property Operating Expenses. *Propertyoperating expenses for the nine months ended September 30, 2009 were approximately $0.1 million. Theseexpenses are from our acquisitions of two wholly owned multifamily communitiesmade in September 2009. We expect continued increases in these expenses asa result of owning and acquiring additional real estate investments.  We did not have any property operatingexpense in 2008.

 

*Asset Management and Other Fees.*Asset management fees for the nine monthsended September 30, 2009 and 2008 were approximately $1.0 million and $0.7million, respectively. These fees are based on the amount of our grossreal estate investments and the time period in place.  Accordingly, the increase is due to thetiming and funded amounts of our investments for 2009 compared to 2008. Weexpect continued increases in these fees as a result of owning and acquiringadditional joint venture interests and other real estate investments.

 

*Generaland Administrative Expenses*. General and administrative expenses for the ninemonths ended September 30, 2009 and 2008 were approximately $2.3 millionand $1.0 million, respectively, and included corporate general andadministrative expenses incurred and reimbursable, as well as compensation ofour board of directors, auditing and tax fees, and legal fees. The significantincreases in the nine months ended September 30, 2009 as compared to thenine months ended September 30, 2008 were due to higher administrativecosts related to our Initial Public Offering which occurred in September 2008,and therefore was not a factor for the period ended September 30,2008.  The increase included corporatelegal and accounting reimbursements to our advisor for $0.7 million, outsideaudit and legal fees for $0.3 million, and other miscellaneous expenses for$0.2 million.  We expect furtherincreases as a result of owning and acquiring additional joint ventureinterests and other real estate investments.

 

*AcquisitionExpenses. *Acquisition expenses for the nine monthsended September 30, 2009 relate to our acquisition of The Gallery at NoHoCommons and Mariposa Loft Apartments. Of the total expenses of $2.8 million,approximately $2.5 million were incurred with our advisor.  As we make additional wholly ownedinvestments, 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 “Funds from Operations and Modified Funds fromOperations” for additional discussion.

 

*Depreciationand Amortization. *Depreciation and amortization expense forthe nine months ended September 30, 2009 was approximately $0.4 million,primarily relating to our acquisition of The Gallery at NoHo Commons andMariposa Loft Apartments. Depreciation and amortization expense primarilyincludes depreciation of our wholly owned properties and amortization ofacquired in-place leases.  As we makeadditional wholly owned investments, we expect depreciation and amortizationexpense to increase and to be a significant factor in our GAAP reportedresults. In 2008, we did not have any wholly owned investments. See the sectionbelow “Funds from Operations and Modified Funds from Operations” for additionaldiscussion.

 

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*InterestIncome.* Interest income, which primarily includedinterest earned on our cash equivalents, was substantially unchanged for thenine months ended September 30, 2009 as compared with the same period in2008, and primarily included interest earned on our cash equivalents. Althoughwe had higher average investment balances for the nine months ended September 30,2009 as compared to the same period in 2008, our average interest rate for 2009was approximately 0.8% compared to approximately 2.5% for the same period in2008 due to market rate declines in short-term interest rates.  Our interest income on bank deposits is afunction of the timing and magnitude of our capital raise and acquisitionactivity, and we expect both to increase. For the nine months ended September 30, 2009, interest income alsoincluded earnings on a direct, wholly owned note receivable of approximately$0.1 million with no investment or earnings for the prior period in 2008.

 

*Equity inEarnings of Investments in Unconsolidated Real Estate Joint Ventures.*Equity in earnings of joint ventureinvestments for the nine months ended September 30, 2009 and 2008 wasapproximately $2.1 million and $3.2 million, respectively, and included ourshare in earnings from our unconsolidated joint venture investments. Thedecrease is mainly due to the acquisition of interests in four BHMP CO-JVs madein 2009. Our portion of acquisition expenses associated with these investmentswas recognized in September 2009 and was approximately $0.8 million.  Additionally, Satori and The Venue propertiesunderlying two of our investments began leasing, which incurred operationalexpenses with no offsetting rental revenues. These losses were partially offset by increased earnings due toadditional fundings, particularly for loan investments. During thetwelve months ended September 30, 2009, we made $70.7 million of newinvestments in BHMP CO-JVs.  Of this amount, approximately $19.5million related to loan investments in Property Entities and approximately $51.2million related to equity investments in Property Entities.  A breakdown of our approximate equityearnings by type of underlying investments for the nine months ended September 30,2009 and 2008 is as follows (amounts in millions):

 
| ** **                  | ** ** | **For the  nine months ended  September 30,** | ** ** |
|-----------------------------|------------|----------------------------------------------------|------------|
| ** **                  | ** ** | **2009**                                           | ** ** | **2008** | ** ** |
| Loan investments            |       | $                                                  | 5.7        |   | $ | 3.9 |   |
|                        |       |                                               |       |   |   |
| Equity investments:         |       |                                               |       |   |   |
| Stabilized / Comparable     |       | (0.4                                               | )          | (0.7 | ) |
| Stabilized / Non-comparable |       | (0.6                                               | )          | — |   |
| Lease-ups                   |       | (2.5                                               | )          | — |   |
| Developments                |       | (0.1                                               | )          | — |   |
|                        |       | (3.6                                               | )          | (0.7 | ) |
| Total                       |       | $                                                  | 2.1        |   | $ | 3.2 |   |

 

Earningsfrom underlying loan investments increased due to additional advances in Property Entities for the GrandReserve, Veritas, and Skye 2905. Our weighted average interest rate for all ofthe loan investments was approximately 10.2% as of September 30, 2009compared to 9.7% as of September 30, 2008. Equity in earnings from all ofthe equity investments was a loss for both periods and was primarily related tothe three properties underlying our investments that began leasing, but have notyet reached stabilized operations, The Eclipse, Satori and The Venue, and ourrecent investment in Forty55 Lofts. These losses were recognized due to thesecommunities recently being placed in service, where interest expense anddepreciation exceeded the unstabilized net operating income as well as one-timeacquisition expenses incurred from our recent investments.  Although all of the underlying equityinvestments produced a loss in equity in earnings, our investments in TheReserve at Johns Creek Walk, Satori, The Venue and The Eclipse provided cashdistributions to us for the nine months ending September 30, 2009 ofapproximately $1.3 million and the loss in equity in earnings for The Eclipse,Satori and The Venue had no affect on our cash flow as the operating deficitwas included in the development budget and was covered by construction loandraws.  The stabilized / non-comparableactivity related to investments in Verandah at Meyerland, Waterford Place andBurrough’s Mill Apartment Homes. These investments were made in the second andthird quarters of 2009.  As of September 30,2009, the average occupancy rate for those investments was 93%.  We expect to receive distributions from theinvestment but due to interest expense and deprecation exceeding net operatingincome, we expect a loss in earnings.

 

Exclusiveof acquisition expenses, we would expect our equity in earnings related tounderlying loan investments to increase until the Property Entities have completed the projectdevelopments, when, if the mezzanine loans are converted to equity investments,our equity investments will increase. However, we anticipate the underlyingequity investments to report less earnings due to depreciation and interestexpense exceeding net operating income for the Property Entities during the initial periodof 

 

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operationsthrough lease-ups. Accordingly, as the proportion of the underlying equityinvestments increases, we expect our net earnings from unconsolidated realestate joint ventures to decline for an interim period and potentially evenreflect a net loss. During the remainder of 2009, we expect one additionalunderlying investment to transition from the development phase to lease-up andnon-stabilized operations: 55 Hundred. During the period until stabilization for this investment, we expectinterest and depreciation expense to exceed net operating income until we reachstabilized occupancy.  For the three andnine months ended September 30, 2009, our equity in earnings from thisunderlying investment was approximately $0.3 million and $0.8 million,respectively. Even if underlying loan investments are not converted to equityinterests, our earnings in unconsolidated real estate joint ventures maydecline due to restrictions on recording interest income, either due todeferral of interest or consolidation. See “Critical Accounting Policies andEstimates” discussed above.

 

Wereview our investments for impairment in accordance with our accountingpolicies. For the three and nine months ended September 30, 2009 and 2008,we have not recorded any impairment losses. However, this conclusion couldchange in future periods based on changes in certain factors, primarily:

 

·                  Status ofguarantors’ financial position. If market prices continue to decline, partiesthat provided us guarantees may not have the assets or net worth as previouslyreported. Guarantors may also face liquidity issues as their financings becomedue. If our analysis was dependent on a guarantor’s ability to perform, ourjudgments could change based on new developments. As of September 30,2009, each of our development Property Entities are dependent upon the guarantor’sfinancial position.

 

·                  Project specificperformance. All of our loan and equity investments in Property Entities are dependenton management derived market assumptions for fair value determinations. Theseassumptions particularly include projected rents, occupancy and terminal caprates. If general and specific market conditions deteriorate, changes in theseassumptions will affect our fair value determinations.

 

·                  Workouts. Instructuring the BHMPCO-JVs investment in PropertyEntities, some of our investments contain provisions that provide us withpriority or preferential returns. If the underlying projects are affected bymarket conditions, which may not directly affect our returns but do affect theother partners, the other partners may request workouts or other changes to thedeal structures. Although we may not be contractually forced to accept thesechanges, there could be other factors that would cause us to accept certainmodifications or enter into workouts. Based on the consequences of theseschanges, our assessment of our investment could change.

 

·                  Lease-upassumptions.  In assessing developmentprojects, we must make assumptions about general market conditions, projectedoccupancy and rental rates for projects that are several periods from the startof lease-up activities. Our assumptions are based on our marketing analysis andcompeting projects. When the developments actually begin lease-up activity, wemay be faced with different market conditions, and our assessment of ourinvestment could change.

 

Wereview for these and similar events in the preparation of our consolidatedfinancial statements.  In April 2009,we received the December 31, 2008 audited consolidated financialstatements of Fairfield Residential LLC and its affiliates (“FairfieldResidential”), the developer for three multifamily community developments inwhich we have invested through their respective BHMP CO-JVs (Bailey’s Crossing,The Cameron and 55 Hundred, or the “Fairfield Projects”).  In its opinion on the consolidated financialstatements, the auditor expressed concern that Fairfield Residential might notbe able to continue to operate as a going concern through the end of 2009.  In September 2009, we received noticethat the senior construction lender for the Bailey’s Crossing project declaredthe construction loan in technical, non-monetary default due to FairfieldResidential’s failure to provide certain required financial information. Topreserve its rights, the BHMP CO-JV served a default notice to the Bailey’sCrossing Property Entity related to its $22.1 million mezzanine loan.

 

BecauseFairfield Residential has guaranteed repayment of each of the seniorconstruction loans that are funding construction of the Fairfield Projects, aswell as completion of such projects, Fairfield Residential’s financialcondition may give rise to an event of default under The Cameron and the 55Hundred senior construction loan agreements just as it has under the Bailey’sCrossing senior construction loan agreement. With respect to the Bailey’s Crossing senior construction loan default,and in the event of another default under a senior construction loan, under ourintercreditor agreements with the senior construction lenders or otherwise, weexpect to have an opportunity to (a) cure the default, (b) purchasethe senior construction loan or (c) otherwise negotiate a solutionacceptable to the senior construction lender. Any such negotiations may requireus to agree to less desirable investment terms than we currently have.  In addition, such defaults or negotiationsmay change our analysis of the accounting for these investments, which couldresult in the BHMP CO-JVs accounting for the investments as joint ventures, orif the BHMP CO-JV is viewed as the primary

 

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beneficiary,to consolidate the investment(s). However, we believe that, even if FairfieldResidential becomes insolvent, we have sufficient collateral, contractualremedies and other creditor rights for us to recover all of our investments inthese development projects.

 

Subsequentto the issuance of the 2008 consolidated financial statements and continuingthrough November 13, 2009, we understand that the development projectsenior construction lenders have continued to fund the construction loan draws,including with respect to the Bailey’s Crossing project subsequent to thedefault notice.  As of September 30,2009, the amounts unfunded under each senior construction loan for Bailey’sCrossing, The Cameron, and 55 Hundred were approximately $34.5 million, $49.9million and $10.5 million, respectively. We understand Fairfield Residentialhas reached an agreement with its senior credit facility lender for anadditional extension through November 16, 2009. In addition, Fairfield asproject developer has continued to perform under the development agreement,meeting all construction requirements and schedules.  Construction is expected to continue throughthe first half of 2010.

 

Asof September 30, 2009, management’s assessment related to the FairfieldProjects is that the BHMP CO-JV loan investments are still properly accountedfor as loans and equity accounting is still appropriate for the BHMP CO-JVequity investment in unconsolidated real estate joint ventures.  The continuation of these accounting treatments isdependent on the resolution of the issues described above, and there can be noassurance as new facts and circumstances arise that different accounting wouldnot be required. A change in accounting could affect our recognition ofearnings in future periods. As of September 30, 2009, no impairment charges related to ourinvestments with respect to the Fairfield Projects have been recorded, and the valueof our mezzanine investments in the Fairfield Projects is approximately $33.8million (approximately 9.6% of our total assets).  For the three and nine months ended September 30,2009, for the Fairfield Projects, the equity in earnings of investments inunconsolidated real estate joint ventures was approximately $0.8 million and$2.4 million, respectively. Distributions to us from our investments related to the FairfieldProjects for the three and nine months ended September 30, 2009 were $0.8million and $2.5 million, respectively.

 

Subsequentto September 30, 2009, the BHMP CO-JVs have had discussions with each ofthe Fairfield Project senior construction lenders and each of the equitypartners regarding potential renegotiations, including, but not limited to,restructuring the senior construction loans, the BHMP CO-JV mezzanine loans andmodifying existing Fairfield Residential guarantees.  These discussions are still tentative but arefocusing on reduced debt leverage through additional first-priority, preferredreturn capital contributions and an extension of the terms of the loans. Ourpotential share of the BHMP CO-JV’s share of such contributions could rangebetween $39.0 million and $55.0 million. However, there is no assurance that we will be able to restructure theFairfield Project senior construction loans and associated guarantees on theseor any other terms. As we or the BHMP CO-JVs are not under any obligation tocomplete such restructurings and the terms of any potential transaction are notfinalized, we are not able to assess the changes in accounting, if any.

 

One of our PropertyEntities in development, Grand Reserve, had a $29 million construction loanwith Guaranty Bank. On August 21, 2009, Guaranty Bank, thefinancial institution that held the senior loan on the Grand Reserve project,was closed by the Office of Thrift Supervision (the “OTS”), and the FDIC wasappointed as receiver of Guaranty Bank. On the same date, the FDIC transferredcertain of the assets and liabilities of Guaranty Bank, including the seniorloan on the Grand Reserve project, to BBVA Compass. Our aggregate investment inthe Grand Reserve project as of September 30, 2009 was $6.3 million,consisting of a senior mezzanine loan made through a joint venture with theBHMP Co-Investment Partner and a wholly owned junior mezzanine loan. As of November 13,2009, construction draws for the project have not been affected by the closureof Guaranty Bank or the transfer of the loan to BBVA Compass, and we havereceived no communication that future fundings will be affected.

 

**CashFlow Analysis**

 

Cashand cash equivalents increased for the nine months ended September 30,2009 by approximately $39.7 million as compared to a decrease in cash and cashequivalents for the nine months ended September 30, 2008 of approximately$23.1 million.  The increase in cash andcash equivalents is primarily due to our Initial Public Offering whichcommenced in September 2008.

 

***The nine monthsended September 30, 2009 as compared to the nine months ended September 30,2008***

 

As of September 30,2009, we had made investments in sixteen multifamily communities, eight invarious stages of development and eight operating multifamily communities. In September 2009,we made our first wholly owned multifamily acquisitions, where cash flows arereported on a consolidated basis rather than as equity investments. We alsobegan to receive proceeds from our Initial Public Offering in October 2008.  As a result, our cash flows for the ninemonths ended September 30, 2009 reflect significant differences from thecash flows for nine months ended September 30, 2008.

 

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Cash flows provided byoperating activities for the nine months ended September 30, 2009 and 2008were $0.2 million and $2.0 million, respectively. The nine monthsended September 30, 2009 recognized less net income as compared to thesame period in 2008, primarily due to our acquisition expenses, but benefitedfrom increased operating liabilities, depreciation and amortization.  Distributions received from our investmentsincreased for the nine months ended September 30, 2009, primarily frominterest income received from increased loan investments made through BHMPCO-JVs.

 

Cash flows used ininvesting activities for the nine months ended September 30, 2009 and 2008were $179.3 million and $20.9 million, respectively.  Our primary investing activity is investmentacquisitions or fundings, which are largely dependent on our capital raise. Ourinvestments in unconsolidated real estate joint ventures decreased due to fulfillingour fundings of our nine BHMP CO-JVs investments in 2008.  As our Initial Public Offering continues into2009, we would expect our new acquisitions to increase.  For the nine months ended September 30,2009, we have made two wholly owned acquisitions for $123.1 million and fouradditional BHMP CO-JV investments for $57.3 million.  Also providing a source of investing cashflow for the nine months ended September 30, 2009 were BHMP CO-JVdistributions which were returns of investments in unconsolidated real estatejoint ventures, primarily related to an excess contribution to the Veritas BHMPCO-JV funded in 2008 and returned during 2009.

 

Cashflow provided by (used in) financing activities for the nine months ended September 30,2009 and 2008 was $218.9 million and ($4.2) million, respectively.  Financing activities increased due to ourInitial Public Offering commencing in September 2008. As our InitialPublic Offering continues into 2009, we would expect proceeds from the sale ofcommon stock to increase. For the nine months ended September 30, 2009,distributions were higher due to higher distribution rates and increased commonstock outstanding as compared to the same period in 2008.  There was no capital raise for the ninemonths ended September 30, 2008. Our board of directors increased thedistribution rate from an effective annual rate of 6.5% to 7.0% in March 2009,increasing the amount of distributions significantly. As discussed above, weexpect to fund increased distributions from earnings on the increased amount ofinvestments and, to the extent necessary, from the proceeds of our InitialPublic Offering. Offering costs paid were significantly higher for the ninemonths ended September 30, 2009, because offering costs paid are a factorof our common stock sales and our advisor incurs greater costs in the initialphases of our offering.

 

**In accordance with the Statement of Policy Regarding Real EstateInvestment Trusts published by the North American Securities AdministratorsAssociation, also known as the NASAA REIT Guidelines, our charter requires thatwe monitor our expenses on a trailing twelve-month basis.  Our charterdefines the following terms and requires that our Total Operating Expenses (“TOE”)are deemed to be excessive if at the end of any quarter they exceed for theprior trailing twelve month period the greater of 2% of our Average InvestedAssets (“AIA”) or 25% of our Net Income (“NI”).  For the trailing twelvemonths ended September 30, 2009, TOE of approximately $4.3 millionexceeded 2% of our AIA (which was approximately $2.1 million) by approximately$2.2 million. ** Our board of directors, including all of our independent directors,have reviewed this analysis and unanimously determined the excess to bejustified considering that we are currently in our acquisition and developmentstage, that certain investments are not stabilized and that we are continuingto raise capital for our Initial Public Offering of common stock where theexpenses incurred as a result of being a public company for audit and legalservices, director and officer liability insurance and fees for board ofdirectors are disproportionate to the Company’s AIA and NI.

** **

**Liquidityand Capital Resources**

** **

***General***

** **

Ourprincipal demands for funds will continue to be for making investments inmultifamily communities, on our own or through joint ventures, and for thepayment of operating expenses and distributions. Generally, cash needs foritems other than our investments are expected to be met from operations, andcash needs for our investments, including acquisition expenses, are expected tobe met from the net proceeds from our Initial Public Offering and otherofferings of our securities as well as mortgages secured by our real estateinvestments.  However, there may be adelay between the sale of our shares, making investments in real estate andloans and the receipt of income from such investments, which could result in adelay in the benefits to our stockholders of returns generated from ouroperations.  During this period, we maydecide to temporarily invest any uninvested proceeds in investments that couldlower returns rather than our targeted investments in real estate-relatedassets.  These lower returns may affect ourability to make distributions or the amount actually disbursed.

 

Ifreal estate financing is not available on terms and conditions we findacceptable, we may not be able to obtain financing for investments. Recently, domestic and international financial markets have experienced unusualvolatility and uncertainty.  If this volatility and uncertainty persists,our ability to borrow monies to finance the purchase of, or other activitiesrelated to, real estate 

 

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assetswill be significantly impacted.  If we are unable to borrow monies onterms and conditions that we find acceptable, we likely will have to reduce thenumber of properties we can purchase, and the return on the properties we dopurchase likely will be lower.  In addition, we may find it difficult,costly or impossible to refinance indebtedness that is maturing.  Ifinterest rates are higher when the properties are refinanced, we may not beable to finance the properties and our income could be reduced.

 

***Short-Term Liquidity***

 

Ourprimary indicators of short-term liquidity are our cash and cash equivalentsand our current raise from our Initial Public Offering. As of September 30,2009, our cash and cash equivalents balance was $63.5 million, compared to$23.8 million as of December 31, 2008. On a daily basis, cash is affectedby our net raise from our Initial Public Offering.  Since September 5, 2008, we soldapproximately 28.0 million shares of our common stock with gross proceeds ofapproximately $279.3 million.  Althoughthere can be no assurance, we expect our sales of shares of common stock in ourInitial Public Offering to increase in 2009. For the three and nine monthsended September 30, 2009, we received gross proceeds from our InitialPublic Offering (including our distribution reinvestment plan (“DRIP”)) ofapproximately $101.3 million and $268.4 million, respectively.  We also expect our operating cash flows toincrease when additional 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 and investing at amountswithin federally-insured levels. Information on our cash and cash equivalents as of September 30,2009 and December 31, 2008 is as follows (dollar amounts in thousands):

 
| ** **                            | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Number  of  Accounts**     | ** ** | **Amount**                  | ** ** | **Number  of  Accounts** | ** ** | **Amount** | ** ** |
| Commercial bank demand deposits:      |       |                         |       |                        |       |   |   |   |   |
| Within federally-insured limits       |       | 1                            |       | $                           | 250        |   | 1 |   | $ | 250 |   |
| In excess of federally-insured limits |       | 3                            |       | 7,113                       |       | 1 |   | 398 |   |
|                                  |       |                         |       |                        |       |   |   |   |   |
| Commercial bank money markets:        |       |                         |       |                        |       |   |   |   |   |
| Within federally-insured limits       |       | 72                           |       | 17,124                      |       | 13 |   | 3,250 |   |
| In excess of federally-insured limits |       | 9                            |       | 36,971                      |       | 8 |   | 4,136 |   |
|                                  |       |                         |       |                        |       |   |   |   |   |
| Money market reserves fund: (1)       |       | 1                            |       | 2,056                       |       | 1 |   | 15,737 |   |
|                                  |       |                         |       | $                           | 63,514     |   |   |   | $ | 23,771 |   |

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(1)          The money market reservesfund invests in high quality, short-term debt securities including bankobligations such as certificates of deposit and time deposits issued bydomestic or foreign banks, commercial paper, and corporate bonds.  These securities may have fixed, floating orvariable rates of interest.

 

Ourprimary operating expenditures are payments for asset management fees andgeneral and administrative expenses.  Wecurrently meet these obligations from cash flow from operating activities.  As the amount of our real estate investmentsincreases, we would expect these expenses to also increase.  Depending on the timing and magnitude, we mayevaluate other short-term financing options, including working capital andacquisition credit facilities.

 

***Long-Term Liquidity, Acquisition and******Property Entity******DebtFinancing***

 

Ourprimary source for acquisitions is the proceeds we receive. This is an offeringof up to $2 billion in gross proceeds from our primary offering and $475million in gross proceeds from our DRIP. Total offering expenses are expectedto be approximately 11% of the gross proceeds from our primary offering,netting approximately 89% that is generally available for new investment,before funding of distributions and other operations as discussed above. Weexpect offering expenses from our DRIP offering to be immaterial. Through September 30,2009, we have raised total gross proceeds from our Initial Public Offering ofapproximately $279.3 million and paid related offering costs of approximately$41.9 million.

 

Wemay increase the number and diversity of our investments by entering into jointventures with partners such as the BHMP Co-Investment Partner. Through September 30,2009, we and the BHMP Co-Investment Partner have contributed approximately$146.5 million and $116.6 million, respectively, to the BHMP CO-JVs for acquisition ofinvestments, primarily mezzanine 

 

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constructionloans and equity investments in multifamily communities. As of September 30,2009, the BHMP Co-Investment Partner has a remaining contractual commitment ofapproximately**$15.8 million to BHMP CO-JVs.For us to realize the commitment, we would generally be expected to contributeapproximately $17.1**million toBHMP CO-JVs. We anticipate raising this capital and capital for future BHMPCO-JVs from our continuing proceeds of our Initial Public Offering. There is noassurance that we will be able to raise sufficient capital to meet theserequirements, and consequently, all or portions of the BHMP Co-InvestmentPartner commitment may not be available to us. See the following section below on “Off-Balance Sheet Arrangements andContractual Obligations” for further discussion of our contractualcontingencies.

 

Foreach equity investment made by us or by the BHMP CO-JV in a Property Entity, we will alsoevaluate the use of new or existing property debt. Based on current marketconditions and our investment and borrowing policies, we would expect toutilize property debt financingin a range of 50% to 75% of acquisition or construction requirements. Ifproperty debt is used on wholly owned properties, we expect it to be secured bythe property, including rents and leases. Property Entity debt, which is alsosecured by the property, including rents and leases, has been used asconstruction financing for six Property Entities and for four operatingproperties.  Property Entity debt is not an obligationor contingency of the BHMPCO-JVs or of us (other than standard indemnities related to administrativematters that are wholly within our control) but does allow us to increase ouraccess to capital. As of September 30, 2009, our only property debt isProperty Entity debt with approximately $337.5 million of borrowings (exclusiveof BHMP CO-JV debt), which are summarized as follows (amounts in millions):

 
| ** **                                       | ** ** | **Amount** | ** ** | **Average  Interest Rates** | ** ** | **Maturity  Dates**                                     | ** **                                             |
|--------------------------------------------------|------------|------------|------------|-----------------------------|------------|---------------------------------------------------------|--------------------------------------------------------|
| Construction financing - variable interest rates |       | $          | 203.7      |                        | 2.93%      |                                                    | October 2011 through December 2012 |   |
| Permanent mortgages                              |       | 133.8      |       | 5.42%                       |       | September 2011 through October 2016 |                                                   |
| Total                                            |       | $          | 337.5      |                        |       |                                                    |                                                   |   |

 

Wewould expect that the PropertyEntities would refinance these borrowings prior to their respective maturitydates. There is no assurance that at those times market terms would allowfinancings at comparable interest rates or leverage levels. In addition to theFairfield Projects, we would anticipate that for some of these properties,lower leverage levels may be necessary which may require additionalcontributions from us or the BHMP CO-JVs. We expect to use proceeds from our Initial PublicOffering to fund any such capital contributions. Because Fairfield Residentialhas guaranteed repayment of each of the senior construction loans that arefunding construction of the Fairfield Projects, as well as completion of suchprojects, Fairfield Residential’s financial condition may give rise to an eventof default under The Cameron and the 55 Hundred senior construction loanagreements just as it has under the Bailey’s Crossing senior construction loanagreement.

 

Otherpotential future sources of capital may include proceeds from secure orunsecured financings, arrangements with other joint venture partners, proceedsfrom the sale of our investments, if and when they are sold, and undistributedcash flow from operating activities.  For our unsecured wholly owned properties, we may obtain financingthrough individual mortgages or credit facilities collateralized by individualor pooled wholly owned properties.  As ofSeptember 30, 2009, we currently have wholly owned properties with a purchaseprice of $124.8 million that are not encumbered by any secured debt.  On October 28, 2009, we closed on $51.3million of financing collateralized by our real estate investment in TheGallery at NoHo Commons.  The mortgageloan payable has a term of 7 years with interest-only payments at an annualrate of 4.72%.

 

For each equityinvestment made by us or by the BHMP CO-JV in a Property Entity, we will alsoevaluate requirements for capital expenditures. Of the eleven equityinvestments with respect to BHMP CO-JVs and our two wholly owned multifamilycommunities, seven are development properties in various stages of developmentand leasing and six are operating properties which were placed in service inthe last two years. For the multifamily communities in development phases, weexpect the construction financing to meet significantly all remaining fundingrequirements, except as noted concerning the Fairfield Projects.  For the multifamily communities, due to theirrecent construction, property capital expenditures are not expected to besignificant in the near term. When they do occur, we would expect recurringcapital expenditures to be funded from ours or the Property Entities cash flowfrom operating activities. For non-recurring capital expenditures, we wouldlook to the capital sources noted above. As of September 30, 2009, neitherus nor any of the BHMP CO-JVs have any significant commitments for propertycapital expenditures for operating multifamily communities.

 

Subsequent to the quarterended September 30, 2009, we entered into a purchase and sale agreementfor a multifamily community for a total purchase price of approximately $38.9million, excluding closing costs.  As of November 13, 2009, we havemade a total of $1.2 million in earnest money deposits on this multifamilycommunity.  If consummated, we expect that the acquisition would be madethrough a wholly owned subsidiary of our operating partnership. Theconsummation of the purchase 

 

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remains subject tosubstantial conditions, including, but not limited to, (1) thesatisfaction of the conditions to the acquisition contained in the relevantcontracts; (2) no material adverse change occurring relating to themultifamily communities or in the local economic conditions; (3) ourreceipt of sufficient net proceeds from the Initial Public Offering andfinancing proceeds to make the acquisition; and (4) our receipt ofsatisfactory due diligence information, including environmental reports andlease information.  Other investments may be identified in the future thatwe may acquire before or instead of this multifamily community.

 

On November 10,2009, we acquired a wholly owned multifamilycommunity known as Grand Reserve Orange, located in Orange, Connecticut, from an unaffiliated seller.  Thepurchase price for Grand ReserveOrange was $25.5 million, excluding closing costs.  The purchase price was paid in cash from theproceeds of our Initial Public Offering. We intend to include this property with other unencumbered properties toraise loan capital through a future credit facility.

 

On November 13, 2009, theBHMP CO-JV that has invested in The Eclipse multifamily community acquired theremaining ownership interests in The Eclipse Property Entity.  Prior to the transaction, the BHMP CO-JVowned a 50.1% limited partnership interest in the Property Entity and hadinvested $8.1million in a 9.5% mezzanine loan to the Property Entity.  In addition, the Property Entity was subjectto a senior mortgage loan in the amount of $38.1 million and a long-term groundlease with the State of Texas.  Inconnection with the transaction, the BHMP CO-JV acquired the remaining PropertyEntity interests in exchange for a $100,000 purchase price paid to the otherowners and assumed the senior mortgage loan and the long-term ground lease.  Simultaneous with the closing, the BHMP CO-JVconverted its mezzanine loan investment to an equity investment in the PropertyEntity, paid off the entire amount of the outstanding balance of the seniormortgage loan at par plus accrued interest in the amount of $20.9 and exercisedan option with the State of Texas to terminate the ground lease and obtain feesimple title to the land for an option price of $4.6 million.  The BHMP CO-JV funded the transaction withcapital contributions from us and the BHMP Co-Investment Partner. Our share ofthe capital contribution was $14.0 million, which was funded from availablecash from the proceeds from our Initial Public Offering. Effective with theclosing of the transaction, the BHMP CO-JV will report The Eclipse and theProperty Entity on the consolidated basis of accounting.

 

**Distributions**

 

Distributions are authorized at the discretion of ourboard of directors based on its analysis of our performance over the****previous period, expectations ofperformance for future periods, including actual and anticipated operating cashflow, changes in market capitalizationrates for investments suitable for our portfolio,****capital expenditure needs, general financial conditionand other factors that our board deems relevant.  The board’s decision will be influenced, insubstantial part, by its obligation to ensure that we maintain our status as aREIT.  In light of the pervasive andfundamental disruptions in****theglobal financial and real estate markets, we cannot provide assurance that wewill be able to achieve expected cash flows necessary****to continue to pay distributions at any particular level, orat all.  If the current economicconditions continue, our board could determine to reduce our currentdistribution rate or cease paying distributions in****order to conserve cash.

 

Until proceeds from our Initial Public Offering arefully invested and generating sufficient operating cash flow to fully fund thepayment of distributions to stockholders, we have and will continue to pay someor all of our distributions from sources other than operating cash flow.  We may, for example, generate cash to paydistributions from financing activities, components of which may includeproceeds from our Initial Public Offering and borrowings (including borrowingssecured by our assets) in anticipation of future operating cash flow.  In addition, from time to time, our advisorand its affiliates may agree to waive or defer all****or a portion of the acquisition, asset management or otherfees or incentives due to them, pay general administrative expenses orotherwise supplement investor returns in order to increase the amount of cash****thatwe have available to pay distributions to our stockholders.

 

The cashdistributions paid in the nine months ended September 30, 2009 and 2008were approximately $7.6 million and $3.9 million, respectively.  For the nine months ended September 30,2009 and 2008, cash flow from operating activities was approximately $0.2million and $2.0 million, respectively. For the nine months ended September 30,2009 and 2008, cash amounts distributed to stockholders exceeded cash flow fromoperating activities by $7.4 million and $1.9 million, respectively. Suchdifferences were funded from proceeds from our Initial Public Offering. Inaddition, acquisition expenses included in cash flow from operating activitiesfor the nine months ended September 30, 2009 were $3.6 million and werefunded from the proceeds from our offerings. We did not incur any expensed acquisition costs in 2008. Prior to 2009, GAAP provided for thecapitalization of acquisition costs and the costs were not included in the cashflow from operating activities section of the statement of cash flows.

 

The amountby which our distributions paid exceeded cash flow from operating activitieshas increased due to a higher distribution rate (as discussed below) andincreased proceeds raised from our Initial Public Offering, particularly for the sixmonths ended September 30, 2009.  SinceMarch 2009, our board of directors increased our distribution rate from anannual effective rate of 6.5% to 7.0%. The yield is calculated assuming a stockholder paid $10.00 for eachshare of stock that he or she owns.  Forthe nine months ended September 30, 2008, we had an annual effectivedistribution rate of 4% (which was based on the most recent sales price of shares in ourprivate offering, which closed in December 2007, at $9.25 per share).

 

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Distributions for the nine months ended September 30,2009 and for the year ended December 31, 2008 were as follows (inmillions, except per share amounts):

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

 
| ** **      | ** ** | **Distributions  Paid** | ** ** | ** **                           | ** ** | ** ** | ** ** |
|-----------------|------------|-------------------------|------------|--------------------------------------|------------|------------|------------|
| **2008**        | ** ** | **Cash**                | ** ** | **Distributions  Reinvested (DRIP)** | ** ** | **Total**  | ** ** | **Total  Distributions Declared** | ** ** | **Declared  Distributions Per Share** | ** ** |
| Fourth  Quarter |       | $                       | 1.8        |                                 | $          | 0.2        |       | $ | 2.0 |   | $ | 2.4 |   | $ | 0.164 |   |
| Third  Quarter  |       | 1.3                     |       | —                               |       | 1.3        |       | 1.3 |   | 0.093 |   |
| Second  Quarter |       | 1.3                     |       | —                               |       | 1.3        |       | 1.3 |   | 0.092 |   |
| First  Quarter  |       | 1.3                     |       | —                               |       | 1.3        |       | 1.3 |   | 0.092 |   |
| Total           |       | $                       | 5.7        |                                 | $          | 0.2        |       | $ | 5.9 |   | $ | 6.3 |   | $ | 0.441 |   |

 

The market for institutional quality multifamily assets hasexperienced an increase in cap rates which allows us theopportunityto invest in equity and debt investments at more attractive prices andtherefore higher current yields.  Under the current economic conditions,we expect to be able to capitalize on attractive acquisition opportunities fromdistressed owners suffering from lack of liquidity and the frozen state of thedebt capital markets.  In addition, the continuing availability offinancing in the multifamily sector through Fannie Mae, formerly known as theFederal National Mortgage Association, and Freddie Mac, formerly known as theFederal Home Loan Mortgage Corporation, coupled with an increase incapitalization rates is expected to provide us the ability to leverage many ofour multifamily community investments, allowing us the opportunity to diversifyour investments and enhance current income and capital appreciation.  Weand our management believe that the increased distribution rate is reflectiveof the changes in the market for investments suitable for our portfolio and onethat can be sustained after we complete our offerings and deploy the capitalraised from our offerings in investments.

 

Accordingly, over the long term, we expect that more of ourdistributions (except with respect to distributions related to sales of ourassets) will be paid from cash flow from operating activities, includingdistributions from our unconsolidated real estate joint ventures in excess ofreported earnings, and operations.  However, operating performance cannotbe accurately predicted due to numerous factors, including our ability to raiseand invest capital at favorable yields, the financial performance of ourinvestments in the current real estate environment, the types and mix ofinvestments in our portfolio and the accounting treatment of our investments inaccordance with our accounting policies.  As a result, futuredistributions declared and paid may continue to exceed cash flow from operatingactivities.

 

**Off-BalanceSheet Arrangements**

 

We have four BHMP CO-JV levelborrowings which meet the requirements of consolidated BHMP CO-JV borrowingsas of September 30, 2009.  Thelenders have no recourse to the BHMP CO-JVs or us (other than standardindemnities related to administrative matters that are wholly within ourcontrol), only to those particular Property Entities.  As of September 30, 2009, no events ofdefault have occurred on these borrowings. The following presents terms of the borrowings (amounts in millions):

 

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| **BHMP CO-JV  Borrowings**            | ** ** | **Loan Amount** | ** ** | **Loan Type**                 | ** **    | **Interest Rate** | ** ** | **Maturity Date** | ** **          |
|---------------------------------------|------------|-----------------|------------|-------------------------------|---------------|-------------------|------------|-------------------|---------------------|
| Verandah at Meyerland                 |       | $               | 24.3       |                          | Interest-only |              | 6.17%      |              | September 2011 |   |
| The Reserve at Johns Creek Walk       |       | 23.0            |       | Interest-only                 |          | 6.46%             |       | March 2013   |                |
| Waterford Place                       |       | 60.5            |       | Interest & principal |          | 4.83%             |       | May 2013     |                |
| Burroughs’s Mill Apartment Homes |       | 26.0            |       | Interest-only                 |          | 5.29%             |       | October 2016 |                |
| Total                                 |       | $               | 133.8      |                          |          |              |       |              |                |   |

 

A total of $23.0 million of the borrowings containcovenants requiring maintenance of certain operating performance levels.  As of September 30, 2009, all borrowingswere in compliance.

 

The investments in real estate and loans owned by us andour BHMP CO-JVswere entered into with unaffiliated third parties who own interests in PropertyEntities that own the underlying real estate and development projects.  These unaffiliated parties and theiraffiliates have provided us with collateral interests in the properties,development projects, improvements and Property Entities and/or financial andperformance guarantees of the developer and certain of its affiliates.  These Property Entitieshave also obtained additional financing that is senior to our investments, bothour loans and equity investments. The senior loans are collateralized by thedevelopments and improvements and further secured with repayment and completionguarantees from the unaffiliated developers or their affiliates. We have nocontractual obligations on these senior level financings obtained by theunaffiliated developers, which include land loans, construction loans, andground leases.  These senior levelfinancings have rates and terms that are different from our loan investmentrates and terms.  In addition, financialinstitutions behind these loans have independent unfunded obligations under theloan terms.  See discussion above andfootnote 5 in the consolidated financial statements in Part I, Item 1 ofthis quarterly report for information regarding borrowings for unconsolidatedProperty Entities.

 

We have no otheroff-balance sheet arrangements that are reasonably likely to have a current orfuture material effect on our financial condition, changes in financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures or capital resources.

 

**ContractualObligations**

 

In the ordinary course ofbusiness, we and/or Co-Investment Ventures (all of which are BHMP CO-JVs)contract with unaffiliated commercial property development companies andprovide equity and/or loans for a particular project (our “Project Commitments”). We generally fund an initial amount under our Project Commitments at contractinception and fund additional amounts as construction progresses, typicallyspanning one to three years.  As of September 30,2009, the BHMP CO-JVs held contracts for equity investments and/or loans with atotal commitment amount of approximately $296.0 million, and the BHMP CO-JVshave currently funded approximately $263.1 million. The BHMP CO-JVs willrequire additional capital from us and BHMP Co-Investment Partner in order tofund the remaining commitments of $32.9 million.

 

TheBHMP CO-JVs may become obligated to purchase all or a portion of the interestson three Property Entities under contingent sell options held by otherinvestors on the Property Entities: Bailey’s Crossing, The Cameron and theGrand Reserve.  The options are generallyexercisable after completion of the development and for a period of three yearsthereafter.  The option price is set byagreement and is either based on the fair value of the project at exercise orthe cost of the project as defined in the respective agreement. The estimatedamount of the purchase options is $63.6 million, and our estimated portion ofthose commitments is $35.0 million.  Asof September 30, 2009, no sell options are exercisable.

 

In the ordinary course of business, the multifamilycommunities in which we have investments in may have commitments to provideaffordable housing. In most of these arrangements, a local or national housingauthority makes payments covering substantially all of the difference betweenthe restricted rent paid by residents and market rents. In connection with ouracquisition of The Gallery at NoHo Commons, we assumed an obligation to provideaffordable housing through 2048. As partial reimbursement for this obligation,the housing authority will make level annual payments of approximately $2.0million through 2028 and no reimbursement for the remaining 20-year period. Wemay also be required to reimburse the housing authority if certain operatingresults are achieved on a cumulative basis during the term of the agreement. Atthe acquisition, we recorded a liability of $13.9 million based on the fairvalue of terms over the life of the agreement. We will record rental revenue from the housing authority on a straightline basis, recognizing a portion of the collections from deferred leaserevenues. As of September 30, 2009, we have recorded approximately $1.5million in deferred lease revenues and other liabilities, and for the three andnine months ended September 30, 2009, we have recognized less than $0.1million of deferred revenue amortization related to our The Gallery at NoHoCommons affordable housing obligations.

 

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OnSeptember 2, 2008, our board of directors authorized a share redemptionprogram for investors who hold their shares for more than one year.  Thepurchase price for redeemed shares is set forth in the prospectus for ourInitial Public Offering of common stock, as supplemented from time totime.  Our board of directors reserves the right in its sole discretion atany time, and from time to time, to (1) waive the one-year holding periodin the event of the death, disability, need for long-term care, or otherexigent circumstances such as bankruptcy, a mandatory distribution requirementunder a stockholder’s IRA or with respect to shares purchased under or throughour DRIP or automatic purchase plan, (2) reject any request forredemption, (3) change the purchase price for redemptions, or (4) terminate,suspend or amend the share redemption program.  Under the terms of theplan, during any calendar year, we will not redeem in excess of 5% of theweighted average number of shares outstanding during the twelve-monthcalendar-based period immediately prior to the date of redemption.  Inaddition, our board of directors will determine whether we have sufficient cashfrom operations to repurchase shares, and such purchases will generally belimited to proceeds of our DRIP plus 1% of operating cash flow for the previousfiscal year.  During the three monthsended September 30, 2009, we redeemed 91,041 shares of common stock forapproximately $0.7 million.  During the ninemonths ended September 30, 2009, we redeemed 235,340 shares of common stock forapproximately $1.9 million. We have funded and intend to continue funding theseredemptions from our Initial Public Offerings.

 

OnNovember 11, 2009, our board of directors adopted a valuation policy forshares of our common stock and approved certain amendments to the shareredemption program to be effective immediately. Under the amended and restated share redemption program, the per shareredemption price will based on the most recently disclosed estimated value pershare as determined in accordance with the valuation policy.  In addition, under the amended and restatedshare redemption program, the cash available for redemption on any particulardate will generally be limited to the proceeds from our distributionreinvestment plan during the period consisting of the preceding four fiscalquarters for which financial statements are available, less any cash alreadyused for redemptions during the same period, plus, if we had positive operatingcash flow during such preceding four fiscal quarters, 1% of all operating cashflow during such preceding four fiscal quarters.  For further information, see Part II,Item 2 of this quarterly report.

 

**Fundsfrom Operations and Modified Funds from Operations**

 

Funds from operations (“FFO”) is a non-GAAP performance financialmeasure that is widely recognized as a measure of REIT operatingperformance.  We use FFO as defined bythe National Association of Real Estate Investment Trusts to be net income(loss), computed in accordance with GAAP excluding extraordinary items, asdefined by GAAP, and gains (or losses) from sales of property, plusdepreciation and amortization on real estate assets, and after adjustments forunconsolidated partnerships, joint ventures and subsidiaries.  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.  Historicalcost accounting for real estate assets in accordance with GAAP implicitlyassumes that the value of real estate diminishes predictably over time.  Since real estate values have historicallyrisen or fallen with market conditions, many industry investors and analystshave considered the presentation of operating results for real estate companiesthat use historical cost accounting alone to be insufficient.  As a result, our management believes that theuse of FFO, together with the required GAAP presentations, are helpful for ourinvestors in understanding our performance. Factors that impact FFO include start-up costs, fixed costs, delay inbuying assets, lower yields on cash held in accounts, income from portfolioproperties and other portfolio assets, interest rates on acquisition financingand operating expenses.  In addition, FFOwill be affected by the types of investments in our and/or our Co-InvestmentVentures’ portfolio, which include, but are not limited to, equity andmezzanine, mortgage and bridge loan investments in existing operatingproperties and properties in various stages of development, mezzanine, mortgageand bridge loans and the accounting treatment of the investments in accordancewith our accounting policies.

 

In addition to FFO, we use modified funds from operations (“ModifiedFunds from Operations” or “MFFO”) which excludes from FFO acquisition expenses,impairment charges and adjustments to fair value for derivatives not qualifyingfor hedge accounting, to further evaluate our operating performance. We believethat MFFO with these adjustments, like those already included in FFO, ishelpful as a measure of operating performance because it excludes costs thatmanagement considers more reflective of investing activities or non-operatingvaluation changes. As explained below, management’s evaluation of our operatingperformance excludes the items considered in the calculation based on thefollowing economic considerations:

 

·                  *Acquisitionexpense.* 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 

 

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bothof these types of investments were capitalized; however, beginning in 2009,acquisition costs related to business combinations are expensed. Both of theseacquisitions costs have been and will continue to be funded from the proceedsof our Initial Public Offering and not from operations.  We believe by excluding expensed acquisitioncosts, MFFO provides useful supplemental information that is comparable foreach type of our real estate investments and is consistent with management’sanalysis of the investing and operating performance of our properties.  Acquisition expenses include those incurredwith our advisor or its affiliates or third parties.

 

·                  *Impairment charges.*   An impairment charge represents a downwardadjustment to the carrying amount of a long-lived asset to reflect the currentvaluation of the asset even when the asset is held for the long-term.  Such adjustment, when properly recognizedunder GAAP, may lag the underlying consequences related to rental rates,occupancy and other operating performance trends.  The valuation is also based, in part, on theimpact of current market fluctuations and estimates of future capitalrequirements and long-term operating performance that may not be directlyattributable to current operating performance.  Because MFFO excludes impairment charges, management believes MFFOprovides useful supplemental information by focusing on the changes in our coreoperating fundamentals rather than changes that may reflect only anticipatedlosses.

 

·                  *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 byexcluding the gains or losses from these derivatives, MFFO provides usefulsupplemental information on the realized economic impact of the hedgesindependent of short-term market fluctuations.

 

By providing MFFO, we believe we are presenting useful information thatassists investors 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 also excludes 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.

 

For the three and ninemonths ended September 30, 2009, MFFO per share was impacted by theincrease in net proceeds realized from our existing offering of shares. For thethree months ended September 30, 2009, we sold 9.9 million shares of ourcommon stock, increasing our outstanding shares by 24%.  For the nine months ended September 30,2009, we sold 26.4 million shares of our common stock, increasing ouroutstanding shares by 63%.  The proceedsfrom this issuance were temporarily invested in short-term cash equivalentsuntil 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 investmentpolicy to identify high quality investments.

 

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-JV’s investment inForty55 Lofts, a high quality project acquired at below-replacement value,requires a 12-month to 18-month lease-up period to achieve stabilization.  When stabilized, this asset will be wellpositioned for long-term returns. We believe this investment and our otherdevelopment investments will add value to our stockholders over our longer-terminvestment horizon, even if this results in less current-period earnings. Seethe “Results of Operations” section above for a quantification of the resultsof our lease-up and development investments.

 

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The following section presents our calculation of FFO and MFFO andprovides additional information related to our operations (in millions, exceptper share amounts):

 
| ** **                                | ** ** | **For the  Three Months Ended** | ** ** | **For the  Nine Months Ended** | ** ** |
|-------------------------------------------|------------|---------------------------------|------------|--------------------------------|------------|
| ** **                                | ** ** | **September 30,**          | ** ** | **September 30,**         | ** ** |
| ** **                                | ** ** | **2009**                        | ** ** | **2008**                       | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income                               |       | $                               | (3.9       | )                              | $          | 0.8 |   | $ | (3.3 | ) | $ | 2.3 |   |
| Real estate depreciation and amortization |       | 1.3                             |       | 0.2                            |       | 2.0 |   | 0.8 |   |
| FFO                                       |       | (2.6                            | )          | 1.0                            |       | (1.3 | ) | 3.1 |   |
|                                      |       |                            |       |                           |       |   |   |   |   |
| Acquisition  expenses                     |       | 3.5                             |       | —                         |       | 3.6 |   | — |   |
| MFFO                                      |       | $                               | 0.9        |                           | $          | 1.0 |   | $ | 2.3 |   | $ | 3.1 |   |
|                                      |       |                            |       |                           |       |   |   |   |   |
| GAAP  weighted average common shares      |       | 36.7                            |       | 14.3                           |       | 26.9 |   | 14.3 |   |
| MFFO  per share                           |       | $                               | 0.03       |                           | $          | 0.07 |   | $ | 0.09 |   | $ | 0.22 |   |

 

·                  The real estate depreciation and amortizationamount includes our consolidated real estate-related depreciation andamortization of in-place lease intangibles and our similar share ofCo-Investment depreciation and amortization, which is included in earnings ofunconsolidated real 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 generally accepted accounting principles. For the three andnine months ended September 30, 2009, acquisition expenses wereapproximately $3.5 million and $3.6 million, respectively.  No acquisition expenses were incurred in2008.

 

Providedbelow is additional information related to our GAAP net income, which may behelpful in assessing our operating results:

 

·                  Included in the return ofinvestments in unconsolidated real estate joint venture for the nine monthsended September 30, 2009 was $2.0 million related to an excesscontribution to the Veritas BHMP CO-JV funded in 2008 and returned during 2009;

 

·                  Accrued interest income onloans with deferred interest payment terms was approximately $0.2 million and$0.2 million for the three months ended September 30, 2009 and 2008,respectively, and $0.5 million and $0.4 million for the nine months ended September 30,2009 and 2008, respectively;

 

·                  Net rental revenueamortization related to deferred lease revenue and other related liabilitieswas less than $0.1 million for the three and nine months ended September 30,2009;

 

·                  Loan fee income collectedand deferred was $0 and approximately $0.1 million for the three months ended September 30,2009 and 2008, respectively, and $0.3 million and $0.9 million for the ninemonths ended September 30, 2009 and 2008, respectively;

 

·                  Amortized loan fee incomewas approximately $0.1 million and $0.1 million for the three months ended September 30,2009 and 2008, respectively, and $0.3 million and $0.2 million for the ninemonths ended September 30, 2009 and 2008, respectively; and

 

·                  Amortization of deferredfinancing and other costs was less than $0.1 million for both the three monthsended September 30, 2009 and 2008, respectively, and approximately $0.1million for both the nine months ended September 30, 2009 and 2008,respectively.

 

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**As noted above, we believe FFO and MFFO are helpful to investors andour management as measures of operating performance.  FFO and MFFO are notindicative of our cash available to fund distributions since other uses ofcash, such as capital expenditures and principal payment of debt related toinvestments in unconsolidated real estate joint ventures, are not deducted whencalculating FFO and MFFO.**

** **

**Recently Announced Accounting Pronouncements**

** **

In June 2009, the Financial Accounting StandardsBoard (“FASB”) issued 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 is applicable for annualperiods after November 15, 2009 and interim periods thereafter.  We are currently assessing the impact, ifany, on our consolidated financial statements.

 

In May 2009, the FASB issued authoritativeguidance for subsequent events.  Thisguidance establishes general standards of accounting for and disclosure ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued.  It requires the disclosure of the date through which an entity hasevaluated subsequent events and the basis for that date; that is, whether thedate represents the actual date the financial statements were issued or wereavailable to be issued.  This guidance iseffective for interim and annual financial periods ending after June 15,2009.

 

In April 2009, the FASB issued authoritativeguidance requiring an entity to provide disclosures about fair value of financialinstruments in interim financial information. This guidance is to be appliedprospectively and is effective for interim and annual periods after June 15,2009 with early adoption permitted for periods after March 15, 2009.

 

In April 2009,the FASB issued additional authoritative guidance for estimating fair valuewhen the volume and level of activity for the asset or liability havesignificantly decreased.  Based on thisguidance, if an entity determines that the level of activity for an asset or liabilityhas significantly decreased and that a transaction is not orderly, furtheranalysis of transactions or quoted prices is needed, and a significantadjustment to the transaction or quoted prices may be necessary to estimatefair value.  This guidance is to beapplied prospectively and is effective for interim and annual periods after June 15,2009 with early adoption permitted for periods after March 15, 2009. Theadoption of this guidance did not have a material impact on our financialstatements.

 

In November 2008,the FASB reached a consensus for authoritative guidance on equity methodinvestment accounting considerations which was issued to clarify how theapplication of equity method accounting will be affected in businesscombinations and noncontrolling interests. This guidance clarifies that an entity shall continue to use the costaccumulation model for its equity method investments. It also confirms pastaccounting practices related to the treatment of contingent consideration andthe use of the impairment model for equity method accounting. Additionally, itrequires an equity method investor to account for a share issuance by aninvestee as if the investor had sold a proportionate share of the investment.This guidance was effective January 1, 2009 and appliesprospectively.  The adoption of thisguidance did not have a material impact on our consolidated financialstatements.

 

**Inflation**

** **

The real estate markethas not been affected significantly by inflation in the past several years dueto a relatively low inflation rate.  The majority of our fixed-lease termsis less than 18 months and contains protection provisions applicable toreimbursement billings for utilities.

 

**REITTax 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 qualify or remainqualified as a REIT.

 

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**Item 3.   Quantitative andQualitative Disclosures About Market Risk.**

 

We are exposed tointerest rate changes as a result of long-term debt used by the PropertyEntities.  Our interest rate riskmanagement objectives are mainly to limit the impact of interest rate changeson earnings and cash flows and to lower overall borrowing costs. To achievethese objectives, borrowings are done primarily at fixed rates or variablerates with the lowest margins available, and in some cases, the ability toconvert variable rates to fixed rates. With regard to variable-rate financing,we will assess interest rate cash flow risk by continually identifying andmonitoring changes in interest rate exposures that may adversely impactexpected future cash flows and by evaluating hedging opportunities.

 

Asof September 30, 2009, we did not have any outstanding debt. Our BHMP CO-JVs had investmentsin Property Entities with funded aggregate senior debt (which consists ofthird-party first mortgages and construction loans and excludes loans made bythe BHMP CO-JVs of $84.5 million) of approximately $337.5 million. Of the third-party PropertyEntity debt, approximately $133.8 million was at fixed rate and $203.7 millionwas at variable interest rates with a weighted average of 3.2%*.*

 

Asof September 30, 2009, we have only one wholly owned note receivable witha carrying value of approximately $2.3 million and a fixed interest rate of10%.  Our BHMP CO-JVs had notes receivable from Property Entities of approximately$84.5 million with a weighted average coupon of 10.2%, all of which were atfixed rates.

 

Asof September 30, 2009, we also had approximately $63.5 million of bank deposits and moneymarket accounts. During 2008, the interest rates on these accountssignificantly decreased, and as of September 30, 2009, had a weighted average interest rate of1.6%. Given that current interest rate levels were are at historically lowlevels, we do not believe interest rates could significantly decrease further;however, if interest rates were to increase, we could earn a higher return onour cash and cash equivalents.

 

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 mature or are otherwise terminated. However, interest rate changeswill affect the fair value of our fixed rate instruments. Conversely, movementsin interest rates on variable rate debt and loans receivable would change ourfuture earnings and cash flows but not significantly affect the fair value ofthose instruments. As we do not expect to trade or sell our fixed rate debtinstruments prior to maturity and the amounts due under such instruments wouldbe limited to the outstanding principal balance and any accrued and unpaidinterest, we do not expect that fluctuations in interest rates would have asignificant impact on our fixed rate debt instruments.

 

We do not have anyforeign operations and thus we are not exposed to foreign currency fluctuationsas of September 30, 2009.

 

**Item4(T).  Controls and Procedures.**

 

**Evaluationof Disclosure Controls and Procedures**

 

As required by Rule 13a-15(b) andRule 15d-15(b) of the Securities Exchange Act of 1934, as amended(the “Exchange Act”), our management, including our Chief Executive Officer andChief Financial Officer, evaluated, as of September 30, 2009, theeffectiveness of our disclosure controls and procedures as defined in ExchangeAct Rule 13a-15(e) and Rule 15d-15(e).  Based on thatevaluation, our Chief Executive Officer and Chief Financial Officer concludedthat our disclosure controls and procedures were effective as of September 30,2009 and provide reasonable assurance that information required to be disclosedby us in this report is recorded, processed, summarized and reported within thetime periods specified by the rules and forms of the Exchange Act and isaccumulated and communicated to management, including the Chief ExecutiveOfficer and Chief Financial Officer, as appropriate to allow timely decisionsregarding required disclosures.

 

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

 

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**Changesin Internal Control over Financial Reporting**

 

There have been nochanges in internal control over financial reporting during the quarter ended September 30,2009 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting.

 

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**PART II**

**OTHER INFORMATION**

 

**Item 1.        LegalProceedings.**

 

We are not party to, andour properties are not subject to, any material pending legal proceedings.

 

**Item 1A.     RiskFactors.**

 

Thefollowing risk factors update the risk factors contained in Item 1A. set forthin our Annual Report on Form 10-K, filed with the Securities and ExchangeCommission on March 31, 2009.

 

***Our reliance on common developers/guarantors may materially adverselyaffect our investments should a developer/guarantor become unable to meet itsobligations to us.  As of September 30,2009, our interests in three loans on three separate development projects witha common developer/guarantor totaled approximately 9.6% of our totalassets.  The developer/guarantor has beenissued a “going concern” qualification in respect of its 2008 auditedconsolidated financial statements.  Inaddition, the developer/guarantor is currently in default with respect its obligationsfor one of the three projects.***

 

Wehave made and may continue to make investments in multifamily developmentprojects with common developers/guarantors, which increases our risks should adeveloper/guarantor become unable to meet its obligations to the seniorconstruction lender, to us or to the other investors in these projects.   As of September 30, 2009, FairfieldResidential LLC and its affiliates (“Fairfield Residential”) served as a commondeveloper/guarantor for three multifamily community developments in which wehave invested (Bailey’s Crossing, The Cameron and 55 Hundred, or the “FairfieldProjects”).  Our investments in thesedevelopments have been mezzanine loans and an equity investment.  Our portion of these investments (which we havemade through joint ventures) was collectively $33.8 million (9.6% of our totalassets) as of September 30, 2009. Because our equity or lending positions are subordinate to seniorconstruction loans with respect to each of these development projects, a defaultby Fairfield Residential on its obligations to the senior construction lender,to us or to the other investors in the development project could result in apartial or total loss of the value of our investment in such developmentproject.

 

Subsequentto the quarter ended March 31, 2009, we received the December 31,2008 audited consolidated financial statements of Fairfield Residential.  In the consolidated financial statements, theauditor expressed concern that Fairfield Residential might not be able tocontinue to operate as a going concern through the end of 2009.  In addition, in September of 2009 wereceived a letter from Bank of America, N.A., senior construction lender forthe Bailey’s Crossing project, notifying us that Fairfield Residential was indefault as guarantor for the senior loan for the project because it had notdelivered a certificate of compliance with certain financial covenants requiredby the guaranty.  This default, in turn,constituted a default under the $22.1 million mezzanine loan we and the BHMPCo-Investment Partner made to the owner of the Bailey’s Crossing project, whichloan has been fully funded.  We sent aletter to the borrower on September 24, 2009 notifying it of the defaultand reserving our rights under the mezzanine loan agreement.  Despite these defaults and our belief thatFairfield Residential continues to be in default with respect to itsobligations for the Bailey’s Crossing project, we understand that the seniorlender for the Bailey’s Crossing project has continued to fund the senior loanfor the project through November 13, 2009.

 

BecauseFairfield Residential has guaranteed repayment of each of the seniorconstruction loans that are funding construction of the Fairfield Projects, aswell as completion of such projects, Fairfield Residential’s financialcondition may give rise to an event of default under The Cameron and the 55Hundred senior construction loan agreements just as it has under the Bailey’sCrossing construction loan agreement. With respect to the Bailey’s Crossing senior construction loan default,and in the event of another default under a senior construction loan, under ourintercreditor agreements with the senior construction lenders or otherwise, weexpect to have an opportunity to (a) cure the default, (b) purchasethe senior construction loan or (c) otherwise negotiate a solutionacceptable to the senior construction lender. If we are unable to reach such a solution, the senior constructionlender may declare the loan due and foreclose on the underlying property.  If the senior construction lenders forecloseon the Fairfield Projects, we may lose the entire value of our loan and equityinvestments in these development projects. Even if we are able to prevent foreclosure, such negotiations mayrequire us to agree to less desirable investment terms than we currentlyhave.  Further, any losses on thedevelopment project caused by refinancing and engaging a new developer anddelays in construction will be absorbed first by the equity investors (of whichwe are one with respect to the 55 Hundred project) and then by us as mezzaninelender before any losses are absorbed by the senior construction lender.

 

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***You may not be able to sell your shares under theshare redemption program, and if you are able to sell your shares under theprogram, you may not be able to recover the amount of your investment in ourshares.***

 

Ourboard of directors approved the share redemption program but may amend, suspendor terminate our share redemption program at any time.  Our board of directors may reject any requestfor redemption of shares.  Further,  there are many limitations on your ability tosell your shares pursuant to the share redemption program.  Any stockholder requesting repurchase oftheir shares pursuant to our share redemption program will be required tocertify to us that such stockholder either (1) acquired the sharesrequested to be repurchased directly from us or (2) acquired the sharesfrom the original investor by way of a bona fide gift not for value to, or forthe benefit of, a member of the stockholder’s immediate or extended family, orthrough a transfer to a custodian, trustee or other fiduciary for the accountof the stockholder or his or her immediate or extended family in connectionwith an estate planning transaction, including by bequest or inheritance upondeath or operation of law.

 

Inaddition, our share redemption program contains other restrictions andlimitations.  We cannot guarantee that wewill accommodate all redemption requests made in any particular redemptionperiod.  If we do not redeem all sharespresented for redemption during any period in which we are redeeming shares,then all shares will be redeemed on a pro rata basis during the relevantperiod.  You must hold your shares for atleast one year prior to seeking redemption under the share redemption program,except that our board of directors will waive this one-year holding requirementwith respect to redemptions sought upon the death or qualifying disability of astockholder or redemptions sought upon a stockholder’s confinement to along-term care facility.  Our board of directorsmay also waive this one-year holding requirement for other exigentcircumstances affecting a stockholder such as bankruptcy or a mandatorydistribution requirement under a stockholder’s IRA, or with respect to sharespurchased through our distribution reinvestment plan. We will not redeem,during any twelve-month period, more than 5% of the weighted average number ofshares outstanding during the twelve-month period immediately prior to the dateof 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.

 

Further,our board of directors reserves the right to reject any request for redemptionor to terminate, suspend, or amend the share redemption program at anytime.  Therefore, in making a decision topurchase shares of our common stock, you should not assume that you will beable to sell any of your shares back to us pursuant to our share redemptionprogram.

 

***If you are able to resell your shares to us pursuant to our shareredemption program, you will likely receive substantially less than the amountpaid to acquire the shares from us or the fair market value of your shares,depending upon how long you owned the shares.***

 

Exceptfor redemptions sought upon a stockholder’s death or qualifying disability orredemptions sought upon a stockholder’s confinement to a long-term carefacility, the purchase price per share redeemed under our share redemptionprogram will equal 90% of (i) the most recently disclosed estimated valueper share as determined in accordance with our valuation policy, 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 ourboard of directors, distributed to stockholders after the valuation wasdetermined; provided, however, that the purchase price per share shall notexceed: (1) prior to the first valuation conducted by our board ofdirectors, or a committee thereof (the “Initial Board Valuation”), under thevaluation policy, 90% of (i) the 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) 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 prior to the redemption date (the “SpecialDistributions”); or (2) on or after the Initial Board Valuation, theaverage price per share the original purchaser or purchasers of shares paid tous for all of his or her shares (as adjusted for any stock dividends,combinations, splits, recapitalizations and the like with respect to our commonstock) less any Special Distributions.  Accordingly,you may receive less by selling your shares back to us than you would receiveif our investments were sold for their estimated values and such proceeds weredistributed in our liquidation.

 

***We established the offering price for the shares on an arbitrary basis;as a result, the offering price of the shares is not related to any independentvaluation.***

 

Ourboard of directors arbitrarily set the offering price of our shares of commonstock for this offering, and this price bears no relationship to the book ornet value of our assets or to our expected operating income.  To assist fiduciaries in discharging their 

 

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obligationsunder the Employee Retirement Income Security Act of 1974, as amended, and toassist broker-dealers in connection with their obligations under applicableFinancial Industry Regulatory Authority rules, we adopted a valuation policy inrespect of estimating the per share value of our common stock.  Until 18 months have passed without a sale inan offering of our common stock (or other securities from which our board ofdirectors believes the value of a share of common stock can be estimated), notincluding any offering related to a distribution reinvestment plan, employeebenefit plan or the redemption of interests in our operating partnership, wegenerally will use the gross offering price of a share of the common stock inour most recent offering as the per share estimated value thereof or, withrespect to an offering of other securities from which the value of a share ofcommon stock can be estimated, the value derived from the gross offering priceof the other security as the per share estimated value of the common stock.  This estimated value is not likely to reflectthe proceeds you would receive upon our liquidation or upon the sale of yourshares.  In addition, this per sharevaluation method is not designed to arrive at a valuation that is related toany individual or aggregated value estimates or appraisals of the value of ourassets.

 

***We have, and may in the future, pay distributions from sources otherthan our cash flow from operating activities and if we continue to do so, wewill have less funds available to make investments and your overall return maybe reduced.***

 

Ourorganizational documents permit us to make distributions from any source, suchas from the proceeds of our prior private offering, this public offering orother offerings, cash advances to us by our advisor, cash resulting from awaiver of asset management fees, and borrowings, including borrowings securedby our assets, in anticipation of future cash flow from operatingactivities.  The distributions paid inthe nine months ended September 30, 2009 and 2008 were approximately $12.5million and $3.9 million, respectively. For the nine months ended September 30, 2009 and 2008, cash flowsfrom operating activities were approximately $0.2 million and $2.0 million,respectively.  Accordingly, for the ninemonths ended September 30, 2009 and 2008, total distributions exceededcash flow from operating activities for the same periods, which differenceswere funded from proceeds from our offerings. If we continue to fund a portion of distributions from the net proceedsfrom this offering or from additional sources that are other than operatingactivities, we will have fewer funds available for acquiring properties andother investments, and your overall return may be reduced.  Further, to the extent distributions exceedcash flow from operating activities, a stockholder’s basis in our stock will bereduced and, to the extent distributions exceed a stockholder’s basis, thestockholder may recognize capital gain.

 

***We have invested in development projects that rely on senior financingsand, as a result, may be adversely impacted by the failure of a financialinstitution to honor its lending obligations.***

 

Throughour BHMP CO-JVs, we have made subordinate debt and equity investments incertain Property Entities that are developing high quality multifamilycommunities.  These Property Entitiesusually borrow money at the senior loan level from a chartered financialinstitution and at the mezzanine loan level from our BHMP CO-JVs to finance thedevelopment activities.  As a result ofthe recent and continuing economic slowdown and financial market disruptions,certain financial institutions have become insolvent or been served with ceaseand desist orders or other administrative actions by federal bank regulators,such as the FDIC or Office of Thrift Supervision (“OTS”), due to a lack ofrequired capital.  Some of these seniorlenders may become insolvent, enter into receivership or otherwise becomeunable to fulfill their respective financial obligations to the Property Entitiesthat are developing the multifamily communities in which we have invested.  Should a senior lender fail to meet itsfunding obligations, the development project could suffer from significantdelays and additional expenses, which could adversely impact our investment insuch project.  As we and our affiliatesare not parties to the senior loans, we will be unable to take direct actionagainst these senior lenders to compel them to honor their financialobligations.  Furthermore, if a seniorlender becomes insolvent or enters into receivership or if other regulatoryaction is taken against it, we may not be able to enforce our rights under theapplicable intercreditor agreement to cure defaults by the borrower under thesenior loan or to purchase the senior loan in the event of default by theborrower.

 

Inaddition, completion guarantees provided to our BHMP CO-JVs by developers inconnection with our mezzanine loans for certain projects may be suspended ifthe senior lender stops funding the senior loan, provided that the developer isusing commercially reasonable and diligent efforts to cause the senior lenderto make the proceeds available or obtain proceeds from a refinancing of thesenior loan.  However, obtaining arefinancing in the current economic environment may be difficult or impossible.

 

OnAugust 21, 2009, Guaranty Bank, the financial institution that held thesenior loan on the Grand Reserve project, was closed by the Office of ThriftSupervision (the “OTS”) and the FDIC was appointed as receiver of GuarantyBank. On the same date, the FDIC transferred certain of the assets andliabilities of Guaranty Bank, including the senior loan on the Grand Reserveproject, to BBVA Compass.  Our aggregateinvestment in the Grand Reserve project as of September 30, 2009 was $6.4million, consisting of a senior mezzanine loan made through a joint venturewith the BHMP Co-Investment Partner and a wholly owned junior mezzanine loan.As of November 13, 2009, construction draws for the project have not beenaffected by the closure of Guaranty Bank or the transfer of the loan to BBVACompass, and we have received no communication that future fundings will beaffected.

 

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

 

**Use ofProceeds from Registered Securities**

 

On September 2,2008, our Registration Statement on Form S-11 (File No. 333-148414),covering a public offering (our “Initial Public Offering”) of up to 250,000,000shares of common stock, was declared effective under the Securities Act of1933. Our Initial Public Offering commenced on September 5, 2008 and isongoing.  We expect to sell the shares offered in our Initial PublicOffering over a two-year period.  Under rules promulgated by the SEC,in some circumstances we may continue the offering beyond this date.  Ourboard of directors has the discretion to extend the offering period for theshares offered under the DRIP up to the sixth anniversary of the termination ofthe primary offering.  We may reallocate the shares of common stock beingoffered between the primary offering and the distribution reinvestment plan.

 

We are offering amaximum of 200,000,000 shares in our primary offering at an aggregate offeringprice of up to $2 billion, or $10.00 per share with discounts available tocertain categories of purchasers.  The 50,000,000 shares offered under theDRIP are initially being offered at an aggregate offering price of $475million, or $9.50 per share.  Behringer Securities LP, an affiliate of ouradvisor, is the dealer manager of the Initial Public Offering.  As of September 30,2009, we had sold approximately 28.0 million shares of our common stock in ourInitial Public Offering on a best efforts basis pursuant to the offering forgross offering proceeds of approximately $279.3 million.

 

From thecommencement of the Initial Public Offering through September 30, 2009, weincurred expenses of approximately $41.9 million in connection with theissuance and distribution of the registered securities pursuant to the offeringall of which was paid to our advisor.

 

From thecommencement of the Initial Public Offering through September 30, 2009,the net offering proceeds to us from the Initial Public Offering, including thedistribution reinvestment plan, after deducting the total expenses incurreddescribed above, were $239.9 million.  From the commencement of theInitial Public Offering through September 30, 2009, we had used $196.1million of such net proceeds to purchase interests in real estate, net of notespayable.  Of the amount used for the purchase of these investments, $5.2million was paid to Behringer Harvard Multifamily Advisors I, as acquisitionand advisory fees and acquisition expense reimbursement.

 

**RecentShares of Unregistered Securities**

 

During the periodcovered by this quarterly report, we did not sell any equity securities thatwere not registered under the Securities Act of 1933.

 

**ShareRedemption 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. On November 11, 2009, our board of directors adopted a valuationpolicy and approved certain amendments to the share redemption program to beeffective immediately.  The terms of theshare redemption program through November 11, 2009 are summarized below,followed by information regarding the amendments.

 

*Summary of share redemption program through November 11, 2009*

 

The terms on which we redeem shares may differbetween redemptions upon the death or “qualifying disability” (as defined inthe share redemption program) of the stockholder or requests for redemptionsought upon a stockholder’s confinement to a long-term care facility(collectively referred to herein as “Exceptional Redemptions”) and all otherredemptions (referred to herein as “Ordinary Redemptions”).

 

For Ordinary Redemptions, the purchase price forshares redeemed under the share redemption program will equal:

 

·                  prior to thetime we begin obtaining appraisals of the value of our properties and our otherassets, the amount by which (a) the lesser of (1) 90% of the averagegross price per share the original purchaser or purchasers of your shares paidto us, which we refer to as the “issue price,” for all of your shares (asadjusted for any stock dividends, combinations, splits, recapitalizations andthe like with respect to our shares of common stock) or (2) 90% of theoffering price of shares in 

 

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our most recent primary offering exceeds (b) theaggregate amount of net sale proceeds per share, if any, distributed to investorsprior to the redemption date as a result of the sale of one or more of ourinvestments; or

 

·                  after we beginobtaining such appraisals of the value of our properties and our other assets,the lesser of (1) 100% of the average issue price per share for all ofyour shares (as adjusted for any stock dividends, combinations, splits,recapitalizations and the like with respect to our shares of common stock) or (2) 90%of the estimated value per share, as determined by the most recent appraisal.

 

ForExtraordinary Redemptions, the purchase price per share for shares redeemedunder the share redemption program will equal, until we begin having appraisalsperformed, the amount by which (a) the average issue price per share forall of your shares (as adjusted for any stock dividends, combinations, splits,recapitalizations and the like with respect to the shares of common stock)exceeds (b) the aggregate amount of net sale proceeds per share, if any,distributed to investors prior to the redemption date as a result of the saleof one or more of our investments. Thereafter, the purchase price will be the estimated value per share, asdetermined by the most recent appraisal.

 

Ourboard of directors reserves the right in its sole discretion at any time, andfrom time to time, to (1) waive the one-year holding period in the eventof other exigent circumstances affecting a stockholder such as bankruptcy or amandatory distribution requirement under the stockholder’s IRA, (2) rejectany request for redemption, (3) change the purchase price for redemptions,or (4) otherwise amend the terms for the share redemption program.  Under the terms of the program, we will notredeem in excess of 5% of the weighted average number of shares outstandingduring the twelve-month period immediately prior to the date ofredemption.  In addition, our board ofdirectors will determine at least quarterly whether we have sufficient cash torepurchase shares, and such purchases will generally be limited to proceedsfrom the distribution reinvestment plan plus 1% of operating cash flow for theprevious fiscal year.  The provisions ofthe share redemption program in no way limit our ability to repurchase sharesfrom stockholders by any other legally available means for any reason that ourboard of directors, in its discretion, deems to be in our best interest.

 

*Summaryof amendments effective as of November 11, 2009*

 

OnNovember 11, 2009, our board of directors approved certain amendments tothe program to be effective immediately. Under the amended and restated share redemption program, the per shareredemption price will equal:

 

·                  in the case ofOrdinary Redemptions, 90% of (i) the most recently disclosed estimatedvalue per share (the “Valuation”) as determined in accordance with ourvaluation policy (the “Valuation Policy”), as such Valuation Policy is amendedfrom time to time, less (ii) the aggregate distributions per share of anynet sale proceeds from the sale of one or more of our assets, or other specialdistributions so designated by our board of directors, distributed tostockholders after the Valuation was determined (the “Valuation Adjustment”);provided, however, that the purchase price per share shall not exceed: (1) priorto the first Valuation conducted by our board of directors, or a committeethereof (the “Initial Board Valuation”), under the Valuation Policy, 90% of (i) theOriginal Share Price (as defined herein) 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 prior to the redemption date (the “SpecialDistributions”); or (2) on or after the Initial Board Valuation, theOriginal Share Price less any Special Distributions; and

 

·                  in the case ofExceptional Redemptions, (1) prior to the Initial Board Valuation, theOriginal Share Price less any Special Distributions; or (2) on or afterthe Initial Board Valuation, the most recently disclosed Valuation less anyValuation Adjustment, provided, however, that the purchase price per shareshall not exceed the Original Share Price less any Special Distributions.

 

“OriginalShare Price” means the average price per share the original purchaser orpurchasers of shares paid to us for all of his or her shares (as adjusted forany stock dividends, combinations, splits, recapitalizations and the like withrespect to our common stock).

 

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 newprice determined by our board of directors.

 

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Inaddition, under the amended and restated share redemption program, ExceptionalRedemption requests may be made within one year of the event giving rise to thespecial circumstances, as opposed to 270 days under the prior share redemptionprogram (i.e. Exceptional Redemption requests may be made within one year ofthe death of the stockholder, within one year of the determination of thestockholder’s qualifying disability or, with respect to redemptions sought upona stockholder’s confinement to a long-term care facility, within one year of theearlier of (1) the one year anniversary of the stockholder’s admittance tothe long-term care facility or (2) the date of the determination of thestockholder’s indefinite confinement to the long-term care facility by alicensed physician).  ExceptionalRedemption requests not made within the one-year period will be treated asOrdinary Redemption requests.

 

Finally,under the amended and restated share redemption program, the cash available forredemption on any particular date will generally 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.

 

Inall other material respects, the terms of our share redemption program remainunchanged.  The information set forthherein with respect to the amendments does not purport to be complete in scopeand is qualified in its entirety by the full text of the Amended and RestatedShare Redemption Program, which is being filed as Exhibit 4.4 and isincorporated into this report by reference.

 

During the three monthsended September 30, 2009, we redeemed shares as follows:

 
| **2009**  | ** ** | **Total  Number of**

**Shares  Redeemed** | ** ** | **Average  Price**

**Paid Per  Share** | ** ** | **Total  Number**

**of  Shares**

**Purchased  as Part of**

**Publicly  Announced**

**Plans or  Programs** | ** ** | **Maximum**

**Number of  Shares**

**That May**

**Be  Purchased Under**

**the Plans  or Programs** | ** ** |
|-----------|------------|--------------------------------------------|------------|-----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------|------------|
| July      |       | —                                     |       | $                                       | —     |                                                                                                               | —     |                                                                                                  | (1         | ) |
| August    |       | 91,041                                     |       | 7.95                                    |       | 91,041                                                                                                             |       | (1                                                                                                    | )          |
| September |       | —                                     |       | —                                  |       | —                                                                                                             |       | (1                                                                                                    | )          |
|      |       | 91,041                                     |       | $                                       | 7.95       |                                                                                                               | 91,041     |                                                                                                  |       |   |

----

(1)          A description of the maximum number of shares that maybe purchased under our redemption program is included           in the narrative preceding thistable.

 

**Item 3.        DefaultsUpon Senior Securities.**

 

None.

 

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

 

None.

 

**Item 5.        OtherInformation.**

 

**Adoption of Valuation Policy**

 

OnNovember 11, 2009, our board of directors adopted a valuation policy inrespect of estimating the per share value of our common stock in order toassist fiduciaries in discharging their obligations under the EmployeeRetirement Income Security Act of 1974, as amended, and to assistbroker-dealers in connection with their obligations under applicable FinancialIndustry Regulatory Authority rules with respect to customer accountstatements.

 

Underthe valuation policy, we are required to provide to our stockholders a pershare estimated value of our common stock on a periodic basis, generallyannually.  Until 18 months have passedwithout a sale in an offering of our common stock (or other securities fromwhich our board of directors believes the value of a share of common stock canbe estimated), not including any offering related to a distributionreinvestment plan, employee benefit plan or the redemption of interests in ouroperating partnership, 

 

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wegenerally will use the gross offering price of a share of the common stock inour most recent offering as the per share estimated value thereof or, withrespect to an offering of other securities from which the value of a share ofcommon stock can be estimated, the value derived from the gross offering priceof the other security as the per share estimated value of the common stock.  No later than 18 months after the last salein an offering, we will disclose an estimated per share value that is not basedsolely on the offering price of securities in such offering.  This estimate will be determined by our boardof directors, or a committee thereof, after consultation with Behringer HarvardMultifamily Advisors I, or if we are no longer advised by Behringer HarvardMultifamily Advisors I, our officers, and employees, subject to therestrictions and limitations set forth in the valuation policy.  After first publishing an estimate by ourboard of directors within 18 months after an offering, we will repeat theprocess of estimating share value of our common stock periodically thereafter,generally annually.

 

Theinformation set forth herein with respect to the valuation policy does notpurport to be complete in scope and is qualified in its entirety by the fulltext of the valuation policy, which is being filed as Exhibit 99.1 and isincorporated into this report by reference.

 

**Adoption of Amended and Restated Distribution Reinvestment Plan**

 

OnNovember 11, 2009, our board of directors adopted the Amended and RestatedDistribution Reinvestment Plan (the “Amended and Restated DRIP”).  We expect that the Amended and Restated DRIPwill be effective no later than March 1, 2010 upon giving participants therequested notice under the current plan.

 

TheAmended and Restated DRIP clarifies the prices at which participants may investin additional shares of our common stock. Pursuant to the Amended and Restated DRIP, prior to the termination ofour current public offering of shares of our common stock, participants mayinvest their distributions in shares of our common stock at a price equal tothe following, regardless of the price per share paid by the participant inrespect of which the distributions are paid: (1) prior to the first thevaluation of the shares conducted by our board of directors or a committeethereof (as opposed to a valuation that is based solely on the offering priceof securities in the most recent offering) (the “Initial Board Valuation”)under our valuation policy, as such valuation policy is amended from time totime (the “Valuation Policy”),  95% of (i) themost recently disclosed estimated value per share (the “Valuation”) asdetermined in accordance with the 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”); or (2) on or after the Initial Board Valuation, 100% of (i) themost recently disclosed Valuation as determined in accordance with theValuation Policy less (ii) any Valuation Adjustment.

 

Aftertermination of our current public offering, participants may invest theirdistributions in shares that may (but are not required to) be supplied fromeither (i) shares registered with the Securities and Exchange Commission(the “SEC”) pursuant to an effective registration statement for shares for usein the distribution reinvestment plan (a “Future Registration”) or (ii) sharespurchased by the plan administrator in a secondary market (if available) or ona national stock exchange (if listed) (collectively, the “Secondary Market”)and registered with the SEC for resale pursuant to the plan.  Shares registered in a Future Registrationthat are not purchased by the plan administrator in the Secondary Market willbe issued at a price equal to 100% of (A) the most recently disclosedValuation less (B) any Valuation Adjustment.  Shares purchased on the Secondary Market asset forth in (ii) above will be purchased at the then-prevailing marketprice, and the average price paid by the plan administrator for all suchpurchases for a single distribution will be utilized for purposes ofdetermining the purchase price for shares purchased under the distributionreinvestment plan on such investment date; however, in no event will thepurchase price for shares purchased under the distribution reinvestment plan beless than 100% of the market price for shares on such investment date.

 

Regardlessof the pricing determined above, our board of directors may determine, fromtime to time, in its sole discretion, the price at which the plan administratorwill invest distributions in shares; provided that if the new price sodetermined by our board of directors varies more than 5% from the pricing thatwould have resulted pursuant to the two paragraphs above, as applicable, we willdeliver a notice regarding the new price to each plan participant at least 30days prior to the effective date of the new price.

 

TheAmended and Restated DRIP also clarifies that any notice to a participant underthe distribution reinvestment plan may be given by letter addressed to theparticipant, delivered by electronic means, or given by including suchinformation in a Current Report on Form 8-K or in our annual or quarterlyreports, all publicly filed with the SEC.

 

Inall other material respects, the terms of our distribution reinvestment planwill remain unchanged.  The informationset forth herein with respect to the Amended and Restated DRIP does not purportto be complete in scope and is qualified in its entirety

 

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bythe full text of the Amended and Restated DRIP, which is being filed as Exhibit 4.2and is incorporated into this report by reference.

 

**Adoptionof Amended and Restated Automatic Purchase Plan**

 

OnNovember 11, 2009, our board of directors adopted the Amended and RestatedAutomatic Purchase Plan (the “Amended and Restated APP”).  The Amended and Restated APP will beeffective March 1, 2010.  TheAmended and Restated APP clarifies that any notice to a participant under theautomatic purchase plan may be given by letter addressed to the participant,delivered by electronic means, or given by including such information in aCurrent Report on Form 8-K or in our annual or quarterly reports, allpublicly filed with the SEC.  In allother material respects, the terms of our automatic purchase plan will remainunchanged.  The information set forthherein with respect to the Amended and Restated APP does not purport to becomplete in scope and is qualified in its entirety by the full text of theAmended and Restated APP, which is being filed as Exhibit 4.3 and isincorporated into this report by reference.

 

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**Item 6.        Exhibits.**

** **
| **Exhibit   Number** | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                             |
|---------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |       |                                                                                                                                                                                                                                                                                                                                                                                        |
| 3.1                       |       | Articles  of Restatement, incorporated by reference to Exhibit 3.1.2 to  Form 8-K filed on September 8, 2008                                                                                                                                                                                                                                                                 |
| 3.2                       |       | Third  Amended and Restated Bylaws, incorporated by reference to Exhibit 3.2 to  the Company’s Form 10-Q filed on November 14, 2008                                                                                                                                                                                                                                     |
| 4.1                       |       | Form of  Subscription Agreement, incorporated by reference to Exhibit B to the  Company’s Post-Effective Amendment No. 1 to its Registration Statement  on Form S-11 filed on March 6, 2009, Commission File  No. 333-148414                                                                                                                             |
| 4.2*                      |       | Amended  and Restated Distribution Reinvestment Plan                                                                                                                                                                                                                                                                                                                                        |
| 4.3*                      |       | Amended  and Restated Automatic Purchase Plan                                                                                                                                                                                                                                                                                                                                               |
| 4.4*                      |       | Amended  and Restated Share Redemption Program                                                                                                                                                                                                                                                                                                                                              |
| 4.5                       |       | Statement  regarding Restrictions on Transferability of Shares of Common Stock,  incorporated by reference to Exhibit 4.5 to the Company’s Registration  Statement on Form S-11/A filed on May 9, 2008                                                                                                                                                                  |
| 10.1                      |       | Second  Amended and Restated Advisory Management Agreement, dated April 1, 2009  incorporated by reference to Exhibit 10.1 to the Company’s  Post-Effective Amendment No. 3 to its Registration Statement on  Form S-11 filed on May 8, 2009, Commission File No. 333-148414                                                                             |
| 10.2                      |       | Amended  and Restated Property Agreement, incorporated by reference to  Exhibit 10.2 to the Company’s Form 10-Q filed on November 14,  2008                                                                                                                                                                                                                             |
| 10.3                      |       | Amended  and Restated Incentive Award Plan, incorporated by reference to  Exhibit 10.3 to the Company’s Registration Statement on Form S-11/A  filed on May 9, 2008, Commission File No. 333-148414                                                                                                                                                                |
| 10.4                      |       | Service  Mark Agreement, incorporated by reference to Exhibit 10.4 to the  Company’s Form 10-Q filed on November 14, 2008                                                                                                                                                                                                                                               |
| 10.5                      |       | Senior  and Junior Mezzanine Promissory Notes by and between SW 131 St. Rose  Mezzanine Borrower LLC as borrower and Behringer Harvard St. Rose REIT, LLC  as lender dated December 31, 2008, incorporated by reference to Exhibit  10.5 to the Company's Form 10-K filed on March 31, 2009                                                                                            |
| 10.6                      |       | Senior  and Junior Mezzanine Loan Agreements by and between SW 131 St. Rose Mezzanine  Borrower LLC as borrower and Behringer Harvard St. Rose REIT, LLC as lender  dated December 31, 2008, incorporated by reference to Exhibit 10.6 to  the Company's Form 10-K filed on March 31, 2009                                                                                             |
| 10.7                      |       | Senior  and Junior Mezzanine Deeds of Trust, Assignments of Rents and Leases,  Security Agreements, Fixture Filings and Financing Statements by and between  SW 132 St. Rose Senior Borrower LLC as grantor and Behringer Harvard St. Rose  REIT, LLC as lender dated December 31, 2008, incorporated by reference  to Exhibit 10.7 to the Company's Form 10-K filed on March 31, 2009 |
| 10.8                      |       | Mezzanine  Guaranty Agreement by and between CFP Residential, L.P., Kenneth J. Valach,  Bruce Hart and J. Ronald Terwilliger collectively as guarantor and Behringer  St. Rose REIT, LLC as lender dated December 31, 2008, incorporated by  reference to Exhibit 10.8 to the Company's Form 10-K filed on March 31, 2009                                                              |
| 10.9                      |       | Intercreditor  and Subordination Agreement by and between Bank of America, N.A. on behalf of  senior construction lenders and land loan lender and Behringer Harvard St.  Rose REIT, LLC as subordinate lender dated December 31, 2008, incorporated  by reference to Exhibit 10.9 to the Company's Form 10-K filed on March 31,  2009                                                 |
| 10.10                     |       | Sale,  Purchase and Escrow Agreement between Verandah Owner Limited Partnership as  seller and Harvard Property Trust as purchaser dated January 26, 2009, incorporated  by reference to Exhibit 10.10 to the Company's Form 10-K filed on March 31,  2009                                                                                                                             |
| 10.11                     |       | Assignment  and Assumption of Sale, Purchase and Escrow Agreement by and between Harvard  Property Trust, LLC as assignor and Behringer Harvard Multifamily OP I LP as  assignee dated January 28, 2009, incorporated by reference to Exhibit  10.11 to the Company's Form 10-K filed on March 31, 2009                                                                                |
| 10.12                     |       | First  Amendment to Sale, Purchase and Escrow Agreement by and between Verandah  Owner Limited Partnership as seller and Behringer Harvard Multifamily OP I LP  as purchaser dated February 20, 2009, incorporated by reference to  Exhibit 10.12 to the Company's Form 10-K filed on March 31, 2009                                                                                   |
| 10.13                     |       | Agreement  of Sale and Purchase and Joint Escrow Instructions by and between Waterford  Place Apartments, LLC as seller and Behringer Harvard Multifamily OP I LP as  buyer dated May 29, 2009, incorporated by reference to Exhibit 10.13 to  the Company's Form 10-Q filed on August 14, 2009                                                                                        |
| 10.14                     |       | Revivor  and First Amendment to Agreement of Sale and Purchase and Joint Escrow  Instructions by and between Waterford Place Apartments, LLC as seller and  Behringer Harvard Multifamily OP I LP as buyer dated July 2, 2009, incorporated  by reference to Exhibit 10.14 to the Company's Form 10-Q filed on August 14,  2009                                                        |
| 10.15                     |       | Second  Amendment to Agreement of Sale and Purchase and Joint Escrow Instructions by  and between Waterford Place Apartments, LLC as seller and Behringer Harvard  Multifamily OP I LP as buyer dated July 13, 2009, incorporated by  reference to Exhibit 10.15 to the Company's Form 10-Q filed on August 14,  2009                                                                  |
| 10.16                     |       | Assignment  and Assumption of Sale, Purchase and Escrow Agreement by and between  Behringer Harvard Multifamily OP I LP as assignor and Behringer Harvard  Waterford Place REIT, LLC as assignee dated August 4, 2009, incorporated  by reference to Exhibit 10.16 to the Company's Form 10-Q filed on August 14,  2009                                                                |
| 10.17*                    |       | (First  Lien) Assumption Agreement by and among Waterford Place Apartments, LLC,  Behringer Harvard Waterford Place REIT, LLC and the Federal Home Loan  Mortgage Corporation effective August 25, 2009                                                                                                                                                                                |
| 10.18*                    |       | (Second  Lien) Assumption Agreement by and among Waterford Place Apartments, LLC,  Behringer Harvard Waterford Place REIT, LLC and the Federal Home Loan  Mortgage Corporation effective August 25, 2009                                                                                                                                                                               |

 

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| 10.19* |   | Multifamily  Note by Waterford Place Apartments, LLC in favor of Deutsche Bank Berkshire  Mortgage, Inc. dated March 31, 2008                                                                                                                   |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.20* |   | Multifamily  Note by Waterford Place Apartments, LLC in favor of Berkshire Mortgage  Finance Limited Partnership dated April 1, 2004                                                                                                                 |
| 10.21* |   | Multifamily  Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing by  Waterford Place Apartments, LLC for the benefit of Deutsche Bank Berkshire  Mortgage, Inc. effective March 31, 2008                                  |
| 10.22* |   | Multifamily  Deed of Trust, Assignment of Rents, Security Agreement and Fixture Filing by  Waterford Place Apartments, LLC for the benefit of Berkshire Mortgage Finance  Limited Partnership effective April 1, 2004                                |
| 10.23* |   | Limited Liability Company Agreement of Behringer  Harvard Waterford Place Venture, LLC by and between Behringer Harvard  Waterford Place, LLC and Behringer Harvard Master Partnership I LP dated May  29, 2009                                           |
| 10.24* |   | Sale, Purchase and Escrow Agreement by and between  SAF Burroughs Mills, LLC, as seller, and Behringer Harvard Multifamily OP I  LP as buyer dated August 7, 2009                                                                                         |
| 10.25* |   | Assignment of Sale, Purchase and Escrow Agreement by  and between Behringer Harvard Multifamily OP I LP as assignor and Behringer  Harvard Burroughs Mill REIT, LLC as assignee dated September 12, 2009                                                  |
| 10.26* |   | Agreement of Sale by and between SF No Ho LLC as  seller and Behringer Harvard Multifamily OP I LP as buyer dated August 12,  2009                                                                                                                        |
| 10.27* |   | Assignment of Agreement of Sale by and between  Behringer Harvard Multifamily OP I LP, as assignor, and Behringer Harvard  NOHO, LLC as assignee effective August 19, 2009                                                                                |
| 10.28* |   | Amendment to Agreement of Sale by and between SF No  Ho LLC as seller and Behringer Harvard NOHO, LLC as buyer dated September 17,  2009                                                                                                                  |
| 10.29* |   | Multifamily Note by Behringer Harvard NOHO, LLC in  favor of Red Mortgage Capital, Inc. dated October 28, 2009                                                                                                                                            |
| 10.30* |   | Multifamily Deed of Trust, Assignment of Rents,  Security Agreement and Fixture Filing by Behringer Harvard NOHO, LLC for the  benefit of Red Mortgage Capital, Inc. dated October 28, 2009                                                               |
| 10.31* |   | Owner Participation Agreement by and between The  Community Redevelopment Agency of Los Angeles and SL No Ho, LLC dated  December, 2001                                                                                                                   |
| 10.32* |   | First Implementation Agreement to Owner  Participation Agreement by and between The Community Redevelopment Agency of  the City of Los Angeles and SL No Ho, LLC dated November, 2002                                                                     |
| 10.33* |   | Second Implementation Agreement to Owner  Participation Agreement by and between The Community Redevelopment Agency of  the City of Los Angeles and SL No Ho, LLC dated December 12, 2003                                                                 |
| 10.34* |   | Third Implementation Agreement to Owner  Participation Agreement by and between The Community Redevelopment Agency of the  City of Los Angeles and SL No Ho, LLC dated October 1, 2004                                                                    |
| 10.35* |   | Agreement Containing Covenants Affecting Real  Property by and between The Community Redevelopment Agency of the City of Los  Angeles and SL No Ho, LLC dated December 19, 2003                                                                           |
| 10.36* |   | Subarea “A” Partial Assignment of Owner  Participation Agreement and Consent to Assignment by and among SF No Ho, LLC,  Behringer Harvard NOHO, LLC and The Community Redevelopment Agency of the  City of Los Angeles dated September 17, 2009 |
| 10.37* |   | Agreement of Sale and Purchase and Joint Escrow  Instructions by and between Acacia on Santa Rosa Creek, LLC, as seller, and  Behringer Harvard Multifamily OP I LP, as buyer, dated October 12, 2009                                                     |
| 21.1   |   | Subsidiaries of the Company (incorporated by  reference to Exhibit 21.1 to the Company’s Post-Effective Amendment No. 1 to  its Registration Statement on Form S-11 filed on March 6, 2009, Commission  File No. 333-148414)                         |
| 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**                                                                                    |
| 99.1*  |   | Valuation Policy                                                                                                                                                                                                                                          |

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* Filed herewith

 

** In accordance withItem 601(b)(32) of Regulation S-K, this Exhibit is not deemed “filed” forpurposes of Section 18 of the Exchange Act or otherwise subject to theliabilities of that section.  Such certifications will not be deemedincorporated by reference into any filing under the Securities Act or theExchange 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 13, 2009 |       | /s/ Howard S. Garfield                          |
|                           |       | Howard S. Garfield                              |
|                           |       | Chief Financial Officer                         |
|                           |       | (Principal Financial  Officer)                  |

 

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